Brokers urge prudence while economist urges rate bump

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Incoming Bank of Canada Governor Stephen Poloz is already getting advice from a C.D. Howe economist urging him to raise his overnight rate, but brokers are staying on message suggesting he should leave well enough alone.
“I think it's too late to raise rates, though it will have to happen eventually,” says Paolo Di Petta, a broker with EQRON Mortgage. “I think efforts would be better focused on providing possible tax incentives for people who aggressively pay down their mortgage. This would probably do wonders in reducing the fallout of a future rate hike.”
That’s not what the right-leaning CD Howe is asking for.
Its report written by economist and former special adviser to the central bank Paul Masson, states that after five years of super-low interest rates, it is time to “take the anemic economy off its meds,” citing years of low rates contributing to asset bubbles in housing and risk-taking and inefficient investments.
For Di Petta, he sees any increase in rates as hurting brokers who deal almost exclusively in clients who refinance.
“In terms of helping or hurting brokers, it will only hurt those who built a book on serial refinancers,” says Di Petta. “The industry is bound to shrink now that the boom is over, but good brokers will always have solutions for their clients.”
“Kilted Broker” Jackson Middleton says a rate hike will hurt homebuyers, but is necessary to grow the economy.
“A steady rate increase might make it tougher for Canadians to qualify for a mortgage in the short term, but long term, I believe it will be better for our economy as a whole,” says Middleton, the principal broker of Saskatchewan First foundation. “I will trade short-term pain for long-term sustainability any day. Bring on the rate increases!”
And it won’t just be the clients who will feel the pinch either, Middleton points out.
“Now, will this hurt brokers and our businesses? You bet it will!”
Drew Donaldson, executive vice president of Safebridge Financial Group, agrees that rates do need to rise – but that the timing needs to be right.
“There are multiple factors at play here and it is not just housing,” says Donaldson. “The jobs report has been bleak and we need to get the economy moving again before raising rates quickly. The government has made many mortgage rule changes, which have basically had the same effect as if rates rose 1 per cent since the lows. I agree we need to get rates up eventually to help out our pensioners and retirees, but the timing has to be right and not rushed.”
Taking a glass half-full approach, Donaldson points to the benefits of higher fixed rates in the long term.
“Don’t forget when fixed rates rise most penalties get smaller, which means more opportunities will pop up to refinance to various terms, in my opinion,” he told
Laura Sauve, a mortgage agent with Centum One Financial Group, has seen clients more affected by loan to value restrictions than low interest rates.
“I have found that record low interest rates have not driven mortgage purchasers as much as one would think.  Not to mention severe refinance restrictions make it nearly impossible for homeowners to take advantage of these low rates,” says Sauve. “For instance my client with zero debt, beacon mid 700s and job tenure of over six years could not refinance his 3-year-old mortgage to take advantage of low rates because of the LTV restrictions. It’s not a fair playing field for mortgage-holders, that’s for sure.”
Masson does concede that raising rates may increase the value of the Canadian dollar and set back exports, but adds a stronger U.S. economy should offset any downside for the Canadian manufacturing sector with a strong Loonie.
  • Ron Butler on 2013-05-16 10:54:29 AM

    I find the concept that a "good broker will always have solutions for their clients" puzzling.

    Raise interest rates, shorten amortization, OSFI tinkering with debt service ratios and banks tightening their own lending policies and eventually some very good clients will have no solutions to property financing they want to do. No matter how good the broker is.

    I believe in the power of mortgage brokers but if enough factors change some clients will be needing Hogwarts graduates with wands to make deals work.

  • Ted Jones on 2013-05-16 11:19:21 AM

    I am having some difficulty understanding the logic of manipulating interest rates in today's economy. First off when the Bank of Canada prime rate rises, this has a negative effect on commercial and business entities resulting in higher costs and inflationary price increases to the consumers. Secondly, an increase in Prime will artificially increase the value of the Canadian dollar which at it's current levels will certainly negatively effect the trade between Canada and the US. This will ultimately slow down the Ontario manufacturing industry. Thirdly, penalizing Canadian homeowners who are not buying and selling due to the already decrease in real estate values and new lending rules who are simply trying to retain their homes will suffer as a direct result of the Government forcing the rates up. Every dollar you take out of a homeowners net income negatively effects the spin off of retail sales and demands for consumer goods. This results in more layoffs in an already sensitive employment environment.
    The Government would be far wiser to let the rates float based on the market conditions today. And I don't mean the Real estate market as that is too narrow of a focus. They would do more for the economy by legislating the Financial Institutions to limit unsecured borrowing to a level of under 10% of the Banks assets. This will result in improving the level of debt with Canadians and putting more emphasis on intelligent underwriting of the unsecured and credit card debt.

  • Paolo Di Petta | on 2013-05-16 11:57:20 AM

    @Ted - What's your solution then? Keep lowering rates? The fact is rates were set artificially low to stimulate the economy, and have sent us down the road of unaffordable properties and a the largest consumer debt load in our history.

    @Ron - We do have other options. There are a wide variety of other lending solutions we can offer above and beyond the typical A-deal scenario. I was primarily talking about the "faux-A" clientele who have funded spending binges by serial refinances. They will simply have to learn to live within their means, or pay a premium via alternative lenders.

  • Ted Jones on 2013-05-16 12:11:08 PM

    The initial rate drops in 2008 and 2009 were designed in my opinion to stop the nationwide collapse on business and industry, not for the benefit exclusively for the real estate market. The government did increase BoC prime in September 2010. I guess what I am saying is the impact of rate increases to the Canadian economy is far more important (negatively) than it is to the Real Estate and mortgage market. The safeguards have already been put in place by restricting Insured refinances that the "serial refinancers" were taking advantage of. We are back to 25 year amortizations, which was the norm going back to the early 2000's and earlier. Insured refinances have been eliminated which takes us back to prior to the 2000's and down payments have been put back to 95%. Raising interest rates to slow down an already slow real estate market will not help the overall economy.
    There has always been the Alternate market for lending, heck this is how the mortgage broker industry got started in the first place. However when was the last time a private investor or a MIC offered refinances or mortgages beyond 80%. It is not going to happen.

  • Paolo Di Petta | on 2013-05-16 12:43:57 PM

    @Ted - I agree the low rates weren't for the housing market - but the fact is all they did was delay the inevitable and exacerbate the problem by artificially increasing affordability. Now we're in a much worse situation - rather than deal with the consequences then, we've made the problem worse, and will have to pay dearly for it.

    Again, I stand by my solution of incentivizing mortgage paydowns. The fact is, it's a cheap form of debt and people have very little incentive to pay it down. Where a rate hike will hurt the economy right now, teaching people better debt habits will be better in the long term.

  • Hogwart Grad on 2013-05-16 2:16:34 PM

    Ron that is bang on! I haven't had anyone wanting to refinance now to save on the excellent low rates. I have been waiving these low rates in my clients faces for months and months. Simply put the raising of prime will only kick the leg out of the very wobbly economy. I understand that rates have to go up but only when realistic signs are there. Tightening the unsecured credit is the only way to make our financial sector stronger. Why Flagherty keeps ignoring this is beyond me. Limit the amount of unsecured credit - leave the interest rates alone.

  • Ottawa Broker on 2013-05-17 12:31:54 PM

    Flagherty keeps ignoring the unsecured debt issues because that is where the banks make their money and the banks hold to much power on parliament hill.
    The money companies spend on lobbyist's is public information, go take a look and you will see whta the banks spend. it is all clear after you see the report on who controls parliament hill and the decisions of the cabinet ministers.

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