MORTGAGES: End of an era

The era of rock-bottom mortgage rates ended with a crush of work for mortgage brokers and bank-loan officers.

It started Monday with a flood of homebuyers looking for last-minute approvals to sneak in under the wire before interest-rate increases went into effect the next morning -- signalled in announcements by RBC and TD that they would raise their fiveyear posted rates 0.6 of a percentage point to 5.85 per cent, an 11-per-cent jump. Scotiabank, CIBC and BMO followed the moves with rate bumps of their own.

There were also calls from clients looking to lock in variable mortgages, and customers exploring options to refinance at historically low five-year rates.

"Everybody was in their office with their heads down the whole time they were there," mortgage broker Chris LeMay said in an interview about the environment in his office at a Dominion Lending Centres branch in Vancouver, when news of the impending rate hike first went out on Monday.

"I was here until 7 p.m. waiting on one last client. Everybody had their heads down for a good eight hours getting pre-approvals, helping people lock in."

The immediate effect of the increase, along with impending changes to mortgage-qualification rules, will be to reduce the size of mortgage for which borrowers will be able to qualify, which market participants anticipate will put a damper on real-estate prices.

"Now that we see the first phase of normalization [of interest rates], that's further going to erode affordability and take a bite out of the purchasing power of Metro Vancouver households," Cameron Muir, chief economist for the B.C. Real Estate Association, said in an interview.

The increase came as no surprise, though. For months, speculation has been about not if, but when rates would be going up, given signs of life in the national economy and a spectacular recovery in housing markets, particularly in Metro Vancouver and B.C.

"People know rates are going up," LeMay said. "The Bank of Canada said its overnight rate is going up. People put it all into one basket and think everything is going up."

In general, Monday signalled a realization that the environment of ultra-low rates, which were ushered in to stimulate the economy at the start of the recession in 2008, is ending.

Since December, however, when federal Finance Minister Jim Flaherty noted concerns over the possibility of overheating housing markets and Bank of Canada Governor Mark Carney expressed his worries over Canadians' record debt levels, the pressure has been on to raise rates and cool the economy.

The change in five-year rates will definitely cool the ambitions of buyers, Joe Santos, president of the Mortgage Brokers Association, said.

He calculated that a family with $100,000 in household income, assuming they can negotiate a reasonable discount to posted five-year rates, would see their purchasing power reduced by about $40,000.

Before the change, he said, that family could qualify for a $614,000, fiveyear mortgage with 35-year amortization and a discounted mortgage rate of 3.89 per cent.

Now, however, the same family would likely face a discounted rate of 4.49 per cent, which reduces the maximum mortgage they could qualify for to $574,000.

"It's obviously going to make it more difficult for people to qualify for Vancouver and Lower Mainland purchases, because property values tend to be higher here than in the rest of Canada," Santos said.

He added that the impending change to mortgage-qualification rules introduced by Flaherty in January will also crimp the hopes of buyers trying to get into variable-rate mortgages, which are based on and float with banks' prime lending rates.

Prime, for now, rests at a low 2.25 per cent, but after April 19, new rules state that borrowers with only the minimum five-per-cent downpayment need to be capable of qualifying for a mortgage with the five-year posted mortgage rate to get a variable mortgage.

That, Santos said, limits that family with $100,000 in income to a $480,000 mortgage, versus $647,000 before the change.

Banks and mortgage brokers have seen borrowers shift away from those variable mortgages over the past year, however, in anticipation that the Bank of Canada will raise its key lending rate, which has a big influence over bank prime rates.

Jared Dryer, managing broker at Dreyer Group mortgage brokers, said among his customers, about 75 per cent are opting to take the certainty of fixed-rate versus variable mortgages.

A couple of years ago, when variable-rate mortgages could be had with rates discounted from the prime rate by as much as 0.9 of a percentage point, only about 40 per cent were opting to take fixed-rate mortgages.

That includes Mike Graham, a Dreyer Group client who owns two rental properties that have variable mortgages, but opted to lock in a five-year fixed rate when he bought his own home in White Rock last summer.

"The market was changing, everybody was talking about the interest rates going up," said Graham, a White Rock realtor. "I just thought for a principal residence, maybe I'll just take some of the risk out and not gamble as much with that one."

Dreyer added that borrowers who hold existing variable-rate mortgages are still in a good position, even when the prime rate starts to rise with increases in the Bank of Canada's key rate. So he advises them to consider holding off on locking in.

However, there was a period in 2008 and 2009 when the variable rates crept up to a premium of up to a full percentage point above prime, and broker LeMay has encouraged those clients to lock into the certainty of fixed rates.

In the big picture, however, the bottom line is that Canada's bond market, jittery about inflation and the prospect of the Bank of Canada raising its key interest rate, increased its rates.

And since banks raise the funds for long-term mortgages in the bond markets, those are what set interest rates for loans of five years or longer.

Benjamin Tal, a senior economist at CIBC World Markets, said it had become evident over the past couple of weeks that long-term mortgage rates would have to increase as bond markets reacted to inflation reports and on concerns over the ballooning of government debts, especially in the United States.

"This is the beginning of the tightening," Benjamin Tal, a senior economist at CIBC World Markets said in an interview. "The era of extremely low interest rates is over."

The challenge for lenders now is to remind borrowers that the higher rates consumers are seeing are still relatively low compared with just a few years ago.

Kevin Lutz, B.C. regional mortgage manager for RBC, noted that posted five-year fixed rates were 7.19 per cent two years ago, and the prime rate was 5.25 per cent.

"When you put it into perspective, we're still in a low-interest-rate environment, despite rates going up," Lutz said. "The big news is that we're coming off that all-time low. [But] consumers have enjoyed low rates for quite some time."

(prepared by Derrick Penner/Vancouver Sun)