Little chance of rate change in Canada this week

Derek Abma, Financial Post
OTTAWA -- Chances are next to nil the Bank of Canada will alter its record-low interest rate of 0.25% when it issues an official decision this Tuesday.

Nonetheless, people will be watching closely for subtleties that accompany the central bank's decision, and the elaboration that comes in Thursday's monetary policy report, on whether it is considering straying from its well-documented plan of leaving rates put until the middle of next year.

For the past several months, such periodic decision dates have been non-events. Since the Bank of Canada set the policy last spring of keeping the rate as low as possible until the end of next year's second quarter, little has happened to prompt a diversion. There's been no sign of excessive inflation for the foreseeable future, and the hoped-for economic recovery has yet to kick into high gear.

Still, questions remain about the Bank of Canada's ultimate path after the recent decision by the Reserve Bank of Australia to raise its benchmark lending rate. Speculation that Canada will follow suit has been a factor in the loonie's recent rise to near-parity with the U.S. dollar.

Bank of Canada governor Mark Carney has talked about the damaging effect a high-valued Canadian dollar can have on the country's efforts to emerge from recession, and has hinted the bank could take steps to intervene.

"This can't be a short ‘steady as she goes' message," Avery Shenfeld, chief economist at CIBC World Markets, said in a research note about the bank's upcoming statement.

He noted the bank's recent indication it would be upgrading its forecast for 1.3% growth in the current third quarter, but added this now seems "unlikely" given the "shockingly low" numbers that were part of reports on gross domestic product for July and factory sales in August.Mr. Shenfeld said Carney is likely to warn about the rising dollar's potential to prevent a return to 2% annual inflation, which the central bank deems as ideal. On Friday, Statistics Canada said prices were down 0.9% in September, the fourth straight month of negative price trends.

"Staying silent on the currency would only give markets carte blanche to tack on a few cents to the loonie," Mr. Shenfeld said.

With the Bank of Canada's previous expectations for economic growth and inflation more or less in line, Mr. Shenfeld said he doesn't anticipate changes to its overall game plan.

Eric Lascelles, chief economics and rates strategist with TD Securities, is of the same opinion. He added that the central bank's determination not to raise rates prematurely might have some negative influence on stocks markets."Stocks actually have a really finicky approach to monetary policy," he said in an interview. "Sometimes you see a stock market go up because rates are hiked and sometimes to you see it fall."

While low interest rates are ideal for companies to operate, Mr. Lascelles said the reluctance of the bank to raise rates can be interpreted as a lack of confidence in the economy.

Despite past hints, Mr.Lascelles said the Bank of Canada is unlikely to go beyond talk in its attempts to dampen the loonie's value.

A key sign in just how strong the economic recovery in Canada is going could some in the August retail figures, to be released Thursday. The July figures, which many were hoping would provide evidence of a strong economic rebound, were surprisingly downbeat with a 0.6% decline. The consensus among economists for the August numbers is for a 0.2% gain.

Some other key upcoming reports on the Canadian economy include wholesale trade numbers and leading indicators, both due Tuesday.

The U.S. will see housing-start and building-permit numbers on Tuesday, and its leading indicators on Thursday.

Don't expect rubber-stamped mortgage approvals anymore

Helen Morris, National Post

Whether you are planning to move from an existing home or are stepping into the property market for the first time, and unless you have a substantial supply of cash, you will likely require a mortgage.

Interest rates may be at historic lows but with uncertain and changing market conditions, lenders want to be doubly sure that borrowers can repay a mortgage. This has led to lenders placing more stringent conditions upon borrowers and demanding more detailed and verifiable proof of income and ability to pay.

A borrower's income, expenses, credit history and down payment are all considered when assessing whether they qualify for a mortgage.

"Prior to eight months ago, for a standard salary individual, I could do the mortgage on a job letter," says Jeff Mayer, a mortgage agent with the Mayer Group, part of the mortgage brokerage firm Mortgage Intelligence. "Now you need a job letter ... then they want a pay stub...and a lot of times they'll ask for two paystubs, then they're going to want either a T-4 or a notice of assessment. The bank wants to make sure that you can afford the mortgage. It's tough love; they want to make sure that you're going to stay in your house."

If you work overtime it is essential to check with the lender if this income can be counted towards your mortgage qualification.

"In a lot of situations, with unemployment rising, there is not as much overtime," says Gary Siegle, a regional manager with the Invis mortgage brokerage firm. "Lenders are looking at that a little bit more carefully."

Because of increased default rates in some communities, some lenders will now only consider a base salary when evaluating a mortgage application.

If you have a stable job, a decent-sized deposit and a good credit score, putting in the hard work at the application stage can secure you a good deal.

"With prices having softened due to the recession, housing has never been more affordable," Mr. Siegle says. "It is a little more difficult to qualify when it comes to showing your income and proving different parts of [it], but it's also much easier to qualify on the numbers because house prices are down and mortgage rates are on sale, really."

However, mortgage qualification has become rather more testing for those with lower credit scores, smaller deposits or irregular income.

"Lower credit scores have become more difficult to get traditional financing for. You can still quite often get a mortgage but it's just going to cost more," Mr. Siegle says. "Those with very poor credit probably have much more difficulty today. If you've got bad credit and haven't been proven to be able to manage it, maybe you need to get things fixed up before you get a mortgage."

It has also become a lot tougher for self-employed individuals to get mortgage financing, Mr. Mayer says. Lenders are still allowing self-employed applicants to state their own income levels but the income stated must be deemed reasonable based on the size and type of business.

Many lenders, Mr. Siegle says, are demanding extensive documentary evidence from self-employed applicants and even then, lenders can refuse to provide a mortgage if they believe that disparities between taxable and real income are not reasonable.

It is not just borrowers buying their own homes who are facing tougher lending criteria.

For buyers of rental properties, Mr. Siegle says, lenders have become less generous when calculating how much rental income can be used to qualify a mortgage. Conventional lenders used to include up to 80% of the rental income when calculating how much homebuyers could borrow. However, due to a higher risk of default, now he says some lenders are including only 50% to 70% of the rental income.