It was only a few days ago that the feds tried again to douse the fire smouldering in the bosom of newbie house-buyers. Premiums for mandatory CMHC mortgage insurance went up sharply (it now costs 3.15% of the loan amount for 5%-downers). Coverage for second homes was eliminated. And loans to the self-employed and commissioned salesguys were punted, unless they can prove income.
But every time Ottawa tries to avoid the housing market train wreck, the bankers just make it worse. They’re at it again, and it almost makes you miss that little devil, F.
The latest gimmick comes from RBC, which is now pretending it sells SUVs and minivans, offering ‘employee pricing’ on mortgages. This is being extended to anyone qualifying for a regular fixed-rate, fixed term loan until the first week in June, and who doesn’t have horns. At 2.99% for a five-year mortgage it’s the same price BeeMo had until it bumped up to 3.29% last week. But while BMO had restrictive conditions on its deal, RBC does not.
Mortgages this cheap are available from mortgage brokers, too, with the actual money flowing from big banks, such as Scotia, then packaged under other names. Loans at prices like these have had a massive impact on house prices for the last four years, since bankers will loan to anyone fogging a mirror so long as CMHC eliminates their risk.
Cheap money has bred a new culture of debt, too. Talk to the kids today and most don’t even think about having a mortgage of $400,000 to pay back. It’s only about the monthly – $1,800 – and how that compares to rent. There’s no desire to actually repay the money, consequently zero interest in accelerated payments, weekly pay options, lump sum prepayment privileges or anything else to do with getting out of hock.
And how can you blame them? With loans costing 2.99%, and inflation at 1.5%, why the hell would you bother paying anything off? Besides, who’s got any extra money for saving and investing these days? Because houses and condos cost more than ever before, down payments suck off all available cash, with normal carrying costs chewing up earned income. In a real estate culture like this, most people have but one financial strategy – put it all into the property.
But these days will pass.
Smart people would be using 2.99% financing to power their way through mortgages, or to invest in financial assets they can use to trash loans when they come up for renewal. They know when an RBC ‘employee’ 2.99% home loan comes up for renewal in 2019 their payments will likely bloat. Five years is a long time, and those who believe rates will stay put for the next half-decade are in a trance.
The US Fed decided days ago it would cut its monthly bond-buying program for the fourth time. There are a few more cuts to come, then the stimulus spending will end. Over the course of one year, that’s an $85 billion-per-month reduction in bond demand. The long-term result (less demand means lower bond prices) is inevitable – higher yields.
At the same time, the slow-motion recovery in the US and global economies continues. American unemployment has gone from north of 10% to just 6.3%. Real estate values there grow by about 1% a month, the trade imbalance has shrunk dramatically and Washington is on track for the smallest budget deficit in six years. Even though the Fed will be insanely cautious about raising its own rate (it will still happen next year), the bond market marches to its own beat. More economic activity means more expansion and inflation, and investors demand a premium. So, up she goes.
Fixed-term mortgages are financed in the bond market. Variable-rate ones, on the other hand, track the prime rate – which is determined by the central bank. These days a VRM, at around 2.6%, is a slightly better price than a five-year fixed at 2.99%. But, if you struggle to make your monthlies, it’s also far more dangerous.
In 2019, an expiring fixed-rate mortgage will still be less than 3%. The variable could well be 5%. Could you cope with that?
If not, you know how to borrow.