Obscure Fact Du Jour: Benchmark Rate Averages

General Allen Cripps 29 Apr

 April 29, 2015   Robert McLister  

One never stops learning in this business. The latest object lesson for us relates to the Benchmark Qualifying Rate, which is used to qualify variable- and 1- to 4-year fixed rate borrowers.

The Bank of Canada (BoC) explained how it was calculated back in 2010 (that story). But a few weeks ago the Benchmark rate inexplicably dropped from 4.74% to 4.64%.

The Benchmark, which is published every Thursday before noon, is supposed to be a mode average of the Big 6 banks’ posted 5-year fixed rates. Those rates are currently 4.49%, 4.64%, 4.64%, 4.74%, 4.74% and 4.79%.

A mode average measures the most frequent number(s). So given the dual modes in the above rates, and the fact that there can be only one Benchmark rate, one might expect the result to be 4.69% (an average of the two modes 4.64% and 4.74%). Instead, the BoC set the Benchmark at 4.64%.

Since the entire mortgage industry relies on this number, it seemed productive to ask why. Here’s what we found.

When there are multiple modes, “we do not always choose the lowest of the modes,” a BoC spokesperson told us. But “unfortunately, we cannot disclose the exact set of rules the Bank uses to calculate the typical rate.”

Okie dokie then. Scratch the idea of explaining it to clients and educating the industry.

“…The Bank cannot share the formula for how the rate is calculated because some of the guidelines are linked to certain data that we purchase and for which we have a confidentiality agreement with the provider.”

What data must be purchased is somewhat of a mystery. All the data the BoC needs for this calculation are directly on six bank websites.

Given the esoteric nature of this all, most are content to not question the Bank’s calculation. To us, it’s more the secrecy of it all that tickles our curiosity. Then again, if next time the BoC uses the higher of two modes, and that causes your mortgage application to be declined due to above-limit debt ratios, this obscure little calculation may hit closer to home.

What Could Have Been

General Allen Cripps 29 Apr

People handshake agreement close deal gapIf there were ever a time that the mortgage broker industry needed to come together, this is it.

Our game is changing. Brokers have decent market share, but agent revenues per deal are dropping, and they may not stop dropping for the foreseeable future. On top of that, regulatory tightening is making it harder to do our jobs, lenders are looking for ways to cut origination costs and the Internet has started to disintermediate slow-to-adapt brokers. It’s not unreasonable to think these trends could conspire against broker networks and cut funding for industry initiatives going forward.

So it was with a degree of disbelief that I watched last week’s developments with Canada’s two national broker organizations —one being the established industry association, the Canadian Association of Accredited Mortgage Professionals (CAAMP), and the other being the upstart Canadian Mortgage Brokers Association (CMBA).

Depending on who you ask, it’s either the best time in history to start a new national broker association or the worst time. But one thing is certain: it would have been so much more productive if the two could have smoothed over their differences for the common broker good.

Why? Well, we as an industry do not need more division. We have bigger fish to fry and enough associations working against each other as it is.

We don’t need more duplication of conferences, awards shows and golf outings. Most sponsors (lenders, insurers, suppliers) absolutely do not have the budgets for it. Most of them would much prefer to back one association, other things equal. But now they’ll have to increasingly choose, thereby diluting their support among ever-more events and affecting event quality.

We don’t need overlapping education. Focusing intellectual power on enhancing existing curriculums, creating one national education standard and leveraging existing learning distribution platforms is infinitely more efficient.

We don’t need more boards and association salaries. Organizations are expensive and time consuming to manage. That money is better spent on direct costs of promoting the broker channel (e.g., advertising, PR, lobbying, self-regulatory enforcement, etc.).

We don’t need more voices appealing to policy-makers and regulators. We need one strong voice that is actually heard through all the noise. The more parties that petition our government, the more we look like individual disorganized special interests.

We don’t need to exclude lenders and leverage broker numbers against them. Without lenders, brokers don’t eat. If lenders feel we’re working against them, absolutely nothing good will come of that long term.

We don’t need two brands and two messages marketed to consumers. Too many consumers are confused enough by what we do.

We don’t need more dues to pay. Many brokers don’t understand the value in paying dues as it is.

We don’t need more diversion of resources. Pooling revenue is the best way to fund powerful widespread marketing campaigns that consumers recognize.

CMBA’s brand (trademark) is strong, and it would have been beneficial for the entire industry to use it, not just regional association members. But it takes more than a good logo to reach consumers, policy-makers and regulators. It takes economies of scale, relationships and industry-wide (not just broker-wide) buy-in. Imagine how much more powerful our industry voice would have been had the association leaders found a way past politics and protecting their turf to find common ground.

Hearing about the CMBA was disappointing to this author, not because the good people involved with CMBA don’t have valuable ideas, but because valuable ideas are rarely implemented as well when key stakeholders don’t work together.

Fortunately, despite two years of trying to work things out, there’s reason for optimism that the two sides will eventually realize the mistake that’s been made. On that subject, one of the best quotes heard last week was from Dan Putnam, Chair of CAAMP: “We’re still open to conversations with all regional associations,” he said. “Never say never.”

In that spirit, may the regionals and CAAMP always keep their doors open to each other because, as CAAMP CEO Jim Murphy rightly noted last Friday, “We’re all in this channel together…We succeed together or we fail together.”

Posted Rates & Penalty Pain

General Allen Cripps 21 Apr

Angela Calla, AMP, Dominion Lending Centres
Special to CMTCalla dlc photo

When choosing between mortgages, knowing how different lenders calculate penalties can be essential. The market and your needs can easily shift during the term of your mortgage and the last thing you want is a painful penalty in order to get out early.

Penalty formulas differ radically, depending on the lender. A major bank, for example, will have a considerably higher penalty than a broker-only wholesale lender. Advice on how to avoid painful penalties is a key benefit of working with a mortgage broker.

You need to ask one important question right off the bat: What rates does the lender use to calculate its penalty? The actual discounted rates that people pay, or some artificially high posted rate? Hopefully the former.

Below is an example of how two lenders calculate the same “interest rate differential” penalty in different ways. Ask yourself, which one would save you the most money?

Penalty #1 – Broker Lender  
Contract Rate (The rate you actually pay) 4.19%
Current Rate (Today’s new rate, closest to your remaining term) 3.09%
Differential (Contract Rate – Current Rate) 1.10%
Remaining Balance $229,000
Remaining Months 16
Penalty Formula: Remaining Balance x Differential ÷ 12 x Remaining Months $3,358.67
Penalty #2 – Major Bank  
Contract Rate (The rate you actually pay) 4.19%
Current Posted Rate (Today’s new posted rate, closest to remaining term) 3.39%
Original Posted Rate (At the time you got your mortgage) 5.99%
Original Discount (That you received off the Original Posted Rate) 1.80%
Differential (Contract Rate – (Current Posted Rate – Original Discount)) 2.60%
Remaining Balance $229,000
Remaining Months 16
Penalty Formula: Remaining Balance x Differential ÷ 12 x Remaining Months $7,938.67

As you can see, there can be quite a difference in prepayment charges when you leave a lender early – over $4,500 in this example. And this is a modest hypothetical calculation. Bank discounts today are on the order of 2.00 percentage points off posted, instead of the 1.80 I’ve used here.

Some lenders will even charge an abnormally high penalty (like 3% of principal) despite you being close to the end of your mortgage term. They do this as a retention tool to keep you from leaving. Others will charge a “reinvestment fee” on top of the penalty, tacking on another $100 to $500 in expenses.

In short, penalties can be thousands—or even tens of thousands—higher depending on the lender’s specific calculation formula, mortgage amount, rates and time remaining until maturity. Extreme penalties are not only more expensive, they can even keep borrowers from moving because the amount eats into the money they’ve got for a down payment and closing costs.

Worse yet, some lenders have a “sale only” clause in their mortgages, meaning you can’t even leave them unless you sell the home. If you think, “Oh, that’s no big deal. I don’t plan on selling,” think again. Throughout every path in life, there are moving parts and uncertainties. When you get married, do you plan on divorcing? Likely not. Did you predict the company you were with for 20 years could downsize, or your pension would be reduced or cut? Can you guarantee your health will never throw you a curve ball?

We all want to believe that none of the above scenarios will come to pass, but they can and do. And when they do, what a relief it is to have options.

And last but not least, there is the refinance consideration. If interest rates fall 0.5-0.8%, (which may seem unlikely but is certainly a possibility) there may be opportunities to lower your borrowing costs. But you can’t do that unless you’ve got a low-cost way to renegotiate your existing contract. And as we’ve seen above, that cost is not based on just your interest rate alone.

The BoC, Home Prices & Mortgage Rules

General Allen Cripps 21 Apr

No rate cut surprises to report today.stephen-poloz

Canada’s key lending rate “remains appropriate,” said the Bank of Canada this morning. That’ll keep prime rate at 2.85% for now.

The BoC’s economic commentary today was both grim and hopeful. The economy “stalled” in the first quarter, it admitted—thanks in part to the “oil-price shock.”

Looking further down the road, however, we got more of the same brand of optimism we’ve come to expect from the Bank—i.e., that the economy will get back to “full capacity” in a few years or less. In the meantime, the Bank says our cheapened loonie and widening output gap will “offset each other,” keeping inflation near 2% on a “sustained basis.”

What does sustained mean, you ask?

Well, barring some out-of-left-field inflation catalyst, the Bank’s assessment portends little probability of rate hikes in 2015. And financial markets agree. OIS traders are pricing in a 44% chance of a rate cut by year-end, according to Bloomberg.

As a result, “interest rate relief” will continue to provide a “cash flow…buffer” for indebted consumers, said Governor Stephen Poloz in today’s press conference. That is particularly true for variable-rate mortgagors.

“On the surface, lower interest rates would be expected to promote more borrowing, which would increase this vulnerability,” Poloz noted in his prepared remarks. “However, in the near term, lower borrowing rates will actually mitigate this risk, by reducing payments for mortgage holders and giving us more economic growth and employment gains. “

That’s all good, but with Toronto/Vancouver home prices on a Saturn V rocket trajectory, mortgage policy-makers have to be wondering if and when they should apply the housing brakes.


CAAMP CEO Jim Murphy believes Ottawa better not jump the gun just yet. “Canada is now two housing markets. One, Vancouver and Toronto, and two, the rest of the country,” says Murphy. “In recent visits to Ottawa and in discussions with government officials, CAAMP has highlighted the [existence of these] two housing markets…Any further changes would impact markets that are not seeing house price appreciation or, in some cases, actual price declines.”

OK, but what about two sets of mortgage rules—one for richly valued markets and one for weaker markets?

“It’s a very interesting question,” says Murphy. “The same issue has been raised with the Bank of Canada about regional interest rates—higher in a region with a strong economy and lower elsewhere. I’m not sure that is possible.”

“For mortgage rules, it may be possible, but it’s still difficult. For, example, do mortgage rules apply to the City of Toronto or to the GTA?”

For now, it looks like the status quo may prevail. “The federal government continually monitors the housing market and consults with stakeholders like CAAMP to gauge opinions on the market. Our sense is that changes are not imminent and are unlikely before the October federal election.”

Barring significant mortgage rule tightening, it may take an economic downturn or improbably large rate hikes to derail single-family price momentum (national numbers are being skewed predominately by single-family home sales in Toronto/Vancouver). And neither seem imminent.

That said, the “data never go in a straight line,” Poloz remarked earlier, and we have no way of knowing what’s around the corner. Will the U.S. Federal Reserve finally jack up rates and pressure the BoC to follow? Will oil prices rebound or fall to new lows? Will a U.S. recovery and hobbled loonie boost demand for Canadian exports? Will EU stimulus work, or backfire? Is another financial crisis waiting in the wings? Fill in your own ‘what if’ here _____________. Any of these possibilities could play on rates in the year to come.

Meanwhile, we’re just a stone’s throw from a new record low for Canadian bond yields. Our most important fixed mortgage rate driver, the 5-year bond yield, rose 3 basis points on today’s news. But if we break below 0.55% and hold there, look out. Five-year mortgages near 1.99% could rocket Toronto/Vancouver prices from the stratosphere to the exosphere.

5yr Bond Yield

First-Time Buyers by the Numbers

General Allen Cripps 15 Apr

 April 8, 2015   Robert McLister   260   

With 35-50% of home sales attributed to first-time buyers (depending on the year and survey), it’s vital for mortgage marketers and industry watchdogs to understand the traits and risks of this demographic. That includes understanding how well prepared young Canadians are to buy a home, and to handle rate hikes, price corrections and unemployment.

Genworth and Environics polled some 1,800 first-time homebuyers recently to get a handle on these questions. We delved through their report to pull out the meatiest data. Here are six findings of note about first-time buyers:

  1. They’re paying more than ever
    • The numbers: The median price paid by a first-timer is now $293,000 nationwide ($420,000 in Vancouver)
    • As prices increase, so do the minimum down payments and default insurance premiums. Sixty-three percent of today’s first-timers get insured mortgages with the median down payment being $34,000 (12%)
    • In big cities in particular, countless young borrowers wouldn’t have a hope of home ownership were it not for default insurance, gifted down payments and borrowed down payments. Nationwide, 28% use a gift or loan to bolster their down payment. Contrast that with 40% in Vancouver
  2. Big lump-sum prepayment privileges often go to waste
    • The numbers: Just 1 in 4 first-timers (26%) made a lump-sum prepayment in the past year
    • Some pay 10-20 basis points more for mortgages with bigger prepayment options. In many cases that’s a complete waste of money. Five or ten percent lump-sum prepayments are more than ample for the vast majority of first-timers
  3. It often takes two 
    • The numbers: 62% of first-time buyers purchased with a spouse/partner
    • That means there’s generally two incomes (roughly $90,000 to $100,000 total on average, says Genworth), helping them qualify for a bigger mortgage and better absorb potential rate hikes
  4. They’re going to have kids
    • The numbers: Almost 6 in 10 (59%) are planning for children in the next five years and another 17% aren’t sure
    • This implies that many will need to up-size their property. In fact, half refer to their purchase as a “starter” home
    • That heightens the importance of picking a mortgage with either good refinancing terms or a fair penalty calculation (in case they have to increase and/or break the mortgage early)
  5. Debt ratios are mostly conservative
    • The numbers: The average Genworth-insured borrower has a 34% total debt service (TDS) ratio
      (Thank you, Genworth, for providing this data, which has been hard to come by. We have no idea why CMHC doesn’t do the same.)
    • The ratio has “crept up gradually over the last couple of years,” which is a function of rising home prices, says Genworth CEO Stuart Levings
    • Once you start getting up to 40%+ TDS, that’s “high,” Genworth says
    • About 8% of Genworth’s portfolio is in the 42%+ range. These tend to be folks with higher earning potential–many of them professionals
    • There’s a large buffer between the average (34%) and the maximum allowed (44%), which acts as a shock absorber for rate hikes
    • Genworth estimates the average first-time homebuyer’s debt ratios would increase 2 points (e.g., from a 34% TDS ratio to 36%) for every point that interest rates increased.

Young couple looking at their new houseOther notable first-time buyer stats:

  • 80%+ choose fixed rates
  • 73% rated mortgage brokers/specialists as important sources for mortgage info (31% consulted a broker and 66% consulted a lender’s specialist)
  • 66% rated bank/credit union representatives important sources for mortgage info
  • 61% rated personal finance websites and media websites as important info sources
  • 80% of respondents bought an existing re-sale house
  • 20% bought new construction
  • 55% bought a fully detached home
  • 17% bought a condo (47% in Vancouver, 40% in Montreal and 39% in Toronto)
  • 16% don’t plan to have kids
  • 20% were born in another country
  • 73% rented before buying
  • 24% lived with parents/other relatives before buying
  • 39% strongly (10%) or somewhat (29%) agree that they are concerned about making ends meet month to month
  • 61% pay off their credit cards in full each month
  • 7% pay only the minimum balance on their credit card
  • 86% of millennials “want to own a home” (Source: Royal LePage survey)

Here’s Genworth’s statistics presentation for those who want to delve deeper into the numbers.


Minimize the costs of bidding wars

General Allen Cripps 15 Apr

Posted on July 9, 2014 by    

Most Canadians know it’s a better idea to stick to their budgets than get sucked into a bidding war, according to data from the Bank of Montreal.

Figures from the BMO Home Buying Report, which polled 2,000 adult Canadians, show that only 28 percent of homebuyers are willing to fight over a property. This number was higher for first-time homebuyers, with 39 percent saying they’d be willing to enter a bidding war over a home.

Data also shows that bidding wars were more likely to occur in Toronto, Vancouver and Calgary. In fact, a quarter of home sellers in Calgary said they purposefully under-priced their properties in an attempt to spur competition among homebuyers.

Coming out on top
While it’s generally a good idea for homebuyers to avoid bidding wars if they wish to save money, there are ways to not only help a buyer win a bidding war, but minimize the financial toll.

When making a purchase offer, it’s important for Canadian buyers to understand the local market. By researching how much comparable homes in the area are selling for, buyers can get a better idea of how much money should be spent. While there’s always wiggle room when it comes to prices, buyers should try to stay at a reasonable amount that makes sense for the size and condition of the property, as well as the area it’s in.

Buyers should also consider expenses beyond the asking price. For instance, since most buyers requirehome loans in order to finance a property purchase, the closing costs associated with a mortgage should be taken into account. The fees and expenses that come with a mortgage can add up quickly, so before buyers begin upping their purchase offers, they should consider the big picture.

Additionally, some homes may require extensive maintenance or repairs. These costs should be analyzed before a buyer decides to increase their purchase offer.

Of course, the professional appraisal of a home is a vital component as well. Mortgage lenders will only provide a certain amount of financing based on how much a property is appraised for. Therefore, buyers who enter a bidding war and go well over a home’s appraised value are essentially pledging to pay the difference out of pocket.

When it comes to actually winning a bidding war, it’s important for homebuyers to differentiate themselves from the competition. One way for individuals to do this is by showing sellers that they’re more serious than other buyers. Homebuyers who get preapproved for a mortgage and attach a copy of their preapproval letter with their purchase offer are saying one thing loud and clear: I’m ready to get this deal moving. It’s one thing for sellers to be tempted by multiple offers, but at the end of the day, homeowners will want to deal with someone who will actually follow through. Of course, it’s also important for buyers to make sure their offer isn’t overly low. There’s a big difference between trying to be frugal and insulting a seller with an ultra-low purchase offer.

In any case, it’s essential for buyers to make sure they can afford their offer in the first place. This is why planning ahead is a vital part of homebuying. Besides getting their financial affairs in order, another way for buyers to plan ahead is calculating their loan costs with an online mortgage calculator. These free tools will allow buyers to figure out how much their monthly payments will cost, as well as how long it will take to pay off a mortgage.