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Spring mortgage market kicks off with a new low rate from Bank of Montreal — but you can do better

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Call it March Madness for the mortgage market, as banks begin a full-court press to lure in homebuyers as Canada heads into another vibrant spring for the country’s hottest housing spots.

That $1 million Toronto home just got even pricier

Detached homes in Toronto have have continued their upward price trend halfway through March, according to the Toronto Real Estate Board On Tuesday, the Bank of Montreal took an early lead, beating the competition with the lowest rate on a fixed five-year mortgage — ever.

“We call it their March miracle. They’ve done this for three consecutive years,” says Penelope Graham, editor of ratesupermarket.ca. “They are the first big bank [to lower] as soon as the March buying season starts to heat up.”

Bank of Montreal said early Tuesday it would lower the rate on the five-year fixed-rate mortgage – the most popular term in the industry – from 2.99% to 2.79%.

The season is certainly warming up in Canada’s largest city, with the Toronto Real Estate Board reporting preliminary March numbers showing that detached homes in the city were selling for almost $1.1 million on average over the first two weeks of the year, a 21.3% price jump from a year ago.

But Canada’s housing market has become a fierce competition, and BMO’s five-year deal is already drawing poor-sported heckles from industry watchers who point out that the posted rate is no lower than the actual rates banks have been offering their customers for weeks — and it is only available with particular restrictions.

Related Bank of Montreal cuts special five-year fixed-rate mortgage to 2.79%, the lowest among big banks That mortgage on your back? Relax. Here’s why Why you should care about the banks’ posted rates on mortgages Like previous March offers, BMO will only let consumers prepay up to 10% of the mortgage in a lump-sum payment every year, compared with the industry norm of 20%. Additionally, consumers cannot refinance the product and are stuck with BMO for the length of the five-year term of the mortgage. Even if you sell your house, you will have to transfer the mortgage to your next one.

“It’s the Hotel California of Canadian mortgages: You can check out but never leave,” said Vince Gaetano, a principal at monstermortgage.ca. “There are just better products out there that are more flexible.” The lump-sum issue is particularly confining because bigger lump payments reduce the penalty for breaking the loan if a borrower ever wants to. “The BMO product is a set of handcuffs,” said Mr. Gaetano.

Other critics charge the BMO product is not all that special, with most banks able to go as low as 2.74% on a discretionary basis. Rob McLister, founder of ratespy.com, said he had someone tell him they received a rate as low as 2.64% on a fixed five-year mortgage this week from a major bank.

It’s the Hotel California of Canadian mortgages: You can check out but never leave But BMO is not even the first bank out in the spring discount game. Before Tuesday, the Canadian Imperial Bank of Commerce had already posted a four-year fixed product offering a teaser rate of 1.99% for the first nine months. The remainder of the term is calculated at 2.83% – equating to a blended rate of 2.69% for four years.

The pitch from CIBC is that, on a $275,000 mortgage, your payment is reduced by $115 per month for nine months. Teaser rates were popular in the United States before the housing market crashed; then, when consumers couldn’t handle the higher rate once it kicked in, the system fell apart.

The difference in Canada is that consumers still must qualify based on their ability to pay their loan on the higher five-year qualifying rate, not based on the teaser rate as was the case in the United States.

Rate has become everything in the Canadian marketplace, according to Paul Mims, a retired mortgage executive who used to work for one of the Big Six banks. “It’s much more plain vanilla now,” he said, referring to his time when there were more variables.

“But the spring market is still the same. We used to work on our campaigns in January and February so we would be ready to go once the spring came. It’s all about gaining market share.” LATEST PERSONAL FINANCE VIDEOS

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Housing sales across the country continued to raise along with prices despite a slowdown in parts of western Canada, the Canadian Real Estate Association said Friday

The average price of a home sold across the country rose to $431,812 in February, a 6.3% increase from a year ago, the Ottawa-based group, which represents more than 100 real estate boards, said.

“A number of buyers across the Prairies stayed on the sidelines in February,” said Beth Crosbie, CREA’s president, in a statement. “That’s likely to remain an important part of the national housing story until the outlook for oil prices starts improving. Meanwhile, home sales in British Columbia and much of Ontario are improving.”

Related History shows Calgary’s housing market can survive oil price collapse Why Finance Minister Joe Oliver isn’t intervening in Canada’s housing market Spring comes early to hot housing markets in Toronto, Vancouver, realtors say Nationally, home sales were up 1% in February from January and 2.7% from a year ago. The number of newly-listed homes climbed 2.5% from January to February which CREA said leaves the market in “balanced” territory.

The board said sales increases were led by boards in Greater Vancouver, the Okanagan region, and Greater Toronto. which helped offset declines elsewhere. A majority of local markets posted weaker sales in February compared to January.

Compared to 10-year average for February, sales were 5% below the average.

“Sales came in below the 10-year average for the month of February in two-thirds of all local markets,” said Gregory Klump, chief economist with CREA, in a statement. “That said, the opposite was true in a few large urban markets in British Columbia and Ontario despite a shortage of listings there, which is fuelling prices higher.”

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Get ready for a new round of speculation of a Canadian housing crash

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The Canadian housing market’s continued strength was on display again Friday, but news that prices are rising on a national level is sure to drive a new round of crash speculation.

The Canadian Real Estate Association said prices were up 6.3% nationally from a year ago to a record $431,812 in February. Even using the Multiple Listing Service home price index, which is supposed to smooth out extremes, prices were up 5% from a year ago.

Rising home values tend to set off alarm bells among those calling for a correction — count the International Monetary Fund as a backer of that theory. The IMF said this week prices were up 60% during the past 15 years, on an inflation-adjusted basis, and the group is sticking with a call that prices could correct anywhere from 7% to 20%.

But Gregory Klump, chief economist with CREA, said the average national price is not a very good barometer for what is happening in the market because the growth in sales in Toronto and Vancouver tends to skew the market.

“All it takes is a pullback in sales activity [in those two] markets, not price, and that will affect the national average price,” Mr. Klump said. CREA noted that once you remove Greater Vancouver and Greater Toronto, the average national sales price in February was $326,910, an increase of only 1.5% on a year-over-year basis.

Factoring in the impact of declining oil prices, CREA updated its forecast on Friday, and now says sales are going to come down 1.1% in 2015 while prices rising 2%. By next year, Canadians can only look forward to another 2% price increase.

The pullback in housing has essentially already happened in some markets or is in the process of happening, with the exception of Toronto and Vancouver.

The Teranet-National Bank national composite index said prices were up nationally to record levels in February, but this was due to three cities. Hamilton, no doubt benefiting from its proximity to the Toronto, is also seeing an upswing in prices.

“Prices have corrected lately in many regions, the result being that prices have declined to their level of April 2012 (almost three years ago) in Halifax, Ottawa-Gatineau and Montreal, and of December 2012 in Quebec City,” said Marc Pinsonneault, an economist with National Bank.

Related Canada home prices keep rising despite slowdown in Prairies Canada household debt ratio hits new record of 163.3% Developers say foreign investors still a small segment of condo market Mr. Klump said that if you use the IMF’s methodology — the group merged CREA numbers with Teranet results — you do find prices are up about 60% since 2000, but the gains have been relatively modest since 2009.

“It’s disingenuous to say we are rising the same way now as we were before the [2008] recession,” said the economist.

None of this will silence the voices loudly predicting a correction. The most outrageous call in a while came in January from Deutsche Bank, which said the Canadian housing market was in serious trouble and almost 63% overvalued. So much for the past decade and a half of gains.

The housing correction call makes for great headlines and books — this month we were introduced to a new publication from Hilliard MacBeth called When the Bubble Bursts: Surviving the Canadian Real Estate Crash. The Edmonton-based portfolio manager is predicting a 50% decline in prices from current levels.

Mr. MacBeth says incomes have not kept pace with home price gains and that fuelled debt, which reached a record level in the fourth quarter of 2014. Household debt is now 163.3% of disposable income.

“All we need is for people to lose or fear they might lose income,” says Mr. MacBeth, adding the cascading effect would crumple the whole market. “We are at a very narrow tightrope act between income and debt, all it takes is a little shove for us to fall off the tightrope.”

The problem is he’s hardly the first person to make the call. And none of them has been right, while the people calling for a soft landing look increasingly accurate in their forecast. LATEST PERSONAL FINANCE VIDEOS

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TORONTO — Rock-bottom interest rates, a scarcity of supply and growing demand from millennials and wealthy immigrants have fuelled a strong start to the spring real estate season in Toronto and Vancouver.

“Spring has come early for both Toronto and Vancouver,” said Sal Guatieri, a senior economist at BMO Capital Markets.

Both cities experienced growth in sales volumes and prices during the first two months of the year, Guatieri said.

“I would expect the spring market to be quite hot in both cities — but that will be the exception across the country, not the norm.”

Related Calgary housing starts plunge by 40% in February as construction activity slows Point Grey mansion gets $51.8M: How Vancouver’s most exclusive real estate is drawing Chinese buyers The real cost of a $1 million home: Toronto buyers resort to sub-prime loans as prices soar In Toronto, February home sales grew by 11% from a year ago while prices jumped nearly 8%, according to statistics from the Toronto Real Estate Board. That’s despite the fact that it was one of the coldest Februaries on record for the city.

“I’ve always said that our climate naturally has a natural cooling effect on our real estate market,” said Claude Boiron, a Toronto-based broker with Royal LePage Terrequity Realty.

“You would think this year, with the extreme cold, that there would have been an extreme cooling, but that really didn’t happen. The amount of demand just continues to increase.”

The number of active listings — which indicates the supply of homes for sale — at the end February dropped by 8.7% from a year ago, leading to heightened competition between buyers.

In Vancouver, home sales were up 21% in February compared to a year ago, while prices rose by 6.4%. The average price of a detached home — an increasingly rare commodity in space-constricted urban centres — tipped over the $1 million mark in both cities this year.

Meanwhile, the spring outlook for other markets across the country is less rosy. Alberta and Newfoundland are likely to see their real estate markets continue to soften due to the impact of lower oil prices on their economies, Guatieri said.

“We do think oil prices will steady later this year, but the next few months could be a bit rough for the housing markets in those regions,” Guatieri said.

He noted that “even high-flying Saskatchewan has lost a lot of steam recently,” with home prices in Regina and Saskatoon, which had been rising rapidly, beginning to fall.

Real estate markets in Quebec and Atlantic Canada, which have cooled considerably, are expected to be remain relatively stable, Guatieri said.

“Those markets have been cool for some time now. Demand has been weak … Listings have shot higher. Prices are either very steady or, in many cases, falling modestly. I don’t see signs of a turnaround.”

But as immigrants continue to flock to Toronto and Vancouver and millennials enter their prime homebuying years, demand for housing will remain strong, Guatieri said. Toronto and Vancouver’s real estate markets will only start to cool once interest rates begin to rise, Guatieri said.

Despite the flood of buyers into the Toronto and Vancouver markets, mortgage expert Rob McLister says the banks have not been as aggressive in trying to woo customers with mortgage rate discounts as in previous years.

“When it comes to mortgage rate promotions, it’s been whisper quiet compared to the last few Februaries and Marches,” said McLister, who is the founder of RateSpy.com.

In addition to trying to maintain their profit margins, McLister says the banks are wary of drawing the ire of policy-makers, “many of whom don’t want flashy rate wars to further stoke demand in Canada’s overheated housing regions.”

The real cost of a $1 million home: Toronto buyers resort to sub-prime loans as prices soar

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Just as in Vancouver, Toronto buyers are now scrambling to come up with the 20% downpayment or $200,000 on a $1 million home, if they want to borrow from a major bank. Twitter Google+ LinkedIn Email Typo? More Vancouver has already passed this high water mark, but now it’s Toronto’s turn to experience the $1 million home as the new norm – a property that comes with so much debt even the federal government seems scared of it.

From a shotgun shack to a waterfront estate: What $1-million gets you in cities across Canada

New statistics from the Toronto Real Estate Board released Wednesday show the average price of a detached home in the city reached $1,040,018 in February, the first time prices have crossed over the seven-figure threshold in any housing category.

Those buyers face a three-year-old rule that Ottawa imposed to cool the market, which bans any sort of government backing on homes worth more than $1 million.

As prices rise, some wonder whether insurers like Canada Mortgage and Housing Corp., the Crown corporation that backs bank loans, may have to revisit that threshold.

“Will it encourage insurers to benchmark or index their maximum home price?” asks Rob McLister, the founder of ratespy.com. “Now, a $1 million is an average house so you are basically saying [the government] is not going to insure an average house.”

Mr. McLister says once you get into $1 million plus, your choices of who you can borrow from change dramatically.

“A lot of people think ‘I’ve got a $1 million mortgage. I’m the man, give me the best rate.’ But that’s not necessarily the case,” he says.

In fact, those people are paying even higher rates than those from the banks because their loans have no government backing. If they can’t come up with the minimum downpayment of 20% required by law to borrow from a major bank, they must seek a loan in the subprime market.

Just as in Vancouver, Toronto buyers are now scrambling to come up with the 20% downpayment or $200,000 on a $1 million home, if they want to borrow from a major bank. And, just as happened on the West Coast, Toronto buyers are turning to sub-prime lenders to get them over the hump, facing interest rates of close to 13%.

Related Toronto home sales climb 11% as average for detached home tops $1 million for first time Pension funds swoop in on downtown Toronto condo towers as rental market heats up Toronto’s rental market reborn as housing prices surge out of reach for many

Yana Papanyan, vice-president of credit and underwriting at First Swiss Mortgage Corp., which is a major player when it come to helping this subprime segment of the market, says in a typical situation, a client might buy a property worth $1 million but only have $100,000 downpayment. First Swiss Mortgage will provide the other $100,000 under a second mortgage starting at 12.99%.

“Clients have to top up to 20% to get a bank to approve. We are filling that gap between what the client has as a downpayment and what the bank will accept,” said Ms. Papanyan. “About 80% of [First Swiss’ mortgages] in Vancouver are high-priced properties.”

First Swiss is not regulated by the federal government; that interest rate is considered competitive based on risk factors including the fact it is a second mortgage behind the bank’s debt.

Why was $1 million chosen anyway? One positive for these people is they do not end up paying mortgage default insurance, which can be as much as 3.15% of the value of a mortgage, based on current CMHC guidelines.

Benjamin Tal, deputy chief economist with CIBC, says rising prices and the $1 million government threshold is sending more consumers into the subprime market to borrow money. He estimates alternative lenders, who are major beneficiaries of that subprime market, now underwrite 2.2% of all mortgage loans, with the market having grown by 25% over the past year.

“When you say $1 million, people think ‘that’s extremely high expensive properties.’ They are not. This [restriction on loans for homes worth $1 million or more] is leading to less regulated entities entering the market,” said Mr. Tal, adding his data for Ontario shows that people are borrowing just to get the downpayment.

Mr. Tal also wonders whether Ottawa is going to have revisit the rules on whether it is willing to insure homes worth than $1 million.

“It’s a legitimate question. Why was $1 million chosen anyway?,” said Mr. Tal. “This is probably not consistent with the spirit of what they want to do, because the spirit of CMHC is to make housing affordable for young people.”

Vancouver home affordability improves on wage gains, but prices continue to climb

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Rising Ontario prices created a drag on the national figure for home-ownership affordability, according to a report from the Royal Bank of Canada, which says strong data from Vancouver could impact those numbers even more.

RBC said Tuesday it became

more expensive to buy a home for a second straight quarter as 2014 closed, news that comes out as the Real Estate Board of Greater Vancouver said sales were up 60% from January with prices up 6.4% from a year earlier, based on its index.

“Almost every province and city improved [in affordability] except Ontario and Toronto,” said Craig Wright, chief economist with RBC, about his bank’s study.

The bank said that during the fourth quarter, affordability – the cost of owning a home as a percentage of pre-tax income – climbed by 0.1 percentage points to 42.7% for bungalows, 0.2 percentage points to 48.1% for two-storey homes and remained unchanged at 27.4% for condominiums. Costs include mortgage payments, utilities and property taxes.

Mr. Wright said Vancouver, still the least affordable place to own a home in the country at 82.4% for a detached bungalow, saw improvements because of wage gains in the province.

In Vancouver, the average price of a detached home reached almost $1.4 million last month, with the local board reporting multiple offers becoming more commonplace.

Related Four years on, economist stands by prediction of Canadian housing’s ‘day of reckoning’ Calgary’s housing market under pressure as new listings, inventory soar Even before housing sales began dropping in Calgary, the oilpatch saw affordability improvements in the fourth quarter as incomes rose, said Mr. Wright.

The average price of a home in Calgary dropped 4.2% in February from a year ago, but that might not be enough to improve affordability if people start losing their jobs. The income part of the RBC measure is based on an average of the population and unemployment will lower that number.

Overall, lower interest rates across the country have helped consumers save money on their housing costs. “We’ve seen this time and time again. Any time interest rates move down, it’s a pretty powerful force for affordability,” Mr. Wright said.

Real estate author Don Campbell thinks Canadians are probably immune to the effect of lower interest rates because they expect to borrow at sub 3% rates now. If anything, he says a rise in interest rates would create a stampede to buy.

“I don’t think a quarter-point drop has much of an impact anymore,” he says. “I’m borrowing at 2.34% now. Who cares if they go lower.”

Mr. Campbell, who is based in Vancouver, said the city’s sales numbers might have been inflated last month because of unusually warm weather.

“A lot of the March, April and May product sold [earlier than expected] in February because we have 15-degree weather,” said Mr. Campbell. “We had a spring-buying season activity.”

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