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Posted Consumer Debt

Govt to cut Secured lines of credit to 65% loan to value…

Thursday’s speech by OSFI head, Julie Dickson, at the Toronto Board of Trade, indicates it’s a done deal.  Secured lines of Credit will be capped to a maximum 65% of the value of your home.  “…the guideline does set out some firm rules that all institutions will need to adhere to – specifically that home equity lines of credit – or HELOCS – can have a loan to value ratio no greater than 65%….”

WE’RE MAKING SOME CHANGES…. I MEAN, WE ARE PROPOSING SOME CHANGES…

It was only a few weeks ago that OSFI issued a Draft B-20 guideline, a guideline that is filled with radical changes to mortgage lending rules and policies.    It was supposed to be up for discussion, with a May 1st deadline…. So much for discussion…. it appears the decision was made already according to Ms. Dickson’s speech today…. here’s a copy of that speech… April 5 2012 remarks by Julie Dickson.

90%, 80% AND NOW 65%???… WHEN DOES IT END?

Remember 2007?  It was just a few years ago that CMHC was offering 100% loan to value, interest only payment mortgages.  Back then it was good to borrow at these levels…. And HELOC’s could be had for up to 90% LTV.  Over the past few years, the govt has tightened up mortgage rules in an attempt to reduce access to credit.    Mortgages were amortized for 40 years, then cut back to 35 and now 30 years..  But now the govt believes they need to step in again and limit access to your equity by reducing the Loan to Value limit to just 65%….   I looked back to some historical lending policies and couldn’t find a time when the govt ever imposed a limit of just 65%.   It is unheard of! And it’s going to have a big effect.

SO WHAT’S THE PROBLEM?

OSFI is finding a solution to a problem that doesn’t exist.   I don’t think they realize that Banks have pushed borrowers into lines of credit for years now, as a way of providing easier access to the equity in their homes.    Canadians aren’t buying new TVs or new cars or other luxury items… they are using the equity to improve their net worth by buying investments.   Why is this a bad thing?   Are our defaults up?  NO!  Then what is the problem….?

WHO WILL THIS AFFECT AND HOW?

If you are a self-employed person and ever tried to get a business loan from the Bank, then you know how difficult it can be to get an approval… but even if you do, the repayment terms and interest costs could be a hard stop.   End result is that business idea could remain just that… an idea that never got launched.   One of the more popular alternatives was to access cheap money by borrowing, against the equity in your home.  Mortgages can be great but if you need to borrow, repay and borrow again, then a mortgage can have costly registration fees and penalties.  But through a HELOC,  the repayment terms are great and it’s also a much lower rate of interest than any business credit facility.

Borrowing to invest isn’t anything new.  A HELOC allows you to access YOUR equity at preferred rates.   How about buying a second home or a rental property?  You could use the equity in your home to help with the purchase and HELOCs give a separate accounting which makes reporting to Revcan much easier.

How about borrowing for your child’s education?   Are we going to force Canadians to refinance their mortgages in order access cheap money?   I’m sure the BIG SIX Banks will love to see you break your mortgage and pay their infamous penalties.

END RESULT

Get ready, because you are about to see us pushed into higher interest, unsecured lines of credit (oh yeah, there wasn’t any mention of reviewing these lending policies… that’s because NONE exist!).

Which debt would you pay last…. a mortgage, a secured line of credit or a credit card or unsecured line of credit?    Obviously, it’s the unsecured debts would be last on our list… we will always pay for the roof over our heads…. which is why the defaults are still very low and within very acceptable levels.

We are going to see many Canadians discouraged from investing.. they won’t want to go through the trouble of borrowing with a mortgage…  Congratulations OSFI, you’ve made borrowing more expensive….you’ve made investing for our future tougher than it has to be.

The WINNERS… the BANK…. The LOSERS… you and me, the average Canadian…!

Posted 2 Comments on OSFI’s latest proposals will affect every mortgage and line of credit.. Consumer Debt

OSFI’s latest proposals will affect every mortgage and line of credit..

Earlier this week we saw a draft guidelines proposed by Brock Kruger from  The Office of the Superintendent of Financial Institutions.  Yes, more tightening of mortgage and secured real estate lending……  To put this in plain language, the proposal will affect almost everyone… it will change how mortgages and secured lines of credit are offered….. in shorty, I think this plan is trying put out a fire that doesn’t exist.  There is no need for the changes.

Draft B-20 just goes too far…..   they target mortgages but also Home Equity Lines of Credit (HELOC).    Most of the media coverage on this has been somewhat neutral.. but finally we have seen one reporter question these proposed changes.  This article by Peter Foster in the National Post was great…   He questions why we need any more changes when our mortgage and banking system is the envy of the world….  There is no emergency, no arrears problem, nothing to indicate our mortgage lending policies are overly generous.

It should be noted that non-bank lenders will not be affected by this… leaving them as a potential winner if these guidelines become policy…

Here’s a link to the entire 18 page draft.

SUMMARY OF THE PROPOSED CHANGES:

–Cash back mortgages could disappear.. currently, one could get a mortgage for 95% of the purchase price at Bank posted rates and then get a 5% cashback.  The cashback can be used as the down payment.  ( I don’t see many reasons for applicants to buy with no money down so this isn’t a big issue for me)

-homes would have to be appraised at renewal time… this is just crazy… can you imagine if your property value dropped and the bank asked you to pay down your mortgage at renewal time or even worse, call in your mortgage?  What’ s OSFI trying to do.. force everyone to take a 10 yer fixed rate mortgage?   They have already made Variable Rate mortgages harder to qualify for…. what’s the matter, they don’t want us to pay less interest?  

–HELOC’s would have to be amortized meaning NO MORE INTEREST ONLY PAYMENTS...  this one will affect more households and business owners than the OSFI probably realizes… businesses use their homes to finance businesses… that’s been going on for decades… but they aren’t borrowing with no assets.. remember, they are putting up their homes as collateral.. if we start to make it even more difficult for self-employed to obtain financing, this will affect the economy almost immediately.  But how about the 2nd or 3rd time buyer in their 30’s or 40’s that wants to tap into their equity for investments… ?  Are we going to eliminate all interest only payment facilities?  

-HELOC’s maximum would be reduced from 80% to 65% loan to value of your house…. and let’s not forget that just a few years ago we could have obtained up to 90% loan to value through CMHC insured products. Again, just another crazy idea and very radical change in just a few years… where is OSFI taking us?

–mortgages would require tighter debt servicing guidelines including fewer exception approvals by your lender…

Mr. Kruger, your intentions may be honorable, but you are not being practical or realistic.   Why have you introduced these proposals?   To reduce access to credit?   To make it more difficult for Canadians to tap into their home equity?   To make it tougher to buy a house?     Whatever you think these changes might do, I can tell you, as a 22 year mortgage industry veteran and industry insider, that these proposed changes will just shrink our economy, force us to take longer fixed rate products resulting in even higher mortgage penalties for the Banks…  It will force us to tap into our credit cards and unsecured, higher interest credit facilities.… It will force business owners to pay more for raising capital… it will discourage investors….

Give this one a rethink… you are searching for a solution to a problem that doesn’t exist.

Posted Case study

Consolidate your debts and save money with today’s record low rates.

It’s December 2011, fixed mortgage rates are at historical lows…a 5 year fixed rate can be had for 3.39% and in some cases, even 3.29%.   Does it make sense to refinance your mortgage and consolidate that car loan, student loan, credit card, line of credit or other debt?   The answer is an overwhelming YES!

Compounding interest rates are a killer.  If you have $20,000 or more in non-mortgaged debt, then you should consider consolidation.   Especially with today’s record low interest rates.

Here’s an example of one situation:

 Rate  Balance  Payment
 Mortgage 3.99% $300,000 $1,349
 Car loan 6.00% $24,000 $563
 Credit Cards 18% $10,000 $300
 Line of credit 7% $10,000 $300
mortgage penalty $2,993 $0
 Totals $346,993 $2,512

And here’s what the new situation could look like after consolidating their debts:

 Rate  Balance  Payment
 Mortgage 3.39% $346,993 $1,533
 Car loan $0 $0
 Credit Cards $0 $0
 Line of credit $0 $0
mortgage penalty $0 $0
 Totals 3.39 $346,993 $1,533

So in this example, we are reducing the monthly payment by $979.00.     Let’s take some of that money and put it towards your new mortgage… if you took $500/mth and put this towards your mortgage for 5 years, you would reduce your amortization to 10 years and 7 months.   Clearly, this is worth breaking the mortgage and paying the penalty.

(keep in mind, the penalty could be higher if the lender uses an Interest Rate Differential to calculate the penalty… Always speak with your Mortgage Broker to ensure the penalty is accurate).

 

 

Posted Consumer Debt

Canadians buy $4.9billion worth of Florida property in 2010

Here’s some interesting stats…. According to the Jacksonville Business Journal, Canadians accounted for 39% of all international buyers of property in Florida during 2010…  That’s $4.9billion worth of property purchased by Canadians. Wow, we must have a lot of snowbirds here.!  Or maybe we just have a lot of investors?   Perhaps it’s is a combination of the two.

One thing is for certain, Canadians like Florida…  It certainly has become a popular investment for many.   Who wouldn’t want a sunny getaway in Florida?  The ads are everywhere…condos starting at $30k… houses that once sold for $600k are now selling for $225k.  Clearly, Canadians see Florida as a bargain.

And maybe, just maybe, Canadians aren’t getting into debt for frivolous reasons?… Maybe we are borrowing with these record low interest rates to invest?   Maybe those stats and articles that keep telling us we should be concerned with the ‘high personal debt levels’ of Canadians, are not a true reflection of our spending habits…??

Most Canadian buyers of Florida property are obtaining loans from a Canadian bank.   Borrowing from a Florida bank isn’t easy these days.  That’s why many Canadians will refinance their homes and use the equity to buy their Florida property.

Borrowing to invest is a good thing…. this is known as ‘good debt’….but I don’t think there are any stats that show how much we are actually borrowing to invest…. sure would be nice to know those figures…

Posted Consumer Debt

Setting us up for fewer rate drops and higher bank profit margins..

It’s becoming clear that the Banks and govt want us to boost Bank profit margins…. Yes, it’s true!   They want you and I to pay a higher interest rate so that the Banks can earn a higher profit…

Let’s look at some facts…

-The Banks recently got together and increased their Variable rate pricing from Prime less 0.75% to Prime less 0% (the Bank websites are showing their variable rates at Prime less 0% but there are still places you can get Prime less 0.40%).   So why is that?  They tell us ‘profitability concerns’ is the reason…

-The best 5 year fixed rate on the web from any of the Big Six Banks is 3.99%… Yet, the 5 year govt of Canada bond yields are at 1.43% today…that’s a spread of 2.56%... historically, that spread is between 1.10% to 1.50%… (by the way, you can still get a 5 year fixed rate at 3.39% from reputable lending institutions).   The Banks are making a fortune these days on Fixed Rate mortgages.

– OSFI (Office of the Superintendent of Financial Institutions) has now come out and said that they are concerned consumers will borrower more than they should because interest rates are so low… and because of this, they are urging Banks not to loosen their lending criteria, especially on Home Equity Lines of Credit…

Read the warning signs

If you read between the lines, we are being warned that tighter lending rules could be just around the corner for Secured lines of credit… I don’t think the govt needs to make any further changes to mortgage lending…both secured lines of credit and mortgages…  We have seen several rules changes over the past few years….  But  the message we are being fed is that Banks need to charge a higher rate of interest because consumers cannot be trusted to borrow wisely…

The reality is that interest rates should actually be lower than where they are today.   Cost of funds are down… so why can’t we just let consumers pay fair market interest rates?  It’s one thing to be told that interest rates are going up because of market conditions and cost of funds… but when I start hearing that Bank Profit concerns and consumer spending habits are issues, then I have to start questioning the motives.   This just sounds like another excuse to raise rates and charge the average consumer more…..Consumers beware…!

Some good news

There was some good news… and that is that US interest rates are forecast to remain low into 2013…. Canada usually follow the US very closely….Hey, let’s enjoy the low interest rates…. a $300,000 mortgage will carry from between $1200/mth and $1325/mth…what’s wrong with that?  Enjoy Canada… Enjoy.