Source: Edmonton Journal, Friday May 15, 2015, Business Section
Garry Marr, Financial Post
Potential buyers should consider pre-approval
An increase in mortgage rates is likely just around the corner, so it may be time to get off that fence.
Five-year Government of Canada bond yields have climbed about 40 basis points in the last month. Since mortgage rates track bonds, it makes sense to try to get a rate guarantee if you are shopping for a house, Rob McLister, the founder of ratespy.com, points out.
“There is an inclination to recapture some of the spread (between bond yields and mortgage rates),” said McLister, who expects an increase on the five-year, fixed-rate mortgage of up to 15 basis points.
Consumers looking to buy a home, then, might consider getting pre-approved for a mortgage – an option that offers a guaranteed rate for as much as 180 days.
“I got an email from one lender suggesting we may see something in the coming days,” said Vince Gaetano, a principal at monstermortgage.ca. “I think it would be very prudent (to get pre-approved). The only reason people don’t is they are just lazy or don’t know when their mortgage is up for renewal.”
A rate guarantee nets you a higher rate most of the time and it rises based on how long you want a financial institution to guarantee the rate. Gaetano said 2.64 per cent can be guaranteed for 120 days on a give-year fixed-rate mortgage, which compares with today’s going rate of 2.59 per cent for the same term.
Rate hikes would be coming just as sales are dropping in Calgary and Edmonton. Meanwhile, prices have peaked in every market in the country with the exception of Vancouver and Toronto. And industry watchers say any upward movement will probably not be enough to slow those two white-hot markets or lift Alberta sales.
Doug porter, chief economist with Bank of Montreal, doesn’t think a small change will have much of an impact. “Every basis point matters, but can it single-handedly cool markets? It will take something much more serious than that,” he said. “There is very much ‘the little boy who cried wolf’ story going on here.” Porter expects bond yields to rise over the next year, and said if there is sustained pressure on rates over the long term that will change some psychology in the marketplace.
Phil Soper, chief executive of Royal LePage of Brookfield Real Estate Services Inc., said there are early signs of seasonal slowing in home sale volumes, even in Toronto and Vancouver. “The battle for mortgage market share typically eases when that happens. Bond yields have been rising without a clear improvement in the economy, so the upward pressure on mortgage rates would normally be minimal. However, the timing may be right for our trendsetting banks to ease retail rates upwards as they look to manage profit margins,” said Soper.
Ultimately, a 15-basis-point increase only means about an extra $8 per month in mortgage payments and $700 in interest per $100,000 of debt based on a five-year term and 25-year amortization. But it might spook consumers.
There is no risk to getting a pre-approval from a lender, McLister said, because the consumer can always go back to the bank and demand a lower rate or switch to another financial institution, if rates drop by the time of purchase. Only 15 per cent of pre-approvals actually close but he said banks agree to the process to generate customers. A pre-approval usually involves some sort of credit check, which an affect your credit score, but the impact is likely negligible for anyone with good credit.
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