Here are three “things” that happened last week which influence Canadian interest rates, and why I think you want to pay attention:
- OSFI draft proposal.
- U.S Federal Reserve’s agenda.
- Governor Poloz’s speech.
OSFI Draft Proposal:
The Office of the Superintendent of Financial Institutions Canada (OSFI) have created a draft proposal, effective January 1, 2017 that require Mortgage Insurance companies (MI’s: CMHC, Genworth & Canada Guaranty) to hold more capital assets relative to their insurance portfolio.
MI’s protect Mortgage Lenders (Banks & Mono-line lenders) from borrower default with a borrower paid premium for down payments less than 20% of the value of the home. Recently, MI’s have increased the borrower Mortgage insurance premium, for a 5% down payment, to 3.60% of the Mortgage amount.
The Capital Requirements for Federally Regulated Mortgage Insurers (Banks & Mono-line lenders) provides a new approach that is more “risk sensitive” when insuring Mortgage files based on “key drivers of risk and loss” including: creditworthiness, remaining amortization and Mortgage loan balance. Basically, OSFI wants to collect more money (capital assets) for increased risk of borrowers AND location of property.
Here’s what that might mean …
Specific regions of Canada might face higher borrower Mortgage insurance premiums so Mortgage Insurance companies have adequate capital for potential “risk and loss”. Today, everyone across the country pays the same insurance premium for an insured Mortgage. A potential example change OSFI might mandate is a 10% down payment Mortgage insurance premium in Toronto or Vancouver (or Calgary?) might be different than Regina or Winnipeg.
The need for adequate capital requirement might also mean increased scrutiny of marginal Mortgage borrowers. Meaning, Mortgage Insurance underwriting guidelines are to be strictly followed, with less approval exceptions.
[Shameless Broker industry promotion here …]
Again, with these kinds of changes looming, I think the value of a qualified Mortgage Broker increases VASTLY for you. There have been MULTIPLE times where I received a “decline” from a Mortgage Insurer. Feedback, and more importantly, mitigation of the negative news/attributes, in preparation for a file re-submission to a different lender and different Mortgage Insurance company, is very important to helping you be approved for your Mortgage.
U.S Federal Reserve’s Agenda:
Last week, the Federal Open Market Committee (FOMC) decided to retain their interest rate, similar to our Bank of Canada’s “do nothing” strategy.
However, with so much attention on the actual decision of FOMC, additional attention is brought about in the language they use to disseminate their information.
Language used by Janet Yellen, Chair, Federal Reserve Board, at the beginning of her post decision interest rate conference, is interesting to dissect … terms like “the case for an increase [to Federal Reserve Rates] has strengthened”, “strong household spending”, “business investment remains soft”.
I think the back-and-forth language, in support of a growing economy AND hesitation to increase interest rates, is to let the market know a rate increase is not far off, but otherwise not certain. As a result, the market’s are pricing a 50% chance Fed rate hike will happen in early December.
It is of known speculation that the Bank of Canada’s hand is significantly forced in the event of a Federal Reserve interest rate hike.
Governor Poloz’s Speech:
Last week, the Bank of Canada’s Governor, Stephen S. Poloz, gave a speech to a group of economists titled: Living With Lower For Longer.
Stephen spoke about how we arrived at such low interest rates in Canada, what low interest rates are doing for Mortgage borrowers and how low rates are effecting “savers” rates or return (retired Canadian’s).
Poloz also went out of his way stating,
… 0ur economy is still facing strong headwinds, and we need stimulative monetary policy to counteract them and move us closer to full capacity. We also need to watch the full effects of the government’s fiscal stimulus unfold.
Really, the outlook is “lower for longer” interest rates.
Although our interest rates are influenced by Global forces, our Governor did offer some solutions to help pull ourselves out. Here’s a great quote,
Here in Canada, one way forward is to identify and remove impediments to business growth. For example, new and young firms are often the ones that can do the most to improve an economy’s productivity, create new jobs and raise potential output. So we need to make sure that our tax and immigration policies, as well as our ability to finance growth of young firms, are as enabling as they can be, so we can nurture those firms and see them flourish right here.
Conclusion:
Despite Canada’s economy justifying low interest rates, our housing sector, regulated by OSFI, might trigger events that push rates higher or push Mortgage Insurance higher (or both!). In addition, I think the market needs to be aware and anticipate any US Fed rate movements that eventually trickle into our Bank of Canada’s interest rate decision.
I think with so much happening, having an experienced Real Estate team advising you is very important. I know the lives of my clients are very busy and feeling confident in the help you hired save you stress, time, energy and money (short and long term).
Feel free to contact me with any questions or concerns.
Talk soon,
Chad Moore
P.S
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