February 22, 2017

Looking for your best mortgage rate? Here’s 20 questions to ask

A real estate sold sign is shown outside a house in Vancouver, on Jan.3, 2017. (Jonathan Hayward/THE CANADIAN PRESS)

DECODING THE MORTGAGE MARKET

ROBERT MCLISTER

“What’s your best mortgage rate?” was once a fairly straightforward question. These days, it’s impossible to respond intelligently to it without asking a litany of other questions.

That’s true today more than ever thanks to recent federal rule changes. Ottawa’s changes to regulations have jacked up lenders’ costs – and the lowest mortgage rates – on refinancing, amortizations over 25 years, million-dollar properties, single-unit rental properties and mortgages where the loan-to-value ratio is between 65.1 and 80 per cent.

So be prepared to play a game of 20 questions to find your best rate in today’s market. Note that thanks to new mortgage rules, which make it more expensive to lend to people who the government deems higher risk, the last six questions on this list have taken on a whole new importance.

Here are those questions:

1) What’s the term?

  • Mortgage contract length (“term”) and rate type (fixed or variable) are usually the biggest factors impacting your rate.
  • As of this writing, the cheapest five-year fixed rate, for example, costs 50 basis points (bps) more than the cheapest five-year variable rate. (Note: 100 basis points equals one percentage point, so 47 bps equals 0.47 percentage points.)

2) Is the mortgage for your primary residence, a second home or a rental that you won’t live in?

  • If you rent out the property and don’t live there, you’ll pay up to 25 bps more than if it were your primary residence.
  • The cheapest rates are seldom available on second homes or unusual properties.

3) Can you adequately prove your income?

  • If you can’t, forget about the lowest rates. In most cases you’ll pay at least 150 bps more.

4) Where is the property located?

  • The province matters. The lowest one-year fixed rate in New Brunswick, Newfoundland, Prince Edward Island, Northwest Territories, Nunavut and Yukon is over 30 bps more than in Alberta, British Columbia and Ontario.
  • The city matters, too. You’ll cough up at least 10 bps more than the lowest market rate (on the term you want) if your property is rural. The reason: if the borrower doesn’t pay, it’s harder for the lender to sell a rural property.

5) When is the closing date?

  • The longer you want your rate guaranteed, the more you’ll pay. A 90– or 120-day rate hold typically costs at least 10 bps more than a 30-day rate hold

6) Can you live with prepayment restrictions?

  • Some lenders now charge 10 bps above their lowest rates if you want to prepay an extra 5 to 10 per cent on your mortgage.
  • One of the country’s lowest rates currently allows no prepayments at all.

7) Can you live with portability headaches?

  • If you move to a new home, certain deep discount lenders will force you to close your old property and new property on the same day (good luck with that). Otherwise you’ll pay a penalty.
  • Remember that if you’re using the equity in a property you’re selling for the down payment on your new property, and that new property closes before your old one, you’ll usually need extra cash or a bridge loan. Not all lenders offer bridge loans.
  • You’ll often pay 5 to 15 bps more, compared to the lowest market rate, to have a full 90 days of porting flexibility and access to bridge loans.

8) Can you live with refinance restrictions?

  • If you want the freedom to refinance early with any lender, some lenders will charge you 10 bps more than their lowest rates for that privilege.
  • If you want to cash out more than $200,000 in equity, you’ll often pay at least 15 bps more than the cheapest market rates.

9) Can you live with a large penalty?

  • More than three-quarters of the fixed mortgages sold in this country do not have, what I’d term, “fair” penalties. In other words, if you break the mortgage contract early, you’ll often pay through the nose (more on that).
  • Some lenders offer both high– and low-penalty options, with the low-penalty mortgages costing 10 bps more. But even with that rate premium, you’d likely still pay less than if you broke a fixed mortgage with a high-penalty lender, like a major bank.

10) What type of property is it?

  • A few lenders charge 5 to 10 bps more for high-rise condos, depending on your equity and other factors.

11) Do you want good rates when you renew and/or if you refinance early?

  • Some lenders try to stick their renewing or refinancing customers with horrid “special offer” rates (they’re not so special, trust me).
  • If you want a lender that’s highly competitive after you close, you’ll often pay at least 10 bps more than the cheapest market rate.

12) Do you have any credit flaws like bankruptcy, consumer proposal or unpaid debts?

  • If so, some lenders won’t even touch you. The ones who will, will charge 50 to over 200 bps more than the lowest rate in the market.

13) Do you have a property address already or is it a pre-approval?

  • You’ll almost never get the best rate on a pre-approval (more on that). Expect to pay at least 10 to 20 bps more than rock bottom rates if you haven’t purchased your property yet.

14) How big is the mortgage, as a percentage of your home value?

  • If you’re a well-qualified borrower, “loan-to-value” (LTV) is the second-most-important factor in determining the rate you’ll pay.
  • If your LTV, for example, is 80 per cent instead of 65 per cent, you’ll often pay at least 15 bps more than the best market rates.
  • Oddly enough, someone with an 80 per cent LTV will pay up to 20 bps more than if they had a 95 per cent LTV. Why? Because mortgages with less than 20 per cent equity cost lenders less, since borrowers must pay for their own default insurance.

15) Can you pass the government’s “stress test”?

  • If you’re getting an insured mortgage (which is usually required if you have less than 20 per cent equity), you must prove you can afford a payment at the Bank of Canada’s five-year “benchmark” rate. That rate is roughly two percentage points higher than your actual “contract rate.”
  • If you can’t do that, but you have at least 20 per cent equity, some lenders will let you qualify on your “contract rate” instead, which is much easier, but you’ll pay at least 15 bps more.

16) What is your credit score?

  • If your credit score is less than 680, it could cost you a minimum of 10 bps more. A few lenders won’t deal with you at all, and others will limit their rate specials to borrowers with scores of 700 or 720.
  • By regulation, a sub-680 credit score will also limit the amount of debt you can carry if you want a competitive rate.

17) Are you purchasing, refinancing or merely switching lenders?

  • A refinance today costs 15 to 50 bps more than the lowest market rate on a purchase.

18) What is/was the property’s purchase price?

  • Many lenders now charge 15 bps more if your property value is more than $1-million.

19) Is your mortgage already insured?

  • If it is, and you’re simply switching lenders with no changes to the mortgage, you’ll save at least 10 bps compared to average discounted rates.

20) How long of an amortization do you require?

  • Many lenders, including big banks, are now charging 10 bps extra for amortizations over 25 years.

The above list of questions is by no means exhaustive. And there are always exceptions. One is if you’re asking for a renewal rate from the lender who presently holds your mortgage. If you send them a copy of various competitor’s rates, you won’t need to answer all these questions to get their lowest rate.

Ottawa’s new mortgage rules have made factors such as healthy credit scores, purchase price and amortization lengths more important. The changed regulations have led some lenders to advertise as many as 10 different rates for a five-year fixed mortgage alone.

Today’s landscape requires lenders and mortgage brokers to factor in more criteria than ever before when setting rates. So if you see a red– hot bargain advertised on a lender or broker’s website, it’s bound to have caveats. Get ready to ask–and answer–plenty of questions.

Canada’s cooling off measures in realty pack a punch

Foreign buyers will feel particularly targeted after tax exemption removal

By Sabine Glai,

The Canadian real estate market has been a topic of hot debate over the last year. With Vancouver and Toronto residential property markets continue to be on an unphased upward trend, the Canadian government introduced new mortgage rules to cool things down.

Remaining up-to-date on the complexities of the property market and the resulting change to the regulatory environment in which the market operates is critical to success for investors in the Greater Toronto Area and other Canadian housing markets.

So what do the new rules look like and how will they affect first time-home buyers or investors? They came into effect October 17 and will reduce the purchasing power of both groups. Wider use of stress testing represents a significant change to borrowing requirements.

Prior to the change, stress testing was only used in certain market segments. In an attempt to ensure that loan payments would not be jeopardised by rising interest rates or changing financial circumstance on the part of the borrower, the government is now requiring stress testing on all insured mortgages. Insurance is required for mortgages where down payment is less than 20 per cent of the purchase price.

Additional stress testing will thus add the additional burden of proving financial stability in the face of changing economic conditions. Buyers in markets such as Vancouver and Toronto, the higher priced markets, will feel the impact of this change more so than others.

‘Bank of mom and dad’ has growing hand in real estate market thanks to first-time buyers: report

Garry Marr

A new survey released Tuesday found first-time buyers are getting help from “the bank of mom and dad” — a theme the head of one of Canada’s largest real estate companies says he continues to hear in the marketplace.

Brad Henderson, chief executive of Sotheby’s International Realty Canada Inc., had his own report out Wednesday on top-tier real estate across the country and he believes family support has an influence as people accumulate equity early in the home-buying cycle.

“I don’t have statistics to back this up, it’s more anecdotal. We see less (family financial support) for high end homes and more for first-time and move up homes,” said Henderson, adding inheritances are more of a direct factor in the high-end sector of the market.

However, a new survey from ratehub.ca did shed some light on the family financing and found 42 per cent of first-time buyers in British Columbia received some type of assistance from kin. Thought not directly linked, the same survey found 45 per cent of first-time buyers in the province, where the average existing home sold for $625,871 in December, were able to put down 20 per cent or more down on a home.

Ratehub.ca interviewed a thousand people across the country between Sept. 2016 and November 2016 to get a sense of how much support buyers are getting from family and British Columbia was by far the leader in terms of pure dollars.

“RateHub is expecting the bank of mom and dad to have a record year in 2017,” the company said, adding regulatory changes in 2016 and rising home prices have made entering the housing market for first-time homebuyers an ongoing challenge.

We are now seeing the Vancouver market pausing while the Toronto market is bolstered by a lack of supply, interest rates and unemployment that is comparatively low

In Quebec, a much cheaper environment for buying houses than British Columbia, 45 per cent of first-time buyers said they received financial help and 45 per cent were also able to meet the 20 per cent threshold. In Ontario, 35 per cent of buyers received help from relatives while 38 per cent were able to put down 20 per cent or more on their homes.

Canadians need at least five per cent down to buy a home with a loan backed by the federal government. They must come up with 10 per cent for any amount between $500,000 to $1 million. The 20 per cent threshold is key because at that point banks can loan money without forcing buyers to get costly mortgage default insurance, under federal rules.

Shawn Poynter/The New York Times

Shawn Poynter/The New York Times

Sotheby’s Henderson says the single family home market continues to be a driver of the luxury home market — with the minimum threshold of $1 million for top tier beyond anything the federal government will backstop with insurance.

In Toronto, Sotheby’s says $1-million home sales were up 77 per cent in 2016 from 2015 and homes that sold for $4 million plus climbed 96 per cent during the period.

“Toronto is not as dynamic as the Vancouver market was in the first half of 2016,” said Henderson, who notes Canada’s largest city is benefitting from a 15 per cent additional property transfer tax that Vancouver slapped on foreign buyers in August.

Vancouver sales for more than $1 million saw a 34 per cent decline in the last last half of 2016 compared to 2015.

We see less (family financial support) for high end homes and more for first-time and move up homes

“We think Toronto is going to see more of the same 2017 because the underlying dynamics are still the same,” said Henderson. “We are now seeing the Vancouver market pausing while the Toronto market is bolstered by a lack of supply, interest rates and unemployment that is comparatively low.”

On the new home construction side, 2016 ended with bang as Canada Mortgage and Housing Corp. reported Tuesday there were 207,000 starts on a seasonally adjusted annualized basis, well above market expectations of 191,000.

Royal Bank of Canada doesn’t think it will last into next year and is forecasting 180,000 starts for 2017 and a decline in existing home sales of 10 per cent on a national basis.

“We are looking to the housing sector to being a drag on growth compared to six of the last year where it contributed positively to gross domestic product growth,” said Josh Nye, an economist with the bank.

Financial Post

Tax affects homeowners

April Dunn

Along with the new mortgage rule changes for qualifying that were introduced in early October, the minister of finance also announced tax changes that will affect every homeowner in Canada.

There will now be requirements to claim the capital gains exemption on the sale of a principal residence.

The intention is to close current tax loopholes used by foreign real estate investors, but the changes are affecting all Canadian homeowners if only by the fact that you will now be required to report the information on your tax return.

All property is subject to a capital gains tax. So if there is any increase in the value of any property such as a home, rental property, family cottage or even a stock portfolio, you may be required to pay a capital gains tax.

Your principal residence is exempt from this tax so that allows you to shelter any profits you might make from the sale of your primary residence.

A principal residence is any property that has been occupied during the year by you or a family member, but that can only be one property.

Here are a few requirements for a property to be designated as a principal residence:

Only one home per family is allowed.

There is no minimum length of time that you must occupy the home.

The CRA will, however, be checking on your buying and selling patterns, how much time you spent in the home, etc. to ensure the property is really your primary residence and not part of a business of buying and selling properties

The property you designate as your primary residence cannot sit on land greater than 1.2 acres, so you would have to pay capital gains tax on the value of the land greater than the 1.2 acres although you may be able to get an exemption

Starting with the 2016 tax year, you will now be required to report the sale of your principal residence, which wasn’t required in the past.

It will get complicated if you only use part of your home as your principal residence and are using another part as a rental suite or a home based business as capital gains may be due on that portion of the sale.

The rules are quite complex and you must report the sale of a principal residence or a deemed sale.

A deemed sale occurs if there is a change in the use of the property such as changing the use of your current principal residence to a rental property or a business and vice versa.

When you change the use of a property, you are generally considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount.

You have to report the disposition (and designation) of your principal residence and/or the resulting capital gain or loss (in certain situations) in the year the change of use occurs.

 

Almost half of Canadian homeowners unprepared for financial emergency: Survey

Manulife says among those polled, homeowners had an average of $174,000 in mortgage debt, with an average of 28 per cent of their net income going toward paying off their home each month.

By

An emergency fund is meant to be there in times of need, but a new survey suggests nearly half of Canadian homeowners would be ill prepared for a personal financial dilemma such as job loss.

The poll released Thursday by Manulife Bank found that 24 per cent of those surveyed don’t know how much is in their emergency fund, 14 per cent admit to not putting away any funds and 9 per cent only have access to $1,000 or less.

The remainder of those surveyed have up to $10,000 saved, with the average amount being $5,000.

Manulife Bank chief executive Rick Lunny says not having three to six months of expenses set aside can lead to desperation if a situation arises where you need to access money right away.

“The risk here is when they don’t have that money, and an unexpected event happens like you need a new furnace or a car repair, many of these people don’t have a choice but to lean on high interest cards,” he said.

Lunny noted that instead of taking advantage of the current low-interest rate environment to save money, the poll suggests that many homeowners are using it to buy more expensive homes.

“They’ve taken on large mortgages and as a result of that, they’re stretched in many ways,” he said. “Because of that, maybe they haven’t had the financial discipline to put aside rainy day money.”

Manulife says among those polled, homeowners had an average of $174,000 in mortgage debt, with an average of 28 per cent of their net income going toward paying off their home each month.

About half (46 per cent) of those polled say they would have difficulty making their monthly mortgage payments in six months or less if their household’s primary income earner lost his or her job.

Sixteen per cent say they would have financial difficulty if interest rates cause their mortgage payments to increase.

Mortgage data has been a hot-button topic in recent months as the federal government takes steps toward reducing the risks in the Canadian housing market, particularly in major cities like Toronto and Vancouver.

Earlier this month, Finance Minister Bill Morneau announced that stress tests will be required for all insured mortgages to ensure that borrowers would still be able to make their mortgage payments if interest rates rise or their financial situations change.

Last year, Ottawa raised the minimum down payment on the portion of a home worth over $500,000 to 10 per cent.

Lunny applauded the changes but says it doesn’t change the financial situation of current homeowners, who may already find it difficult to make mortgage payments.

The poll by Environics Research was conducted online with 2,372 Canadian homeowners from June 28 and July 8 of this year. Survey participants were between the ages of 20 to 69 with household income of $50,000 or more.

The polling industry’s professional body, the Marketing Research and Intelligence Association, says online surveys cannot be assigned a margin of error because they do not randomly sample the population.

Trump has made this month the best time ever to get a five-year fixed mortgage

Special to The Globe and Mail

Donald Trump might have just made this month the best time ever to get a five-year fixed mortgage. The president-elect’s effect on the rate market could reinforce trends that are already making mortgages more expensive. Here’s why:

The Donald is bullish for rates

U.S. interest rates have surged as Mr. Trump’s trillions in expected infrastructure spending and tax cuts, protectionist job policies and deregulation will fuel economic growth, and hence inflation. Bondholders dread high inflation.

They also dread an unwieldy U.S. debt load, default risk and comments made by Mr. Trump, such as: “I would borrow, knowing that if the economy crashed, you could make a deal.”

With bonds coming off their biggest bull market in history, all of this has traders urgently selling before their profits evaporate. As bond prices fall, U.S. rates are surging, and they could keep climbing longer-term.

With Canada so linked to the U.S. economy, our rates are flying too. The billion-dollar question is whether Mr. Trump erects trade barriers with Canada that stunt our growth. That would keep a lid on rates. But with Canada being a key market for U.S. goods and services, a major source of commodities and U.S. investment, and with our wages being on par with those in the United States, we’re much less of a threat to Mr. Trump than Mexico.

In any event, keep an eye on Canada’s five-year bond yield, now 0.87 per cent. Most mortgage rates are tied to it. If it breaks definitively above 1 per cent, today’s record-low five-year rates may not be seen again for months, if not years.

Covert rate hikes

The Department of Finance has flung a slew of regulations at mortgage lenders. It’s imposed higher capital requirements, limits on selling mortgages to investors, reduced access to default insurance (which investors demand when buying mortgages), higher fees and insurance premiums and so on and so on.

By doing all his, regulators are slyly making lending more expensive behind the scenes. Lenders are passing these costs on to borrowers, like we saw last week with TD Canada Trust’s surprise hike to its mortgage prime rate. Expect more such stealth rate hikes in the next 18 months, especially if Canada Mortgage and Housing Corp.’s new lender-loss-sharing proposal gets approved (and you can bet it will).

There’s a fire sale on fixed rates

You can now find five-year fixed rates that are lower than most variable rates. That’s an historical oddity that won’t last long-term.

As of today, the average discounted five-year variable tracked by RateSpy.com is 2.25 per cent. But you can fetch a five-year fixed rate for a juicy 2.19 per cent or less. In fact, some insured rates are below 2 per cent.

Could the Bank of Canada cut rates again? Sure. But that doesn’t mean lenders are going to drop their prime rate (much, if at all).

So a variable at a similar rate to a long-term fixed gets you maybe 0-30 basis points of potential benefit if rates drop again, in exchange for God knows what upside rate risk in a Trumpian economy.

Timing

Most of the best mortgage rates in the country come from mortgage finance companies. These non-bank lenders must insure their mortgages in order to sell them to investors. After Nov. 30, they’ll be forced to hike rates on a variety of mortgages as the Finance Department bans insurance on certain loan types. This could affect folks shopping for a refinance, amortizations over 25 years, $1-million-plus mortgages or rental financing.

Those with above-average debt loads and at least 20 per cent equity will also see their rate options shrink. That’s because, on Nov. 30, insured lenders must start testing borrowers to see if they can afford a payment based on the Bank of Canada’s five-year posted rate, currently 4.64 per cent. This leaves banks and credit unions – most of which have higher rates – as the main source of financing for folks with higher debt-to-income ratios. So if you’re thinking of consolidating debt, get off the fence now.

The nitty-gritty

Unless our economy seriously underachieves, despite Mr. Trump’s economic renaissance, we might look back on this month as one of the best times in history to get a five-year fixed rate. And if it’s not the best time, it will be right up there.

TD Bank raises mortgage prime rate to 2.85%

TD Bank has raised its variable mortgage rate for the first time since the summer of 2015.

Bank has held its mortgage prime rate steady since July 2015

CBC News Posted: Nov 01, 2016 1:21 PM ET

Toronto Dominion Bank has become the first major lender to hike its mortgage rates after Ottawa’s move last month to change some of the rules that govern insured mortgages.

The bank’s mortgage prime rate is rising 0.15 points to 2.85 per cent, effective immediately, after it had remained steady for 15 months.

Only customers with variable rate mortgages will be affected, the bank said in a statement, while fixed-rate customers should see no change. Other products such as lines of credit are not affected.

“We regularly review our rates and adjust them based on a number of factors, including the cost that TD pays to fund mortgages,” the bank said. “Increasing our rates is not a decision we take lightly. We consider the impact on our customers before proceeding with any rate change, and we communicate directly with customers whose loans or mortgages are affected.”

It’s rare for the big banks to leave much gap between themselves on their prime lending rates, so other major lenders are expected to follow suit. CBC News has reached out to Royal, CIBC, Scotiabank and BMO for comment, but none was immediately available.

James Laird, a co-founder of rate-comparing website RateHub and president of mortgage brokerage Canwise Financial, says he can’t recall the last time a major bank moved its prime lending rate out of step with the Bank of Canada, which has been on the sidelines for all of this year and is next scheduled to meet next month.

“That being said, there’s been some very major changes to the mortgage industry,” he said in an interview. “This could be in anticipation of higher funding costs when the new rules come in.”

In addition to a new stress test for borrowers, Ottawa also implemented new rules set to kick in at the end of this month that will make many types of mortgages ineligible for bulk insurance — which is one of the cheapest ways for lenders to insure their loans.

That means in less than a month, many lenders won’t be able to cut their costs by packaging their mortgages together and selling them to investors. That will raise the cost of mortgages everywhere, especially for non-bank lenders.

So TD moving to raise their mortgage rates could be a way of getting out ahead of those changes, Laird said.

“Without being able to ensure those mortgages,” Laird said “we can point to that as a likely reason for today’s news.”

Of Prime Interest: Mortgages for the self-employed

These days, as a result of the rules brought in over the past few years by the regulator of the country’s chartered banks, borrowing money to buy a home has become much more difficult for the 2.75 million Canadians who are self-employed—a group that according to Stats Canada has a higher median net worth than paid employees.

In the past, self-employed individuals with a 680+ credit score and their word they were earning enough from their business, could secure a mortgage with little or no documentation.

Today these same individuals are shocked to find they are no longer ‘approvable,’ even with a perfect repayment record of their existing mortgage.

The guideline B-20, which required federally regulated banks to tighten their approval process, has had a negative impact on self-employed individuals.

If you are self-employed or a business owner, you may be surprised to find that getting a mortgage without the conventional documents is not a simple process. The self-employed typically lower their taxable income by maximizing business expenses and personal deductions resulting in a discrepancy between what shows on their tax return and how much they actually do earn.These individuals have obtained their mortgage through what is referred to as “stated income” applications which require an impeccable credit history and a signed income declaration along with sound proof of the self-employment. Today they can still apply for a stated income mortgage but under B-20 they can only borrow up to 65 per cent of the value without the requirement of default insurance from Genworth, CMHC or Canada Guaranty. The criteria for qualification has increased and each insurers has different criteria.

So, what should you do if you are self-employed and want to buy a home, refinance your existing mortgage or switch lenders? Begin by having copies of your CRA Notice of Assessments for the last two or three years. Good credit is a must. Ensure your tax returns are filed on time and pay the taxes owing to create a positive picture of your finances.

You will be required to provide confirmation of your business. This can be as easy as providing a business license. A mortgage for a self-employed business owner “stating income” may, in some cases, result in a higher mortgage rate and higher mortgage insurance premiums.

If you are able to qualify with your self-employed earnings and there are ways a professional can assist with this, your rate will reflect the best rates offered.

Mortgage professionals  assist clients every day with their mortgage requirements. If you are unsure whether you can prove your income – talk to me.

Why It Pays To Put Less Than 20% Down When Buying a House

Why It Pays To Put Less Than 20% Down When Buying a House

Conventional wisdom says when you’re buying a home, a bigger down payment is always better. Not only will you lower your monthly payments by minimizing your debt, but a loan with a greater down payment offers more security for a bank. This should, in theory, make them more likely to lend.

Reality is a little different, however. Usually, folks with more than 20% down will get the same rates as those with a smaller down payment. Sometimes, though, people who put down less get even better rates.

Why would this be? It’s because of three little words. Mortgage. Default. Insurance.

In Canada, all mortgages with less than 20% down must have mortgage default insurance, insurance paid by the borrower that protects the lender in case of default. This insurance makes sure the lender doesn’t lose money on a deal that goes badly.

A part of the federal government, Canada Mortgage and Housing Corporation, is the largest mortgage default insurer.

Once this insurance is in place, a bank has very little risk involved. A deal without mortgage insurance– one with more than 20% down– becomes more risky. Thus, that borrower has to pay higher rates.

Yes, a borrower will pay a premium for mortgage insurance, which can range from 1.25% to 3.60%. But that fee is only applied once, and could mean an annual interest savings of 0.25% or 0.50%, which means it could very well end up cheaper in the long run to pay for mortgage default insurance.

CIBC sells negative-yield bonds for 1st time

Bank sells 1.25 billion euros worth of debt guaranteed to lose money in long run

By Pete Evans, CBC News

CIBC, led by CEO Victor Dodig, sold its first ever negative yielding covered bonds this week.

CIBC, led by CEO Victor Dodig, sold its first ever negative yielding covered bonds this week. (Jeff McIntosh/Canadian Press)

Canadian Imperial Bank of Commerce has become the first Canadian bank to sell bonds with a negative yield, and it had no problem selling the debt even though buyers are guaranteed to lose money if the debt is held to maturity.

The bank raised almost $1.8 billion via a bond sale of six-year debt that yields minus 0.009 per cent. That means anyone who bought the debt paid $100.054 for the right to get $100 back from the bank in 2022.

Despite the seemingly poor return, the bank had no trouble selling the euro-denominated bonds on Monday. The bond sale was two times oversubscribed, which means there were people willing to buy twice as much debt as there was debt available for sale.

Going negative

The bond sale makes CIBC the first Canadian bank to dip into a current appetite for negative-yielding bonds. But the lender is far from the only one to be selling investments guaranteed to lose money.

According to Bloomberg data, there is almost $12 trillion US worth of negative-yielding debt in the world now, much of which has come from governments and central banks that have cut their interest rates to record lows in order to stimulate the economy.

“Low yields may be great for governments, but they are lousy for savers and investors,” Hilltop Securities managing director Mark Grant said in a note

Investors have an appetite for such debt because the forecast for other assets is even worse. With stock returns looking dodgy due to fears about the global economy, lending money to a bank can seem appealing even if it’s guaranteed to lose a few pennies per dollar over time.

“As expected returns on ‘safe’ assets have diminished, investors have been forced up the ‘risk curve’ to obtain satisfactory returns,” Scotiabank said in a recent note to clients. “The search for yield will only become more desperate.”

The CIBC bonds are doubly appealing, because they are what’s known as covered bonds. That means they are backed by Canadian mortgages, so investors in the bonds have the right, theoretically, make a claim against those mortgages in the unlikely event the bank ever defaults on its loans. That gives investors two layers of protection, both in the bank’s creditworthiness, and from that of the underlying assets — the mortgages themselves.

The bonds have yet to be rated by an agency, but they are expected to get a pristine AAA rating for safety and creditworthiness, according to Bloomberg.