Skip to content

CategoryMortgage Trends

Posted Consumer Debt

Shhh…Interest rates are still at record lows… and Canadians are making huge prepayments.

 IT’S OKAY TO FEEL GOOD ABOUT LOW INTEREST RATES

I’m sure this isn’t what our Federal govt wants you to hear.   But it’s true… Fixed rates are in the low 3.00%s….  So why aren’t we feeling good about this?   Why isn’t everyone happy?   Record low interest rates means less interest cost to you… it means low housing costs…It means you are saving money.

A mortgage is the biggest debt most of us will ever have…  We all talk about mortgage rates with our friends, co-workers and family…. It’s a popular subject… But for some reason, we aren’t feeling good about these low rates…  It’s almost like we should be feeling a little guilty, like the cat that swallowed the canary… do you feel like that?

Could it be that we have been beaten to death with negative messages by the Federal Minister of Finance?   Housing Bubble coming!!!…. personal debt levels rising!!… higher interest rates coming…!!   Maple Leafs win Stanley cup (oops, had to throw that one in)… we’ve been talking about these same things for years… yet they haven’t happened!  I’m not saying these aren’t concerns but I think some of these have been overstated without providing enough proof or evidence.

The govt doesn’t want you to borrow at these rates…   They are afraid you would be too irresponsible and would borrow more than you could afford… (never mind the fact that you must qualify at BANK POSTED rates which are 2.00% higher than these wholesale mortgage rates…)

NEW STATISTICS SHOW WE ARE RESPONSIBLE AND NOT SHOWING ANY SIGNS OF TROUBLE

By the way… the strange part about all this “boy that cried wolf” noise from the govt, is that there really isn’t any proof that we are in trouble….  That’s right..  Mortgage Arrears are low and have been low for over a decade… Affordability is better than it was 20 years ago!   (low rates have helped but increases in income have also factored in)…

And how about this stat that just came out….Around 23% of Canadian mortgage borrowers have increased their regular mortgage payments by $400 to $500 per month.  19% are making lump sum payments of around $12,500 per year.   That works out to over $20billion in extra payments towards their mortgages.  Or put another way, over 1 million mortgage holders out of the estimated 5.85million mortgage holders in Canada are paying far more than the minimum payment.   Does this sound like a country of irresponsible borrowers? … (source Financial Post).

Either the govt’s message has sunk in, or there really wasn’t as big a problem as we were led to believe…. I’ll let you be the judge…

But we could be facing a ‘Made in Canada’ problem as this article states… .  With the govt planning to make the biggest changes in history with  mortgage and HELOC lending, they will be affecting a large segment of new borrowers but even more EXISTING borrowers… they will force a large percentage of Canadians to sell their homes, close their businesses or seek higher interest debt….  And why?  What purpose does it serve?  The stats tell us we are fine…

House prices are hot in Toronto but they are cold in the rest of Canada…  The govt is providing a solution to problem that doesn’t exist.

If you aren’t sure if you could benefit from today’s low rates,  or how these proposed new lending changes will affect you, give me a call or send me an email…  I’d be happy to discuss your options.

Steve Garganis

Posted 1 Comment on CMHC under OSFI control…. another kick in the rear to Canadians. Mortgage News

CMHC under OSFI control…. another kick in the rear to Canadians.

CMHC’s MOVE TO OSFI CONTROL WILL BE A KICK IN THE BUTT TO ALL CANADIAN HOMEOWNERS.

Is this what CMHC staff and Canadian homeowners are thinking?….   That’s right, it could be OSFI head, Julie Dickson on one end, and that’s you and I on the receiving end!

You’ve seen the headlines lately….  “OSFI proposes radical changes under Draft Bill B-20” which was up for discussion until May 1st.    But weeks earlier, Julie Dickson, the head of OSFI made a surprise remark at speech in Toronto’s Board of Trade…(some were calling it an ‘oops’, or a ‘slip-up’ ) where she stated that the proposed HELOC changes were a done deal…  this was on April 7th… well before the May 1st discussion deadline…

And more recently, we saw more questionable remarks from OSFI…. this time from Vlasios Melassanakis, Manager of Policy Development.   “Are the banks equipped to handle a 40% drop (what occurred in Toronto market in early 1990’s)? Need to stress test to find out.”    Is Melassanakis for real?   40% drop??  where is he getting that number from??    Absurd..! and unsubstantiated!   That’s my response.

What’s going on here, you might ask??

Mortgage arrears are low, affordability is high, property values have declined or remained flat across the country except a few pockets including GTA…   So why all these drastic changes?

I was contacted for my opinion by some business writers from our national media.   We were trying to read the fine print… to understand what it all this meant…. and why it had to be done so quickly…  Why do we have move CMHC, a Crown corporation that’s been around for over 50 yrs and making $billion profits for Canada…why do we need to move them under OSFI control?

The dust hasn’t settled yet, but here are some of the changes and my thoughts on what seems to be happening.

  • introduce a limit on secured lines of credit to 65% of the value of your home… down from 80%… this move makes no sense…  this will limit your ability to draw on the equity in your home to invest, access cheap money to run a business (the self-employed are an understated segment of the population that will really suffer), pay for your kids education, or just access funds for personal use…   the govt wants to mandate this product for the first time in history…  and by the way, it’s always been harder to qualify for these products than a regular mortgage.
  • re-underwrite your mortgage at renewal... they propose to reapprove your income, credit, get a new property appraisal at time of renewal… regardless if you made all your payments on time…  where’s the logic?  what’s the point?  Would any lender really tell someone their mortgage won’t be renewed even though they paid fine?  Will they ask you to pay down your mortgage if a new appraisal says your house is worth less?
  • they have even suggested they want to change our long running standard underwriting debt servicing ratios… these have been around for over 30 yrs and have served us well… why the change?
  • OSFI is a regulatory body that provides regulation and supervision to 152 Banks, Trust companies and other Lenders.   They are auditors….  Where is their motive to provide access to mortgage money for prospective homeowner?   This move to push CMHC under OSFI is the biggest change in decades and it’s very risky given that Canada is looked upon as a stable country with a stable banking system…  why would the govt make all these changes?  and why now?
  • let’s not forget some of the comments from Minister of Finance Flaherty.. he suggested CMHC may not even be necessary in the future…  a bold statement.

POSSIBLE EFFECTS OF THESE CHANGES

It’s clear these changes will effect us all….. here are some of the early results of the changes:

  • we have already been informed that CMHC has tightened their lending policies… there was an official communique released last month that stated, more applications will get referred to underwriters for full review….
  • several banks have amended or cut their business for self mortgage programs… end result is higher cost to obtain funding… guess that’s good for who?? not the consumer…
  • less access to the equity in your homes will mean less money towards investments… we have  huge segment of our population that borrows to invest in stocks, properties, etc..  they will have less to access now….  resulting in less money in the economy.
  • we may achieve  a lower personal debt level… but will that help the economy?…
  • less money flowing into the economy can’t be a good thing…  if we wanted to slow things, the Bank of Canada would have raised their Target Rate long ago…. instead, it has remained unchanged since Sept 2010.
  • there will be more..

We’ve heard that a review of CMHC by OSFI will be  completed by June… but the results won’t be published… so we can only guess and speculate as to what changes these auditors at OSFI will be proposing….  We’ll be watching and reporting…..Let’s hope they don’t fix something that isn’t broken.

As always, if there is something you need help with, let me know… I’m happy to help.!


Posted Case study

A complete overhaul of Mortgage Lending in Canada?

  FED GOVT KEEPS TALKING ABOUT TIGHTENING MORTGAGE LENDING POLICIES

But why?  Why does the govt believe there is a need for all this change?  That’s the question most industry insiders are asking.  Here are some facts with my thoughts mixed in….  tell me if you see some contradiction between the different branches of the govt or a lack of consistency:

  • Surprise…we don’t have a mortgage default problem… Mortgage arrears in Canada are 0.38% as of January 2012.   In Ontario, the housing hot spot, arrears are only 0.28%.   These figures are very low by anyone’s standards.
  • The average resale price dropped 0.5% nationally.  But resale prices in Toronto, are up around 7.3% in a year-over-year comparison.  But that trend is cooling according to The Canadian Real Estate Association.
  • Inflation isn’t a problem… it’s hovering at 1.9%, well within acceptable levels.
  • Housing affordability hasn’t really changed in 10 yrs according to the RBC housing affordability index and it actually improved in Q4 of 2011 (it’s probably even better this year as interest rates are even lower).
  • Personal household debt is around 153% of income.  That’s a record high number, it’s true, but what are Canadians borrowing for?  Studies tell us it’s not for big screen TVs or trips to Bahamas…  We’re actually investing… in stocks, mutual funds, real estate here and in the U.S.  In fact, we are the biggest foreign buyers in Florida and we are also buying in Phoenix, Arizona in record numbers…. Is buying a second home a bad investment?
  • Did you know that 1/3rd of Personal Debt is non-mortgage debt including high interest credit cards, loans and unsecured lines of credit…. yet, there is little to no regulation for these products…
  • Speaking of credit cards… the arrears rate is just over 1.00%... that’s around triple what mortgage arrears are!  Why isn’t the govt clamping down on these credit products?
  • Record-low interest rates were brought in to stimulate the economy.  Haven’t Canadians played their role to kick-start the economy?  Why does the govt want to punish homeowners now with tougher qualifying rules?  OSFI has even proposed you re-qualify for your mortgage at renewal time!!   How absurd is that?
  • The Bank of Canada wants to raise rates to slow our personal debt growth…   but can’t for fear of slowing the economy…
  • The Federal Minister of Finance, Flaherty, wants to tighten mortgage lending to slow the housing market and reduce the amount of mortgage debt we take on.
  • The housing market accounts for up to 40% of this country’s GDP… all these changes will affect our economy.
  • Business for Self mortgage programs have been eliminated by some banks and other Lenders… making borrowing more expensive for this segment of our population…. by the way, they are paying their mortgages just fine.. there is no evidence suggesting Business for Self borrowers have repayment problems…
  • CMHC opted out of rental property mortgages last year in an attempt to slow real estate investment… so you must come up with 20% down or use equity from other sources for the down payment..

FED GOVT’S LATEST MOVE IS TO PUSH CMHC UNDER OSFI CONTROL

  • OSFI will assume control over CMHC, the country’s national housing agency…. You will have an audit dept overseeing a social program… hmm, I wonder what will happen to CMHC??  The possibilities frighten me and should frighten most Canadians… (more on this later).
  • Minister Flaherty made a comment that maybe the govt should consider selling CMHC…  say goodbye to a business that nets over $1billion a year.. $16billion since 2002.   Here’s an idea…why not split CMHC into 2 business… bulk insurance business and the traditional low down payment business… wouldn’t that keep the Canadian dream of home ownership alive and also satisfy the auditors, like OSFI??
  • OSFI wants to limit Secured Lines of Credit to 65% loan to value from today’s 80% loan to value…  This one makes no sense and has received harsh criticism from Financial Experts…. scares me to think that it’s even gone from thought to paper to print… what other changes were they considering that didn’t make it to print??

MY SUMMARY OF IT ALL…

In short, the govt wants to keep the economy stable but they are going to make it harder for you and I to qualify for a mortgage….  Yet, there are no changes coming for the most expensive of debts… Credit cards, loans and unsecured lines of credit rules either don’t exist or will not change…  For some reason, the govt thinks it’s okay to borrow at 7% , 8% for unsecured lines of credit and pay 18% to 20% on credit cards, but please don’t borrow for a home, at 3% and 4%??

If we continue to make it harder for Canadians to get a mortgage, then we will have fewer home sales.. Fewer home sales will affect ALL HOME VALUES and slow the economy.  It’s really that simple…  this affects the biggest asset that most of us will own… our home!

Let’s hope the govt thinks like a carpenter… measure twice and cut once… !

If you’re a homeowner and aren’t sure how these and other changes might affect you, feel free to contact me anytime.   I’d be happy to help.

Posted Interest rates

Flaherty is, isn’t, is, isn’t changing mortgage rules?

So which report do you want to believe….?  2 separate reports… both from April 10, 2012.     We have Reuter’s reporting that Canada’s Finance Minister Flaherty, isn’t making any changes to mortgage rules….  Click here for their report.   Here’s a quote from the article “I have no present plans to intervene in the housing market in Canada,” Flaherty told reporters in New York.

And here’s another report from Bloomberg.com entitled “Flaherty Says He’s Planning Changes on CMHC Rules.” Click here for their report.   Are you confused yet?    Well, you’re not alone.   The mixed messages are everywhere today.   Bank of Canada Carney warning about record high Personal Debt Levels…. you’ve seen this one, I’m sure.   We have too much personal debt… and then another report says Canadians are ready to tackle their debt level… and yet another one that say the economy is very fragile and is at risk of slowing down…

It’s hard to know which report is correct.   One thing is certain… today’s mortgage rates are at historical lows.   The govt and the BANKS don’t want them to last.     If you have a house and some debt, or if you are considering buying a house, then why wouldn’t you take advantage of these low rates…?   I’m NOT saying to go out and borrow more money for a TV or new car or other luxury items…  If you have high interest debt, or higher interest debt than today’s 3.00%+ interest rates, then take action and restructure your finances…   Today’s record low rates won’t last…  You can still benefit from these historically low interest rates.

 

Posted Interest rates

A change of strategy… Fixed rates… 5yr or 10 yr?

For years, I have recommended Variable rate mortgages over Fixed rates.   The reasons are simple:

  • Variable rate outperformed Fixed rates in over 88% of the time.
  • You could lock into a Fixed rate at anytime should interest rates go up.
  • you could exit the product at anytime with a maximum 3 month interest rate penalty (compared with Interest Rate Differential penalties for Fixed rates that vary depending on current rates.. we’ve seen 10, 14, 16 and even 20 months interest penalties charged in recent years).
  • If you were in a Variable rate the last 5 years, then you have enjoyed an average rate of around 2.92% compared with a 4.37% fixed rate (annual average rate over last 5 yrs).    It’s been the least expensive way to own your home…  (my clients have saved between 1.45% and 3.00% per year on their mortgages over the past 5 years based on my recommendation).

But then, in August 2011, the Banks caught on.  They decided they wouldn’t offer those great Variable Rates or Prime less 0.75% (3.00% less 0.75% = 2.25%).  They all raised the price on new Variable rate mortgages to Prime less 0.00%.    And this year we have seen 5 year fixed rates hover at around 3.19% to 3.39%…  10 year fixed has also come down to 3.99% and 3.94%.

So what’s the strategy today?  What’s the least expensive way to own your home?     Here are some answers…

If you have Prime less 0.50%  or better, then considering sticking with it.

The fact is, over 80% of my clients are in a Variable rate mortgage of Prime less 0.50% or better.   They have enjoyed huge savings, especially over the last 5 years. I’m not too anxious to have them start paying a higher rate….. Instead of locking into a 5 or 10 yr Fixed rate, why not set your Variable rate payment based on the higher Fixed rates…  You’ll pay more towards principal and pay the mortgage off faster.

If you’re getting a new mortgage or your mortgage is coming up for renewal, then I would consider a Fixed rate term..

This might shock many of my clients and regular readers, but I can’t recommend taking a new 5 year Variable rate based on today’s pricing…  It’s time to look at Fixed rates…  The term will depend on your own personal situation, goals and needs.   5 year fixed (currently 3.29%) is looking like a good choice for many today… But a 1 year fixed (2.89%) might also we a good choice…   One product that is attracting more attention is the 10 year fixed rate (3.89% to 3.94%)… It’s never been under 4.00%… so many people are recommending it… But I’m not so sure about it…. After all, if you were to pay this mortgage out before the first 5 years, you would be faced with a monster penalty!   10, 14, 18 months worth of interest … maybe more…  On the positive side, if you paid the mortgage out after 5 years, the penalty is capped at 3 months interest.

If we compare the 5 yr fixed vs the 10 yr fixed, we can look at a number of different scenarios… but here’s a really simple one to look at…The question is, how much will rates have to increase by in order for you to be further ahead?

If you took a 5 yr fixed rate today at 3.29% but set your payments based on today’s 10 yr fixed of 3.94%, then at the end of the first 5 years, you would have to renew at a rate of 4.75% or higher, before you start to win with a 10 yr fixed rate.     So this is where the unknown comes in to play…  and the unknown can cause fear and panic…     But it can also mean opportunity…  Will interest rates be 2.00% higher than they are today??   Will Variable rate pricing come back to normal and again be the product of choice?  Will there be a new product that is even better than today?    I don’t know the answer… but I think 10 years is just too long of a term to commit to…Things change faster today…   Can we really make plans for 10 yrs?  Remember, if we need to refinance or sell, there is mortgage penalty to deal with….this can blow the savings right out the window…  A lot of what if’s…    I’d probably stick with 5 yr fixed today or go shorter term…

A last thought and point of reflection..

Interest rates have remained below average for the last 10 years…  They have been at record lows over the past 4 years due to the US sub-prime mortgage crisis and the longer than expected global and US economic recovery…..  Interest rates are expected to go up…  the big question is, when??   Regardless of the answer, shorter terms have ALWAYS been a better choice when it comes to mortgages… don’t be so quick to jump into a 5 or 10 year fixed rate… speak with your mortgage broker and get some advice.   Banks want borrowers to be afraid.. they want you to remain unsure…  They want you to lock into the longest term possible because this is where they earn the most $$profit….   Don’t be so quick to contribute the Bank’s profit margin….