The U.S. economy continues to grow at a modest pace, limited by the consolidation of household balance sheets. Growth in Europe is maintaining momentum while the disasters that struck Japan in March are severely affecting its economic activity and causing temporary supply chain disruptions in advanced economies.  Commodity prices have declined recently but are expected to remain at elevated levels, supported by tight global supply and very strong demand from emerging markets.  These high prices, combined with persistent excess demand conditions in major emerging-market economies, are contributing to broader global inflationary pressures.

Economists predicted the prime rate to reach 3.75% by end of 2011, and 4.25% by 2012.  The rate hike is likely to commence September, October and December of 2011.

Source: Vancouver Sun

Rules for amortization and loan to value (LTV), effective March 18th, 2011 are as follows:

• Reduce the maximum amortization period to 30 years from 35 years at high ratio (>80% LTV) 
• Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. 

Rules on Line of Credit (HELOC), effective April 18, 2011, as follows:

•Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs.   This means you will not be able to obtain line of credit at 80% LTV or higher (some lenders cap loan to value for HELOC at 75% LTV or lower  before this rule anyway)

For further questions, dont’ hesitate to email us at cchien@mortgagegrp.com about how this rule may affect your buying decision and qualifications.

Full story and source: Department of Finance Canada

“(But) cheap money is not a long-term growth strategy,” he warned. “Experience suggests that prolonged periods of unusually low rates can cloud assessments of financial risks, induce a search for yield and delay balance sheet adjustments.” For Canadians, he noted with alarm that household credit has grown by seven per cent since the recession’s trough, compared to a 3.5 per cent decline in the U.S., perhaps an indication that Canadians believe the easy ride on debt payments will be permanent.

The Bank of Canada will set interest rates based on inflation, not on whether a large swath of Canadians have taken on too much debt, he added. In fact, he suggested the bank may tighten even in a low-inflation environment to discourage risky behaviour.  The next interest rate announcement is Jan 18th, 2011.

• The income reported by the borrower must be reasonable based on the industry, length of operation and type of business
• Strong credit and credit score with minimum 2 trade lines with at least two (2) years history (for recommended bureau score requirements see the premium matrix below)
• Genworth will average the scores pulled from both credit bureaus for each borrower, and the minimum score requirement will apply to all borrowers on the application
• No mortgage, installment or revolving credit delinquencies appearing on the credit bureau in the past 12 months
• No reported defaults on residential mortgages for the past 7 years
• No previous bankruptcy
• Minimum 5% down payment from the borrowers own savings. The remainder may be gifted from an immediate family member. Borrowed down payments are not permitted.
• Borrowers with commission income are ineligible
• Lender to ensure borrower(s) have no tax arrears
• Maximum one (1) Genworth-insured Alt. A mortgage
• Up to 90% LTV on Purchase and 85% LTV on Refinances

**Please remember, not all lenders have adopted the change for the down payment requirement**
Make sure to check with each lender before submitting a BFS file.

Bank of Canada raised the prime lending rate to 3.0%, acknowledged the economic recovery in Canada would be “slightly more gradual” than envisaged it its most-recent economic outlook, due to sluggish private-sector demand in the United States. However, it said domestic demand was expected to be “solid” and business investment to advance “strongly” — powered by “accommodative” credit conditions that have eased further in recent weeks due to sharp declines in bond yields.

Consumers continue to take out loans at a steady pace, with central bank data suggesting household credit expanded at an annualized 7.1% pace for the three-month period ended July 31.

Important message:  It’s time to lock-in your rates and do a pre-approval if you are thinking to buy in the next 3-6 months!   As well, never hurt to message me and ask about the ‘easy transfer’ process if you had a prime plus, or prime with very minimal discount on your existing mortgage.

Source: Financial Post

We asked Bill Butler for his insights into a few questions about the current Canadian Commercial Lending landscape and trends for the future, and here’s what he had to say.

Q: Who is lending, and on what type of transactions?

We’ve certainly seen a tightening of availability of capital. To the extent where we’ve had some development success, we work much harder to find the funds. The safety valve in the West has been the Alberta Treasury Branch and the Canadian Western Bank. They’ve stayed reasonably active (especially the Alberta Treasury Branch).

The life company lenders we traditionally work with – Great Life, Sun Life and Manulife – have all been tighter with their lending practices.

Lenders are focusing on new spreads and lower ratios, but clearly they want to do business with the people that they’ve done business with in the past as opposed to being courted by new borrowers.

I think relationships have paid off from that point of view. I think this pattern is going to continue over the next couple of years.

Q: What will likely be the spread between prime and lending rates?

The spread (related to the bond rate) has come down from about 400 basis points to about 300. Our opinion is that over the next six to twelve months you will probably see further reduction in the spread to about 200 basis points.

I think at some point in time lenders are going to relax some of their tougher standards because quite frankly, as they get more and more money coming in they have to put some portion of that money into solid long term real estate. Lenders want to go with tried and tested borrowers. They are certainly looking closely in the retail side at the strength of the tenants you have and the market that you’re located.

Q: Where are underwriting and lending practices heading?

From an underwriting perspective they are requiring a greater percentage of the project in developers’ equity and more up-front money from the developers for construction loans.

We had historically worked off non-recourse financing. Lenders are shying away from this model or at least reducing the ratios to such a point that non-recourse becomes impractical. Developers are being pressured to bundle projects to get commitments.

Lenders would rather see more public company models where all of your projects are under one ownership. Smaller developers who don’t have huge bundles of assets under one company are being asked for personal covenants or cross-collateral guarantees.

Q: What are the major sources of debt financing and what will be the yield expectations?

That question is best answered by the lenders. The disappearance of the conduit lenders will create challenges for many existing borrowers. With respect to yield — the model has certainly changed dramatically. We’re going to head back to more traditional practices. It was probably overdue and [the industry] had certainly lost track of values. I think lenders and borrowers are re-calibrating the model and I think we’re headed toward a slow, steady market where fundamentals will return to where they were five to ten years ago.

Q: How much more equity will be required from borrowers?

Traditionally, lenders were lending between 65 and 75 percent of value. Now two things have happened, the lending ratios have fallen five to 10 percent, and secondly, valuation of the real estate has gone down by 20 to 30 percent. The combination of the two factors is creating significant equity challenges for developers and for borrowers on mortgage renewals. Small developers are getting squeezed out of the market.

Vancouver Sun Report – With mortgage rates low and more likely to go up than down, some borrowers may want to think long and hard about whether they want a long and hard fixed rate mortgage.

Statistics show that 88 per cent of the time, a variable mortgage is cheaper than a fixed-rate mortgage, but the problem with a variable rate is that it is just that: It changes over the life of the mortgage.

The variable rate is based on the lender’s prime lending rate, which today is 2.75 per cent for the major banks and credit unions.  But banks change their prime rate from time to time, usually whenever the Bank of Canada changes its overnight target rate, which it has done twice since the beginning of June and is expected to do again in the fall.

If that kind of uncertainty “is going to keep you up at night,” it is recommended taking a fixed rate.

Some variable mortgages will adjust the monthly payment every time the rate changes, making it difficult to budget. Others will keep the payments the same but just attribute more to interest and less to principal if rates go up (and vice versa if they go down).

“Lock it in and forget about it,”  The most common term for fixed-rate mortgages is five years, but with rates at historic lows,  some people might want to look at a 10-year mortgage.  The 25-year average for the five-year rate is more than eight per cent, but the 10-year rate now is as low as 5.35 per cent.  So for those on a fixed income, or employed in a job that isn’t likely to see much of a pay increase over time, knowing what your payments will be for 10 years may be a source of comfort, he said.

One thing a 10-year borrower doesn’t have to worry about is a larger prepayment penalty. As discussed in last week’s Money Watch, lenders usually charge the greater of three months’ interest or interest differential — the difference between the interest on the mortgage being paid out and the rate the banks could earn re-lending that money — when a borrower wants to pay out his mortgage before the term is up.

If this applied to 10-year mortgages, that interest rate differential could be quite high. But a Canadian law, which has been around for more than 100 years, limits the prepayment penalty for any mortgage that is greater than five years to three months’ interest, said David Mydske, the national practice group leader for the commercial real estate group at Borden Ladner Gervais LLP.

Private Sector Fuels Surge in Jobs

After weathering a brutal downturn that knocked hundreds of thousands of Canadians out of the work force, Central Canada’s job machine is back and revving into high gear.  The country’s remarkable rebound from recession gained momentum in June, as surging job growth in Ontario and Quebec underpinned an increase of 93,000 jobs and unemployment fell below 8 per cent for the first time since early 2009, Statistics Canada reported.

The private sector has accounted for more than 246,000 new jobs over four months, …the stunning employment gain was close to the highest on record, second only to an increase of about 109,000 jobs two months earlier. The June hiring brought the combined total of new positions created since last July to 403,000, restoring most of the jobs lost during the recession. The jobless rate dropped to 7.9 per cent from 8.1 per cent.

“The jobs picture clearly shows that the Canadian recovery hasn’t stalled yet,” said Benjamin Reitzes, an economist with BMO Capital Markets. “The handoff from public to private spending looks to be going smoothly.”

The jobs report, far stronger than expected, also lays the groundwork for another interest-rate hike later this month, following a quarter-point increase by the Bank of Canada in early June, economists said. The quickly improving jobs picture, along with rising interest rates, stands in sharp contrast with the still-sluggish economy south of the border. Only a fraction of the more than eight million jobs lost in the United States between late 2007 and late 2009 have been restored, while the U.S. Federal Reserve shows no sign of raising its near-zero interest rates any time soon.

The Canadian dollar soared by nearly a full cent against the U.S. dollar Friday, as investors bet that Bank of Canada Governor Mark Carney will raise the benchmark interest rate by another 25 basis points on July 20 to 0.75 per cent. But economists caution that Canada’s economy and job creation are not guaranteed to continue at the current clip.

Since June 1, when Mr. Carney became the first central banker in the Group of Seven to lift borrowing costs, the European debt crisis has produced a march toward austerity in the world’s rich economies, a cure which some analysts warn could prove painful. Also, the recovery in the United States, Canada’s top export market, looks increasingly fragile, as housing and the labour market sputter. And there are fears that measures to keep emerging-market economies such as China’s from overheating could cool a vital source of global demand.

For export-heavy Canada, where the housing market is already slowing down, that means it’s highly unlikely that the current pace of job creation, let alone the first quarter’s 6.1-per-cent economic growth rate, are sustainable. “Any realistic look at what’s happening in the U.S., Europe, China, suggests that the second half of this year will be much, much weaker than the first half,” Benjamin Tal, deputy chief economist at CIBC World Markets, said. “This recovery is going to be the most nonlinear recovery in ages. The story will not be as pretty three months from now.”

Mr. Carney later this month will release his latest forecasts for Canada and for key countries and regions around the world. Most economists, including Mr. Tal, say things are good enough in Canada for now that the central bank will probably keep raising interest rates in 25-basis-point increments until the benchmark rate is at 1 or 1.25 per cent, but then policy makers will pause to assess how much global headwinds are affecting the domestic economy.

Michael Gregory, a senior economist at BMO Capital Markets in Toronto, on Friday predicted “a pattern of oscillating rate hikes and pauses” as Mr. Carney takes a cautious approach.

Another concern is the type of jobs being created. Retail and other service-sector jobs tend to be more temporary, based on flexible hours, and are often lower-paying, economists said. The goods-producing industries that make many of Canada’s exported products saw a net job loss in June.

Still, Canada’s job gains are far brighter than in the United States, where the jobless rate is still 9.5 per cent and in recent months has dropped only because discouraged job-seekers have stopped looking and thus aren’t counted as part of the labour force.

Mr. Carney started warning in April that Canada’s rebound from the crisis would slow considerably starting in the second quarter because of a slowdown in housing, the impact of the loonie near parity with the U.S. dollar and the inevitable end of government support.

Pointing to those factors, plus “uneven” global growth and sovereign-debt worries, Mr. Carney has said several times that a return to more normal interest rates is not “preordained.’’  On Monday, he will release a closely watched survey of executives from across the country, which will give a sense of how worried businesses are about Canada becoming a victim of economic problems from outside its borders.

“I have doubts about whether the economy is going to be able to keep up the head of steam that it has right now,’’ said Carl Weinberg, chief economist with High Frequency Economics in Valhalla, N.Y. “The U.S. economy is questionable, Europe is in trouble, Japan is in trouble, all the major trading partners are hurting and the loonie is quite strong,” he said. “So it’s hard to look at the months ahead and draw a strong line on the chart for where GDP is headed.”

Source: Globe and Mail Report on Business

HST Rules and Rebate- BC

Effective July 1, 2010, British Columbia will be combining the GST and PST taxes into one Harmonized Sales Tax (HST). The implementation of the HST will not change the taxation on mortgage insurance premiums. However, the HST will be applicable on new construction homes and may be eligible for the HST new housing rebate.

• In BC, the HST rate on new construction housing (i.e. both house and land) will be 12% (GST of 5% and PST of 7%)
• There will be a partial rebate of the PST portion of the HST in an amount equal to 5% of the purchase price up to a maximum rebate of $26,250. The rebate would eliminate any tax increase on new housing sold for a purchase price of up to $525,000. There would be no phase out of this rebate, such that homes priced above $525,000 would qualify for the maximum rebate amount of $26,250.
• New home buyers may be eligible for the federal GST new housing rebate, which generally equals 36% of the tax paid on the first $350,000 of the purchase price. The amount of the GST rebate is phased out on a straight-line basis for homes priced between $350,000 and less than $450,000.

Examples of the applicable taxes are as follows:

Note: Lender Financing of HST – For qualification and submission purposes, the lender is not required to deduct the rebate from the purchase price.  The lender may finance and submit to the insurer, the total purchase price as reflected on the purchase and sale agreement that would include the HST for a total Purchase Price.