A Canadian federal election would rule out a spring interest rate hike

Michael Babad

What an election could mean:

If Canada in fact heads into an election, economists believe there could be some headwinds for the Canadian dollar (CAD/USD-I1.02-0.002-0.21%), which didn’t react much yesterday after NDP leader Jack Layton said he wouldn’t support the budget, and uncertainty surrounding the fiscal outlook. Most likely is that a campaign would stop any talk of the Bank of Canada hiking its benchmark overnight rate in April.

“First, the uncertainty over the near-term fiscal policy environment just went up in that it is less clear whether fiscal policy will act as a drag on growth if election goodies are dangled about,” said economists Derek Holt and Gorica Djeric of Scotia Capital.

“Second, over roughly the past 20 years, the [Bank of Canada] has generally avoided starting a tightening campaign in an election. It only did so in 1997, and that was because the economy was rapidly healing after the disaster of the first two thirds of the 1990s via over 734,000 jobs having been created in the back to back years of 1997-98. Now, if a May or June vote is in the cards, that adds to a long list of reasons why most analysts have abandoned much of any notion of a spring hike.”

Avery Shenfeld, the chief economist at CIBC World Markets, agreed, moving back his forecast for a rate hike to July, from his initial projection of May. He cited three reasons:

•The loonie will probably stay firm given high oil prices.
•Bank of Canada Governor Mark Carney may be "reluctant" to even signal a May rate hike at his next meeting in April.
•Softer core inflation amid 7.8-per cent unemployment could prompt Mr. Carney to raise his estimate of "potential" economic growth.
Over all, economists believe that Canada's fiscal standing will trump any uncertainty surrounding an election, which should leave the loonie in a strong position.

"Political uncertainty will be a looming question, however the global market has become quite comfortable with Canadian elections, the differences (or lack of) in our parties and a minority government," said Scotia Capital currency strategist Camilla Sutton. "Accordingly, we think in the medium term the focus should reside more with the strong sovereign position in Canada and less with political uncertainty."

Carl Weinberg, the chief economist at High Frequency Economics in Valhalla, N.Y., told his clients today that there wouldn't be a "sea change in power" if an election is called, and deficit-reduction will still be on the table regardless of what happens.

"Anything can happen at the polls, and the resulting budget is likely to differ in some respects from the plan outlined yesterday," he said. "However, fiscal austerity will be a key part of the platform of any party that wants to form a government Up North. So we see an election as neutral for the loonie and the bond market."

There was no detremental news to the housing industry and with the budget likely to be over turned, any fundamental changes won't be seen until the next adminstration.

Toronto Real Estate: Mortgage Insurance changes

Lots of questions today about the changes to Mortgage Insurance rules. In follow up to my previous blog, this should net it out. Federal Finance Minister Jim Flaherty announced changes to mortgage insurance rules intended to ensure the stability of Canada's housing market.

These measures include:
1. AMORTIZATION period reduced to 30 years from 35 years.
2. Maximum REFINANCING Loan to value (LTV) lowered to 85% from 90%.
3. Government insurance backing on home equity lines of credit, or HELOCs, has been removed.

IMPORTANT: There are no changes to down payment requirements as of yet that was widely expected to be raised from 5% to 10%.

Changes will take effect March 18th for 30yr AMORTIZATION and REFINANCING to max 85% whereas changes for Heloc's no longer being insured will take effect April 18th.

Know your options and contact a Realtor or a mortgage broker you trust to support you if you are looking to buy or refinance in the next 6 months.

Mortgage Rules: Canada makes changes to Mortgage terms

There is no doubt that the hardest hit will be new home buyers. If you are a first time buyer and were basing your budget on a 35 year amortization, you may want to consider buying before March 18th 2011.

Here is an excerpt from the Globe and Mail:

Ottawa’s three-pronged announcement Monday will effectively eliminate 35-year mortgages for home buyers who need mortgage insurance, lower the maximum amount that people can borrow in refinancing their mortgage and put an onus on lenders to be more careful about which customers get home equity lines of credit.

“It’s a tough little set of measures that will pull back the excess availability of credit,” said John Cocomile, a broker with GreedyMortgage.com in Toronto. “I think it’s fantastic. It’s too bad the Americans didn’t do this three or four years ago, or the mess they’re dealing with wouldn’t be nearly as bad.”

The Bank of Canada is worried about how indebted Canadians are, big bank executives have spoken up on the subject and now the federal government has shown how concerned it is as well. Borrowers, as Mr. Cocomile tells it, have been oblivious. As a result, they need to be saved from themselves.

At Mr. Cocomile’s office, nine of 10 new home buyers have been choosing to pay off their mortgage over 35 years. Starting March 18, 30 years will be the new ceiling for people with down payments of less than 20 per cent.

The extra interest charges resulting from an amortization period of 35 years as compared with 30 years can amount to tens of thousands of dollars. Mr. Cocomile said clients who are informed of this typically say they intend to start paying down their mortgage at the earliest opportunity. Does that actually happen?

“No,” Mr. Cocomile said. “I’ll follow up with them and say, ‘Why don’t we ramp up payments?’ They say, ‘Oh, we have a car loan now, or we spent some money on renovations, or we’re trying to get rid of credit card debt.’ Credit’s so easy – everyone’s using it.”

Requiring people to pay off their mortgages over a shorter period means they must either pay more per month, or buy a cheaper house. So it’s hard not to see home sales suffering as a result of the new measures in pricey cities like Toronto, where David Larock is building up his new mortgage planning business.

“None of these measures will be popular with mortgage brokers and realtors, but Canadian debt levels were climbing to alarmingly high levels,” said Mr. Larock, a onetime employee in a big bank’s mortgage department. “I don’t like it, but for the long-term health of our market I think it’s short-term pain for long-term gain.”

Mr. Flaherty said his prime concern is that people are borrowing to the maximum at a time of low interest rates. Rising rates will make the debt load less manageable, but people haven’t shown any inclination to alter their behaviour in the housing market and in other forms of borrowing.

That’s why the government is lowering the maximum people can borrow through a refinancing of their mortgages to 85 per cent of the value of their home, down from 90 per cent. Mr. Cocomile said he’s seen strong demand for refinancings from people who have run up other debts and want to consolidate them in their mortgage.

Whereas you can get a five-year mortgage at 3.85 per cent, a typical credit card would charge about 19 per cent. But refinancing to the maximum drastically reduces your home equity and leaves your house vulnerable if you can’t keep up with your mortgage when interest rates rise.

Home equity lines of credit have become one of hottest borrowing tools around, but they’re getting the lightest treatment from Ottawa. Instead of targeting borrowers directly, the government is putting the onus on banks to lend responsibly. Starting April 18, government-backed insurance will no longer be available to banks to cover losses from customers with lines of credit.

Interest rates on new home equity credit lines could rise as a result, or it could become tougher to qualify for one. Call this another example of how protecting Canadians from themselves comes at a cost that even people who make their living in the housing market think is worthwhile.

“You can totally realize why the Finance Minister is imposing these rules,” Mr. Cocomile said. “As interest rates nudge up, people won’t be as pressed as they might have been.”

Changing Mortgage Rules

Starting March 18, people buying a home with a down payment of less than 20 per cent will be able to take no more than 30 years to repay the loan, down from the current maximum of 35 years. Here are two ways the changes will affect people.

1.) The maximum affordable house price falls

Example: A couple with household income of $120,000 and a 10 per cent down payment.

Maximum house price with a 35-year amortization: $620,000
Maximum house price with a 30-year amortization: $560,000

2.) Monthly payments rise (but the amount of interest paid over the long term falls)

Example: A $300,000 mortgage at 4 per cent

Monthly payments over 35 years: $1,322
Monthly payments over 30 years: $1,427
Additional monthly cost: $105
Total interest savings: $41,850

Source: John Cocomile, Department of Finance

http://www.theglobeandmail.com/report-on-business/economy/housing/flaherty-details-new-mortgage-rules/article1872599/page2/