A mortgage pre-payment is an investment.  Making extra payments or larger payments early on can add up to significant interest savings and shorten the life of the mortgage, leaving more money available for RRSPs and other investments, as well as changing lifestyle needs. 

During the past year, 13 per cent of mortgage holders made lump sum payments, and 16 per cent voluntarily increased their monthly payments beyond required amounts, according to a recent consumer survey by the Canadian Association of Accredited Mortgage Professionals. 

Here are some strategies for making prepayments:

Add a bit to your monthly payment 
Most of us can find an extra $50 per month by cutting out a restaurant meal.  Add that money to your mortgage and you’re saving a lot on interest down the road.  

Make a yearly pre-payment 
Paying an extra one or two thousand on your mortgage once per year on the anniversary date of the mortgage could yield significant savings over the life of the loan.  For many borrowers, the money for such a prepayment comes from a tax return. 

Make a larger prepayment early in the mortgage
Note that lump-sum mortgage prepayments have a much greater impact on the total amount of interest you’ll pay if they are made earlier.  

“Mortgage Broker Kelowna”

“There’s no clear evidence of a housing bubble, but we’re taking proactive, prudent and cautious steps today to help prevent one.  Our government is acting to help prevent Canadian households from getting overextended, and acting to help prevent some lenders from facilitating it,” commented Minister Flaherty.

The new rules take effect April 19, 2010.  Here is a quick look at the changes, which apply to government-backed insured mortgages: 

1. Borrowers must now qualify based on a five-year fixed rate even if they choose a mortgage with a lower interest rate and shorter term. 

The government’s rationale for this change is that it will help borrowers prepare for higher rates, although it may squeeze the purchasing power of home buyers.  It remains unclear whether borrowers must qualify at the five-year posted rate or the five-year discounted rate. 

2. The maximum amount Canadians can withdraw in refinancing their mortgages will be reduced to 90 per cent of the value of their homes, instead of 95 per cent. 

The government’s rationale for this change is that it will help ensure home ownership is a more effective way to save.  The impact of this change is expected to be minimal as relatively few homeowners withdraw equity from their homes to this extent. 

3. A minimum down payment of 20 per cent will be needed for government-backed mortgage insurance on non-owner-occupied properties “purchased for speculation,” which realistically means rental properties.

While this measure is intended to hamper the speculative buying of properties by reducing the leverage of buyers, it will also impact those buying real estate for general investment purposes

Sales of existing homes in Canada jumped 31.5% in the second quarter from the previous one – their first year-over-year quarterly increase since before the peak of the financial crisis, the Canadian Real Estate Association said this week.

The industry group said actual home sales totaled 147,351 units in the second quarter of 2009, up 1.4% from the same quarter of 2008.

Home sales rose 8.7% in June from May on a seasonally adjusted basis. They were up 17.9% from June 2008, using non-seasonally adjusted figures.

“This is on par with the record for the month of June, set in 2007, and is the fourth highest ever for activity in any month on record,” CREA said in a report.

A total of 41,304 homes changed hands in the month.

The report is the latest piece of evidence showing that consumers are venturing back into the home market, encouraged by low mortgage rates and signs that the worst of the recession is over.

“The recovery in the Canadian housing market continued in earnest in June …,” said Millan Mulraine, economics strategist at TD Securities.

“With prices remaining quite favorable and low borrowing rates enhancing affordability, it is likely that this uptick in sale activity may continue for some time as the recovery in the housing sector takes hold,” he said.

The average home price rose 3.6% year-over-year to a record high $326,613 in June.

On a quarterly basis, the average price was up 0.5% from a year earlier to $318,696.

But CREA said strong sales activity in a handful of very expensive markets was distorting the national average to make prices look unusually high.

Sales growth in Vancouver, Toronto, Montreal, Calgary and Edmonton contributed most to the national increase.

The inventory of unsold resale homes – measured as the number of months it would take to sell the stock of houses at the current sales rate – fell to its lowest level since August 2007 at 4.2 months.

Kelowna, BC – The Central Zone of the Okanagan Mainline Real Estate Board (OMREB) reported the number of units listed on the Multiple Listing Service® in the Central Zone was down this month by 9% at 881 listings compared to 968 in January 2008. Total sales dollars of all property types sold on the MLS® in January decreased by 71% compared to January 2008 while the number of units sold decreased by 65% (114 units sold compared to 322 last December).  

“January is generally a slower month in real estate, but what we are seeing so far this year is the additional impact of slower economic conditions across the country and around the world,” says Brenda Moshansky, OMREB Director and REALTOR® in the Central Zone. “We are not immune to these conditions, and while we can’t escape the international and national downdraft, our downside will be mitigated somewhat by our demographics, Okanagan lifestyle and economic diversity.

Meanwhile, the upside is that affordability is improving and is better than at any time in the last two years,” she adds.  “Buyers, particularly first time buyers, can take advantage of an excellent selection, record low interest rates and more flexible sellers on everything from price to closing dates.”

Moshansky summarizes, “Listing inventories may come down in the coming months, so now is an excellent time to seriously consider the opportunities out there.”

The Central Zone of OMREB covers an area from Peachland to Lake Country and east along Highway 33 to Westbridge (including the Christian Valley).

The Okanagan Mainline Real Estate Board (OMREB) is comprised of 1,165 member REALTORS®  and 91 real estate offices in the Southern Interior of BC.  For the most comprehensive source of all real estate listings, home buying and selling information, visit our national websites at www.realtor.ca and www.icx.ca. Our local public website is available at www.omreb.com.  All OMREB listings are published in the MLS® Real Estate Review magazine available at all real estate offices and various locations in the Central Okanagan, North Okanagan, the Shuswap and Revelstoke areas.  For comprehensive Board-wide statistical information please visit www.omreb.com ‘

Courtesy of your Kelowna Mortgage Broker

The federal budget released yesterday contains a few items of interest to those in the residential construction industry. In summary, they are as follows:
 
Home renovation tax credit:
Homeowners can claim a non-refundable 15% tax credit on eligible home renovation costs incurred and paid after January 27, 2009, and before February 1, 2010, under agreements entered into after January 27, 2009.
 
The tax credit is available on expenses exceeding $1,000, but a maximum of $10,000 of expenses qualify per family unit, so that the maximum credit will be $1,350 (i.e., $9,000 x 15%).
 
Home Buyers’ Plan:
Commencing January 28, 2009, first-time home buyers can withdraw $25,000 from a Registered Retirement Savings Plan (RRSP) to purchase or build a home, without incurring tax. Previously, the limit was $20,000.
 
First-time home buyers’ tax credit:
First-time home buyers that acquire a qualifying home after January 27, 2009, can claim a 15% non-refundable tax credit on up to $5,000, for a maximum credit of $750. If a home is purchased jointly, the total credit that may be claimed by all purchasers is $750. The unused portion of the credit can be transferred to a spouse or common-law partner.

Mortgage Broker Kelowna

The current recession will be characterized by de-leveraging by households and corporations. Household credit will be little changed in the course of the coming 12 months, and for the first time in many years the very important debt-to-income ratio will stop rising.

The most notable softening will be seen in the mortgage market. After rising by 12-13% in 2008, look for mortgage outstanding to rise by only 2-3% in 2009. On average, house prices will fall by roughly 10% in 2009 versus the average value in 2008.

Yes, we are in a recession. But like previous recessions this one will also end, and the sun will shine again. Meantime we have to try to understand the nature of this recession and see how we can position ourselves to take advantage of the opportunities presented by the current situation and prepare ourselves for the eventual recovery.

One of the derivatives of the recession is that the savings rate will rise. Households are reducing reliance on debt (which is negative savings), and lower consumer confidence is leading to increase in precautionary savings. Overall, we expect the savings rate to rise to 5% in the coming year. This is a significant increase. And the money will have to go somewhere. In this context the timing of the introduction of the Tax-Free Savings Account (TFSA) is ideal since it provides Canadian with a tax efficient way to park these precautionary savings.

Given the expectations that the economy will start showing some pulse in the second half of the year, and the fact that equity markets tend to lead the economy, there is a growing sense that the coming few months will see a rally in the stock market (some say it is going to be a bear market rally), a fact that might lead to some renew inflow into mutual funds.

In the near-term the bond market might also provide some opportunities. After all, we will have to wait for some further narrowing in spreads and lower rates before we see a notable improvement in the stock market. So in the short-term, the government bond market and potentially the corporate bond market can lead to nice returns.

An addition to the unprecedented efforts by central banks, global governments in general, and in North America in particular, are engaged in a massive fiscal stimulus which will include a combination of tax cuts but more importantly, infrastructure spending. Given that every one billion dollar of infrastructure spending in Canada works to lift the overall economy by close to 0.15% and create no less than 11,500 new jobs, such programs will not only work towards closing the Canada’s $120 billion infrastructure gap, but also in providing a badly necessary lift to a recessionary economy. And at the back of this discussion, US and Canadian infrastructure stocks have been rallying recently—in anticipation for a new injection of public money.

Benjamin Tal
Senior Economist
CIBC WORLD MARKETS INC.

Compliments of your Kelowna Mortgage Broker… 

DAVID FRIEND

THE CANADIAN PRESS

Canadians should brace themselves for another year of economic woe that could top the misery that unfolded in the latter half of 2008, according to some of the country’s leading bank economists The flood of dire financial challenges facing the United States is still working its way steadily across the border into Canada, TD Bank chief economist Don Drummond told a gathering at the Economic Club of Toronto yesterday.
“We shouldn’t really be thankful for the end of 2008 because I think (it) will have proven to be a better year than 2009,” he said.
“We’ll have a rough fourth quarter, but it’ll really hit in Canada in the first quarter, and we’ll start to see a lot more variables that look somewhat like the United States.”
The dramatic economic decline will likely push Bank of Canada governor Mark Carney to further slash interest rates, to as low as 0.5 per cent, in an effort to fend off deepening economic problems, suggested Avery Shenfeld of CIBC.
“The Bank of Canada has been aggressively cutting interest rates and has more to do,” he said at a news conference after the meeting.
However, he added that “going all the way to a zero interest rate might not be necessary, given that we’re going to get the stimulus from both the U.S. actions and fiscal policy, and we also have a cheaper dollar.”
Last month, Canada’s central bank slashed a key interest rate to 1.5 per cent, its lowest level in half a century.
The bank economists focused especially on the world economy, and how what started as a U.S. economic slowdown began to relentlessly expand in recent quarters.
“There is no question that the current situation is without precedent,” said Bank of Montreal’s Sherry Cooper.
“It is global, it is affecting sectors around the world and there is no place to hide.”
In Canada, the global economic meltdown will continue to affect the country for at least the first half of the year before it returns to moderate growth, the economists agreed.
A report from BMO Capital Markets suggested real GDP will contract just over two per cent, while unemployment will rise to eight per cent by the end of the year.
Home prices are also expected to erode further while consumer spending tightens, especially in auto sales, the BMO report said.
Cooper said she believes government policies and monetary stimulus will bring the country out of a recession, and that a recovery will start in the third quarter.
“At the end of the day we will have outperformed much of the rest of the world, certainly the rest of the G7,” she said.

Ottawa, get tough

Time to crack down on banks

Tough times take tough measures. And tough leaders.

So it’s time Ottawa got tough with our big banks and forced them to pass along interest rate relief for overly-indebted Canadians, after a bold move by the world’s central bankers to chop rates by 1/2%.

This is serious stuff when for the first time in history central bankers work together in a desperate attempt to put the brakes on a growing global financial meltdown not seen since the Great Depression.

The Bank of Canada joined in, cutting our key rate by 1/2% to 2.5%. Normally, banks would lower their prime lending rate by same 1/2%, bringing the rate to 4.25%. But with a raging credit crunch that’s pushed up their cost of borrowing, they refused. They cut by only 1/4% to 4.5%.

“I don’t understand how the Bank of Canada can cut rates, yet borrowing is getting more expensive,” said an angry Sun reader.

She was referring to how TD Canada Trust hiked its variable rate mortgages and home equity lines of credit that were at prime by a full 1%, even before the Bank of Canada move. Others have hiked variable mortgages to prime plus two. And one, First Line, a division of CIBC, even suspended all variable rate products, effective yesterday.

These changes do not affect lenders who’ve already locked in contracts, some with sweet discounts that new clients can no longer get as credit deals dry up.

“The variable product today is not the product you should be taking,” said mortgage expert Jim Rawson, regional manager of Invis, Canada’s largest brokerage network. In July when Rawson’s variable mortgage came due, he locked in a fixed-term mortgage and he’s advising his clients to do the same. 

“In uncertain times, people want security, to sleep at night,” he said. For those who still want to play the variable rate game, Rawson suggests taking a six-month open. “You pay a premium, but it gives you options.” 

Credit card rates have also been edging up, with a standard card charging 19.5% for an obscene spread of 17% when stacked against the bank rate. Some retail cards are at 30% and higher.

Bottom line is Canadians owe a record $1.1 trillion, and borrowing against home equity is getting more expensive, while real estate prices are now starting to decline.

Yesterday’s bold interest rate cut helped ease overnight lending rates, but three-month borrowing rates, or “term funding” stuck at lofty levels, meaning this credit crunch is still raging and could get worse.

Now is the time to get your finances under control, get rid of debt and play it safe.

The Toronto Star
Thursday, September 4, 2008

Loonie leaps ahead as bank stands pat

Canada’s monetary authorities stood on the sidelines yesterday as jobs disappeared, the economy slowed and federal parties prepared to fight an election.

Despite strong indications that inflation is a fading threat, Bank of Canada governor Mark Carney and his five deputies held the bank’s key overnight lending rate at 3 per cent.

The rate is low by historic terms, but is actually higher than the yield investors were demanding yesterday to hold five-year Government of Canada bonds.

It is also well above the 2 per cent rate for comparable loans to banks in the United States.

The do-nothing decision spurred currency traders to bid up the dollar – making our exports more expensive to foreigners – and disappointing the economist for a major labour union.

“The central bank should have decisively cut interest rates today,” argued Erin Weir of the United Steelworkers, noting much has changed since the last rate announcement in July, including the loss of 95,000 jobs that same month.

He questioned why the bank has done much less to stimulate the economy than the Federal Reserve Board, the central bank of the United States.

There, the combination of steeper rate cuts and tax refunds, helped lift economic growth in the spring quarter to an annual rate of 3.3 per cent versus 0.3 per cent in Canada.

Economist David Wolf of Merrill Lynch (Canada) noted our economy and job market would have shrunk in recent months if not for an increase in government spending, investment and hiring.

But he questioned how long governments will have the revenue to maintain the approach.
Even so, most economists and traders in futures contracts had expected the Bank of Canada would make no move yesterday.

Only in the currency markets did it appear that traders had some doubts.

The price of the Canadian dollar drifted as low as 92.79 cents (U.S.) in early morning trading overseas before bouncing back.

The dollar rose nearly two cents to as high as 94.53 in the 40 minutes after the Bank of Canada rate announcement, but ended the day at 94.25 cents (U.S.).

Canada’s economic growth has been slower than expected, the bank acknowleged – and U.S. growth could fall to low levels for a prolonged period considering global financial markets remain in turmoil.

Bank officials also pointed out that the unexpectedly rapid fall in prices for oil and other commodities is likely to provide relief on the inflation front.

Oil slipped back 36 cents to $109.35 (U.S.) yesterday, the lowest level since March.
Toronto’s commodity-heavy S&P/TSX Composite Index fell 1.2 per cent to 13,137.72 points.

But the bank defended its inaction by arguing that consumer demand and income gains remain strong in Canada.

It also said that financial conditions are significantly better than in most other countries.
Economists forecast Canada’s economy will only grow by only about 1 per cent this year, yet most expect the bank will not cut its overnight lending rate before early in 2009.

“It is becoming increasingly clear the (bank) would have to see either significantly weaker than expected labour and/or housing market conditions to consider easing further,” wrote TD Bank Financial Group economist Pascal Gauthier.

“Short of that, we look for the (bank) to stay on hold for the balance of the year.”

That period of stability in short-term rates could actually support the housing market if home buyers take comfort that they can safely grab the savings available with variable-rate mortgages.

Mark Olkowski, a regional manager with mortgage broker Invis Inc., pointed out that buyers can find variable-rate mortgages at a 4.15 per cent interest rate.

That compares with 5.45 per cent for a five-year term, the largest savings gap since May of 2005.

“Even if the Bank of Canada were to hike its (overnight) rate by a full per cent over the next year, borrowers with a $200,000 mortgage with a 25-year amortization would still save $3,037.87 over five years by going with a variable rate mortgage,” Invis noted.

Complimpents of your Kelowna Mortgage Broker

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 3 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 3 1/4 per cent.

The three global developments highlighted in the July Monetary Policy Report Update continue to have a major influence on the Canadian economy. Two of them – the course of the U.S. economy and the ongoing turbulence in global financial markets – have evolved broadly in line with the Bank’s expectations. However, there is an increased risk of a more pronounced interplay between weakness in the U.S. economy and tightness in credit conditions that could affect the U.S. outlook for 2009.

With respect to the third highlighted development, the sharp increases in commodity prices, the risk identified in July that these prices could be weaker than assumed has materialized. This has been largely due to the impact of slower global growth on the demand for energy. Given tight inventories, commodity prices can be expected to remain volatile. The reduction in commodity prices has been a significant factor in the decline of the Canadian dollar against the U.S. dollar. The weaker global growth and the decline of the Canadian dollar will have opposing effects on the demand for Canadian goods and services.

In Canada, domestic demand has slowed modestly but remains strong. It continues to be supported by financial conditions that remain significantly better than those in most other major economies and by income gains stemming from past improvements in the terms of trade. Overall, the level of economic activity is slightly lower than expected in July but still close to the economy’s production capacity.

Global inflationary pressures remain elevated, with potential implications for import prices and the dynamics of inflation in Canada. While total CPI inflation has moved above 3 per cent, core inflation has stayed at 1.5 per cent as expected. The temporary factors affecting both of these measures should dissipate over the coming quarters, and the Bank continues to expect that total and core inflation will converge on 2 per cent in the second half of 2009. However, the recent decline in both spot and futures prices for energy means that the spike in total CPI inflation expected between now and the first quarter of 2009 will be lower than projected in July.

Given these developments, the Bank judges that the current level of the target for the overnight rate remains appropriately accommodative. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.

Information note:

The Bank of Canada’s next scheduled date for announcing the overnight rate target is 21 October 2008. A full update of the Bank’s outlook for growth and inflation, including risks to the projection, will be set out in the Monetary Policy Report, to be published on 23 October 2008