Financing for new homes!

For those who are buying a brand new home

Financing for new homes! 

 

 

CMHC has upped its forecast for new-home construction for 2010 to 164,900 from 150,300 though that’s still off the 211,000 starts of 2008.  Will there complete craziness scheduled for end of 2009 and for 2010?  Time will tell but one thing to be very careful about is getting mortgage financing.  Lenders are still very cautious about foreclosures and are still very tight on their lending guidelines.  Even CMHC and most lenders will be more restrictive then their advertised guidelines which can leave Alberta home buyers in a pickle if they go in with short or no financing terms.  Another caution is don’t get sucked into the word pre-approval!  Many banks and lenders will go for a pre-approval thinking that it means something when most mortgage lenders will not underwrite the paperwork until it is a live deal.  You may be thinking then what is the point of a pre-approval? – it is a rate hold and generally not much better.  Make sure you deal with a Mortgage specialist or a Alberta Mortgage Broker who will go through the documentation up front which will limit your risk on getting the approval. 

 

I also should mention that most Brokers and Lenders have a max of a 120 day rate hold on mortgages for new construction.  I have access to a major lender that will do it for a 6 month hold rate hold.  I just had one client that went through the builders “mortgage specialist”  oh they did a rate hold but they did it at 6.4% on a 5 year fixed.  That is over 2 full percent where all the other banks are at.  Some service that is. 

 

Other quick warnings

 

- If your house takes 6 months – 12 months to build you can only get financing of the lesser of the two purchase price or appraised value.  (a lot can happen in a year)

 

- Make sure you are reviewing your credit at the beginning and during the process.  Make sure that you are very careful with your credit because even if it is a mistake, if you credit doesn’t show well you could lose your deposit.

 

- Make sure your income is as secure as can be.  If you think there is a chance of job less or going from a double income to a single income talk to your broker.  I don’t suggest those just barely fitting under the wire to wait 6 months to actually move in. 

 

- Be aware pre-approvals mean nothing!  What guidelines the banks have now can change at any time.  If you are basing your qualifying on a 35 year amortization and it gets restricted again to 30 or 25 years you could be in trouble.

 

- Make sure that the property fits the bank – Square footage, location, type of home, ext can all change at any time so make sure you aren’t on the line. 

 

- Home builder sales agents are just sales people they are not licensed and so might not follow the same guidelines.  Note that you can bring a realtor to protect you even if it is through a builder. 

 

 

RBC - Economic Report on Mortgage rates!

Excerpts from RBC’s  Economic Updates

U . S . H I G H L I G H T S

The U.S. economy grew at a 3.5% annualized pace in the third quarter backed by a rebound in consumer spending and surging residential investment, which ended 14 quarters of decline.

Early reports on fourth-quarter activity point to another increase in output, with the ISM manufacturing
index driving solidly into expansionary territory in October and housing indicators pointing to firming sales against a shrinking inventory overhang.  However, emerging from the deepest recession since the Great Depression, the U.S. economy remains fraught with uncertainty about the health of the financial system and pockets of weakness outside of housing.

Our forecast is that the first rate increase will come late next year with the funds target ending 2010 at 75 basis points and then rising to 2.75% by yearend 2011.

G L O B A L   H I G H L I G H T S

The tide has turned for the global economy with U.S. real GDP posting a strongerthan-expected increase in the third quarter, the Reserve Bank of Australia (RBA) citing Australia’s good economic performance as a reason for raising the policy rate and China recording a breathtaking 8.9% increase in third-quarter output.

Canada, the United Kingdom and the Eurozone have yet to produce clear indications that their economies are out of recession, but conditions are improving and we expect reports of positive growth soon. Central banks are cautious, however, with only the RBA of the major central banks we cover starting to unwind monetary policy stimulus. Given the deep hole in economic activity, it is likely to be a long time before other banks will be in a position to follow the RBA’s lead, with hikes expected to come in the latter part of 2010 and continuing in 2011.

C A N A D A ‘ S   E C O N O M I C    P I C T U R E 

Unlike the United States where the data point to the end of recession, Canada’s numbers are less clear-cut. The third quarter showed stronger-than-expected gains in employment and housing, but both July and August’s GDP reports disappointed.  Our estimate that the economy expanded in September will skate GDP
back into positive territory, but the risks are that the rebound will fall short of the consensus forecast for a 2% annualized gain. Our reckoning is that on an expenditure basis,real GDP growth was 0.5% to 1% at an annual rate in the quarter.

The rebound in U.S. growth, low rates combined with government spending augur well for an improving trend to emerge in quarterly growth rates in the latter

C A N A D A    H I G H L I G H T S

Unlike the United States where the data point to the end of recession, Canada’s numbers are less clear-cut.
The economy shrank by 0.1% in August after posting no growth in July.  We think that the economy will
skate back into positive territory in September, but the risks are that the rebound will fall short of the consensus forecast for a 2% annualized gain.

Our reckoning is that on an expenditure basis, real GDP growth was 0.5% to 1% at an annual rate in the third quarter.  For the Bank of Canada, the road to the normalization of interest rates will be long. Our forecast is that the Bank will boost the overnight rate to 1.25% by the end of 2010 with further increases in 2011, yielding a policy rate of 3.5% by year-end.

L O O K    A H E A D    T O    2 0 1 0    A N D    2 0 1 1

While near-term indicators signal an end to the global recession, markets remain worried about the durability of the upturn as fiscal and monetary policy support subsides. In Canada, the recovery started with a whimper rather than a bang, but we expect the momentum to build, spurred by a strengthening U.S. economy, low interest rates and a steady influx of government spending. Consumer confidence increased for seven months and, although the index edged down in October, it remained near the highest level since early 2008. With asset values recouping part of their losses and interest rates extraordinarily low, we expect consumer spending will recover in 2010, helped early in the year by government programs like the Renovation Tax Credit. We forecast that the economy will grow by 2.6% in 2010 with the unemployment rate peaking early in the year and then drifting lower.

I N T E R E S T    R A T E   F O R E C A S T S

Quarter	Q4-09	Q1-10	Q2-10	Q3-10	Q4-10	Q1-11	Q2-11
Overnight Lending Rate	.25	.25	.25	.75	1.25	2.75	3.50
5 Yr GoC bonds	2.75	2.80	2.85	3.10	3.40	3.70	4.05

 

BMO Mortgage Rates

BMO Mortgage Rates

 

Bank of Montreal sent out a detailed report on their take on the very debated topic of which is better, fixed or variable rates.  They started the discussion with this statement “Fixed or variable decision much closer to call, While variable-rate mortgages continue to beat out fixed-rates when it comes to cost savings, the gap between the two is likely to become closer due to the economic environment.’  BMO is taking the stance that a variable rate mortgage over a 5 year term will save you more money than going with a 5 year fixed generally.  BMO economists Douglas Porter and Benjamin Reitszes state,

Variable rate products have proven the better option 82 per cent of the time since 1975, Porter and Reitzes wrote, and forecast that variables will continue to remain cheaper than fixed rate mortgages.

 

On the other side, they these same two BMO economists argued the economic recovery - and the expected rise in interest rates next year - has potentially caused “one of those rare periods when a fixed rate turns out to be the superior choice.” It also pointed out that negotiated rates (as opposed to posted rates) make fixed and variable products closer to call.

 

The graph that they are using to determine that Variable rate has outperformed the fixed rates 82% of the time, is below.

One of the problems with this graph is that very few Canadians pay posted rates on fixed mortgages.  This was an argument made by a mortgage website Canadamortgagetrends.com.  They did a different a graph that better represents fixed vs variable rates. 

 

This graph is based off of posted – 1.5%.  With these numbers there were at least six periods in recent history when fixed rates beat variable rates at prime.  One thing we have to keep in mind is that when prime rates go higher generally we can get prime – products which would again change the graphs completely. 

 

Maybe this new Bank of Montreal report has something to do about them not being extremely competitive with their fixed rates.  Below is BMO current mortgage rates a

 

Type	Term	Annual Percentage Rate
Fixed Rate	6 month (convertible)	4.650%
Fixed Rate	6 month (open)	6.450%
Fixed Rate	1 year (closed)	3.700%
Fixed Rate	1 year (open)	6.800%
Fixed Rate	2 year (closed)	3.950%
Fixed Rate	3 year (closed)	4.450%
Fixed Rate	4 year (closed)	5.290%
Fixed Rate	5 year (closed)	5.780%
Fixed Rate	6 year (closed)	5.780%
Fixed Rate	7 year (closed)	6.800%
Fixed Rate	10 year(closed)	6.950%
Fixed Rate	18 year (open)	8.950%
Variable Rate	3 year (open)*	3.050%
Variable Rate	5 year (closed)*	2.250%

 

If you had good credit and a very good relationship with your BMO Mortgage specialists they could probably offer you closer to the 4.50% on a 5 year fixed and similar discounts on all the other fixed rates.  My current rates are

 

As you can see, on the fixed rates BMO current mortgage rates are nowhere close to being competitive but on the variable rates they are the same if not very close.  Maybe this is one reason they are encouraging people that variable is the way to go?  Either way my advice stays the same on the debate on which is better, fixed or variable.  It all depends on you.  No one can argue that best mortgage rates are at an all time low for both the fixed and the variable.  If you are looking for piece of mind that your payments will never increase during the term then fixed is the way to go.  If you want to get today’s lowest interest rate, even if that means having a higher rate any time during your term then variable is probably going to work the best.  Either way it is up to you….

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