by Ephraim Vecina

Canadians’ purchasing power will continue deteriorating significantly, with the national unemployment rate most likely to settle at the double digits by year-end.

The latest forecast by the federal government’s Parliamentary Budget Officer (PBO) warned that Canada’s unemployment levels are now in the red zone, and will peak during the third quarter of the year.

With the rate at 7.2% as of the end of Q1, unemployment will enter into a steep upward slope. PBO’s projections placed Q2 figures at 14.8%, Q3 at 15%, and Q4 at 12.7%. Overall, these numbers are expected to yield an end-of-2020 rate of 12.4%, real estate information portal Better Dwelling reported.

The impact of the coronavirus pandemic has been particularly apparent in Canadians’ household finances. Unprecedented travel restrictions and social distancing policies have led to work stoppages for millions across North America.

A recent edition of the Bloomberg Nanos Canadian Confidence Index has found that 22.3% of the nation’s employed professionals are afraid that they might lose their jobs. This was the highest share since 2013, and accompanied another record high (36.9%) in the share of Canadians who said that their personal finances have worsened over the past year.

Seventy-nine percent said that they are expecting the economy to be in much worse shape within the next six months. This considerably outstripped the previous record (57%) last seen during the 2008-09 recession.

by Nicola Brown

Amid the global financial chaos of the past few weeks, Canada’s major banks have been making some big changes. For the second time in 2 weeks, the Bank of Canada slashed the prime rate by 50 basis points, bringing the total rate cut to a full percentage point lower than before the global COVID-19 pandemic.

Like many homeowners, I make some fairly eye-watering mortgage payments. And like many gig economy workers, I don’t have much job security to lean on in these uncertain times. So naturally, when interest rates dropped, I wondered if there could be a way to take advantage of a lower rate on my mortgage.

My mortgage broker, Scott Brown from Ultimate Mortgage and Finance Solutions Inc., answered some of my most pressing questions.

Should I break my fixed-term mortgage to take advantage of lower rates? Should people consider switching from variable to fixed to lock in a lower rate?

In the past week, many people have been contacting their mortgage brokers about breaking their current mortgage agreements to lock in lower rates. “Things are really busy right now. I must have done around $10 million worth of mortgage breaks last week,” says Brown.

Two weeks ago, there was a big incentive to do this. By the end of last week, things have changed slightly.

In theory, a 1% lower prime rate makes it cheaper for people to borrow money for a mortgage. In reality, the numbers aren’t so simple. It’s up to the banks to decide whether or not they pass along the full amount of the lowered rate to borrowers.

RELATED: What Canadians Care Most About When Considering a Mortgage

Two weeks ago, we did see banks passing along the full lowered rate to borrowers. But just a few days later, we started seeing a few caveats. Many banks have also started to reduce the discounts they’re offering on their variable rate mortgages by 0.5% or more. Similarly, while fixed rates initially dipped, they’re now rising again. We are likely to see much more fluctuation in rates over the coming weeks and months.

Right now, rates are still lower than they were before the pandemic, but whether or not it’s a good idea to break your mortgage very much depends on your individual situation.

How can I calculate whether or not breaking my mortgage is worth it?

It depends on three things:

• The balance of your mortgage (i.e. how much of it you have left in your term)
• The penalties for breaking it
• The rate differential available

There are 2 types of penalties: three months interest, and loss of interest. The first is the lesser penalty, while the second can be a much larger one. Variable rate mortgages always have a three month interest penalty, whereas fixed rate mortgages take the greater of three months interest or loss of interest. You can find out more about these two types of penalties here. Big banks tend to levy steeper penalties. Brown’s advice is to call your lender to find out which one applies to you.

If you can save more than the cost of the penalty before your term ends, it’s worth considering. If you can’t, you’ll end up paying more in the long run, even with a lower interest rate.

Keep in mind, too, that posted rates aren’t necessarily reflective of the rate you’ll be offered. When you first get a mortgage, depending on your individual financial situation, it’s sometimes possible to get a lower rate than those posted. But rates for refinancing a mortgage are typically higher than posted rates. So don’t expect the same kind of deal you got initially. The rate that you will be offered also varies according to different scenarios, like whether the mortgage is insured or not, and the amortization period.

Rather than try to work it out yourself, contact your mortgage broker to find out whether it’s worth pursuing or not. If you have a variable rate mortgage, or you have a fixed mortgage and know what your penalties are, your broker can work this out in about 5 minutes.

Are there any long-term negative consequences to breaking a mortgage?

According to Brown, not really. If it makes financial sense, there’s nothing wrong with breaking a mortgage. It won’t count against you in the future and the details of any penalties paid are not reflected in credit histories.

How exactly do you break a mortgage? What does the process look like?

Breaking a mortgage means refinancing a mortgage. That involves starting a whole new application, so there’s significant time and effort involved. While some things stored on file may not have changed, like void cheques and identification documents, others require up-to-the-minute information and date stamps.

If you don’t stand to gain all that much after the penalties are factored in, it may not be worth the bureaucratic effort. If your penalties are in the region of $25-35K, Brown typically doesn’t recommend breaking your current mortgage.

Think about the time and effort you went through to get your mortgage in the first place. If you’re comfortable putting in that level of work, ask your broker to check by how much you’d come out ahead.

If I’m worried about being able to make my mortgage payments, what should I do?

In light of the global turmoil we find ourselves in, many banks are offering a 6-month deferral of mortgage payments. However, it’s not clear how interest would rack up in these cases.

If you’re worried about making your mortgage payments, Scott says contact your lender directly (not your broker) to find out if they’re offering a payment deferral option, and the details of their policy around it.

Deferring your mortgage payments may be a better option for those who are particularly cash-strapped at the moment, rather than breaking your mortgage to take advantage of lower rates.

Ultimately, I’ve chosen to stick with my current mortgage for now. But I’ll be keeping a close eye on the rates and staying in touch with my broker in the weeks and months ahead.

Source

As the country continues to respond to the economic fallout caused by the COVID-19 pandemic, there has already been an “unprecedented” rise in Canadians looking to refinance their mortgages following the Bank of Canada’s latest emergency rate cut.

On March 27, the Bank of Canada announced for the third time it would be cutting its key interest rates by half a percentage point in response to the outbreak, bringing the key interest rate down to 0.25% — its lowest level since 2010.

In the weeks to follow, LowestRates.ca, an online rate comparison site for insurance, mortgages, loans, and credit card rates in Canada, said it saw an unprecedented rise in mortgage refinancings through its mortgage quoted, indicating Canadians are trying to save money anywhere they can.

After noticing the spike in numbers, LowestRates.ca examined its data to compare the number of mortgage quotes in February and March of this year, as well as the number of quotes generated in March 2020 compared to March 2019.

As explained by LowestRates.ca, a mortgage “quote” can be defined as “a consumer who has used the LowestRates.ca mortgage quoter to compare rates and has filled in their information to request a formal offer from one of the banks or brokers LowestRates.ca compares on its website.”

Here’s a look at what they found:

• The total rise in mortgage quotes in March 2020 when compared to February 2020 was 101%
• The total rise in mortgage quotes in March 2020 when compared to March 2019 was 109%
• The total rise in refinancing mortgage quotes in March 2020 compared to February 2020 was 389%
• The total rise in refinancing mortgage quotes in March 2020 compared to March 2019 was 156%

“The latest rate cut has led to some of the best refinancing deals we’ve seen in years,” said Justin Thouin, Co-Founder and CEO of LowestRates.ca.

“There’s some uncertainty about whether these deals will continue to last, but in the meantime, we’re seeing a flood of Canadians trying to take advantage of them. Being able to refinance to a lower rate can save you thousands of dollars a year.”

LowestRates.ca., says refinancing can lead to major savings. For example, say you have a $480,000 fixed-rate mortgage at 3.09%, with a 25 year-amortization and a five-year term locked in for another four years. Right now, your monthly payments are $2,294.

However, if you can refinance to 2.39% as a result of the recent rate cuts, your monthly mortgage payment now falls to $2,124. That’s a monthly decrease of $170. Over the remaining four years of your term, that means you save $8,160 on your mortgage.

But remember, in order to refinance, you’re going to have to break your current mortgage, which may come with penalties.

According to mortgage broker, Scott Brown from Ultimate Mortgage and Finance Solutions Inc., there are two types of penalties: three months interest, and loss of interest.

The first is the lesser penalty, while the second can be a much larger one. Variable-rate mortgages always have a three-month interest penalty, whereas fixed-rate mortgages take the greater of three months interest or loss of interest. You can find out more about these two types of penalties here. Big banks tend to levy steeper penalties. Brown’s advice is to call your lender to find out which one applies to you.

If you can save more than the cost of the penalty before your term ends, breaking your current mortgage is worth considering. If you can’t, you’ll end up paying more in the long run, even with a lower interest rate.

Source

by Candyd Mendoza

Aside from replenishing the national inventory, building new homes might also play a vital role in bringing the US economy back to health once the COVID-19 outbreak is contained.

The National Association of Home Builders reported that building 1,000 average single-family homes creates 2,900 full-time jobs and generates approximately $110 million in taxes and fees, which the government can use to support police, firefighters, and schools.

Similarly, building a thousand rental apartments results in 1,250 jobs and $55.91 million in taxes and revenue for local, state, and federal government, while $10 million in remodeling expenditures generates 75 jobs and roughly $3 million in taxes.

“Before the coronavirus pummeled the US economy, housing was on the rise with January and February new-home sales numbers posting their highest reading since the Great Recession,” said NAHB Chairman Dean Mon. “The demand is clearly there, and as this study shows, we expect that housing will play its traditional role of helping to lead the economy out of recession later in 2020 when the pandemic subsides.”

However, building new homes and apartments is more likely to create jobs in industries that produce lumber, concrete, lighting fixtures, heating equipment, and other home remodeling-related products. Other jobs are generated in the process of transporting, storing, and selling these products, according to NAHB.

Last week, the Department of Homeland Security designated the construction of single-family and multifamily housing as an “essential infrastructure business,” which means that construction could continue in places under stay-at-home orders.

Mon said that NAHB has already come up with a plan to protect workers from coronavirus.

“Ensuring the health and safety of home builders and contractors is our top priority,” Mon said. “This is why NAHB and construction industry partners have developed a coronavirus preparedness and response plan specifically tailored to construction job sites. The plan is customizable and covers areas that include manager and worker responsibilities, job site protective measures, cleaning and disinfecting, responding to exposure incidents, and OSHA record-keeping requirements.”

Source

Doug Alexander, Bloomberg News

Canada’s mortgage rates are creeping up — even though the country’s central bank has slashed borrowing costs to combat the COVID-19 pandemic.

That’s due to the “enormous pressure” Canadian banks face amid disruptions caused by the outbreak, said Sherry Cooper, chief economist at Dominion Lending Centers.

“The costs of funds for banks is skyrocketing and bank earnings are plunging,” Cooper said Monday in a phone interview. “Every single business they have ever loaned to is subject to a massive decline in revenues, and therefore their own revenues are going down because nobody is taking out new business with banks except to extend debt.”

The Bank of Canada has cut its overnight interest rate three times this month, bringing the benchmark to 0.25 per cent. The large Canadian banks matched those moves by cutting their prime rates, which influence borrowing rates for variable mortgages and credit lines, to 2.45 per cent from 3.95 per cent at the start of the month.

As those rates have dropped, banks have been eliminating discounts off prime on variable mortgages. At the start of the month, qualified borrowers could get a rate of prime minus 1 per cent from HSBC Canada, for example, while Canada’s large domestic lenders were also offering “prime minus” deals as well.

But those discounts have shrunk by 75 to 85 basis points, said Rob McLister, founder of mortgage comparison website RateSpy.com.

Funding Costs

Typical five-year fixed rates at also rising. Rates at large Canadian bank are now at 2.99 per cent to 3.04 per cent versus around 2.49 per cent to 2.59 per cent at the end of February, McLister said.

“The big banks are leading the charge higher here, on both the fixed side and the variable side,” he said. Preferred borrowers can still get some prime minus deals at big banks, but they’re more like prime minus 10 or 15 basis points.

McLister said the rising cost of short-term funding, used for variable mortgages, explains the jump. Spreads are wide, fewer people want to lend big banks money at preferable pricing, so that gets passed through to the borrower, McLister said.

Fixed-rate mortgages, which are tied more to swings in the bond market, are also creeping up after Canadian bond yields hit record lows earlier in the month, added Cooper.

“The banks just can’t afford to price their loans at what are de minimis bond yield levels,” Cooper said.

She expects banks to start charging prime plus a premium for variable loans, as well as higher rates for fixed mortgages than those seen earlier in the year.

“I believe mortgage rates will trend around current levels,” Cooper said. “I don’t think interest rates in general are going to be a lot higher in the next year.”

Source