As we look ahead to 2017, there are sure to be further changes to come in the mortgage and housing industry. The following three reasons are why I personally feel that interest rates have no where to go but up, and that they are going to do so sooner than later. A mortgage pre-approval is the answer: keep in mind that a pre-approval holds your terms and interest rate for 120 days, well within the time that a suspected significant increase is going to come.
The Bond Market:
1) Since the new president-elect, Donald Trump won the election there has been a major sell-off in the bond market which has driven bond yields up significantly. We have gone from record low bond yields under .5% to where we are today around 1.2%. Fixed interest rates are priced off bond yields and with this possibly continuing we will continue to see rates increase (see attached bond yield diagram).
November’s Changes to Insured Mortgages:
2) The Government rule changes from back in November impacted lenders funding costs taking away lenders ability to “bulk insure” mortgages. This bulk insurance was the cheapest source of funds for lenders as the mortgages were guaranteed by CMHC or one of the other insurers (Genworth or Canada Guaranty). Lenders now must adhere to high ratio insurance guidelines in order to use this program so we are now seeing new pricing models for insured mortgage files, which are files less than 20% down (best rates), insurable files, meaning more than 20% down but meet all insured guidelines or uninsurable mortgage files, meaning more than 20% down but do not meet insured guidelines*.
Offloading of Further Risk To Lenders
3) A change that was made in November but is still under discussion and still to be implemented is CMHC offloading further risk onto the lenders. This is going to impact interest rates as the lenders costs to fund mortgages will significantly increase if they are less secured and seen as investors as more risky. We have heard from lender partners that their costs for back end insurance is going up by as much as 6x the current cost. This always gets passed along to the consumer.
*The main insured guidelines are:
-25 year amortization max
– max $1M purchase price