CategoryMortgage Trends

Posted January 25, 20112 Comments Consumer Debt

January credit card offers, new mortgage rules and Canadians buying U.S. real estate…

There’s been lots of reaction to the latest round of Mortgage rule changes… it’s been just over a week since the changes were announced and I’ve had some time to digest these changes but something just isn’t making sense.

At the same time, my December credit card bills have started to come in…..and because it’s January, I’m also getting those preapproved credit card offers…. I can even skip a payment with some of my credit cards… Isn’t that convenient?

This made me wonder….I decided to ask some simple questions like, “who will be affected?”… and “who will benefit?”. Here’s what I have come up with…

First, here’s what a few Experts think…

Jim Murhpy, President of Canadian Association of Accredited Mortgage Professionals, says ‘Debt Fears are overblown’…. and here are the stats to back it up. One stat that really stood out for me was that 79% of Canadians are in a 5 year fixed rate mortgage… that means 79% of Canadians are not at risk of interest rate hikes…

(as an aside, I still like Variable rate mortgages with their low interest rates and the historical data that clearly shows Variable outperforming Fixed rate….but if the govt wants us to be ‘safe and secure’ in our mortgage, then this stat should make the govt feel more comfortable)….

On January 10th, 2011, Bank of Canada’s own Deputy Governor, Agatha Cote, said that debt growth in Canada was slowing… So hold on here….On the one hand, we are spending like kids in a candy shop.. but on the other hand, our spending has slowed…. Mixed message? … So what’s really going on?

I’m going to change the subject for a minute…. but read on as you will see this is all related….

Canadians are buying U.S. real estate like never before

There was another great article last week that showed Canadians are the largest foreign buyers of real estate in the U.S. accounting for 23% of all purchases? WOW! And in border towns like Ellicottville, New York, a local real estate broker said Canadians accounted for 50% of sales…. read more here.

These stats and buying patterns are showing me something… Our mortgage arrears are below 1.00%… this is an unbelievably low number.. Click here to see what our U.S. neighbors are saying….. Hmmm, maybe we are borrowing wisely? Maybe we are borrowing to invest? Isn’t this a good way to spend our money?

If the govt wants to slow personal debt levels, then why not impose qualifying rules on borrowing unsecured lines of credits, credit cards and loans? After all, mortgage balances are around $1trillion… but Credit card purchases totaled $260billion...! Remember this number.

Who is really affected by the new Mortgage Rules?

Simply put, there are 3 new Mortgage rule changes:

1- Amortization maximum is 30 years, down from 35 years and down from 40 years in 2008. 2- Refinances will be reduced to 85% loan to value, down from 90% and down from 95% just 2 years ago. 3- Secured lines of Credit will no longer be insured, meaning the maximum is 80% loan to value.

1- 30 year Amortization.… First time home buyers, Self-employed, contract employees are just some of the people that will be affected.. More Canadians are becoming self-employed or are on contract employment… This group of individuals doesn’t get a steady pay cheque… I would always recommend that this group take the longest amortization possible….Not to have a mortgage forever, but to ensure they have options and flexibility during times of uncertain income… I would also recommend they set their payments based on a 25 year amortization or shorter… The longer amortization just means you could always reduce your payment to the lowest possible amount if and when needed.

This change will also make it a little harder for some Canadians to qualify for a mortgage… If you think this is good you need to remember last year, the government changed the rules that made it mandatory for all mortgages with less than 20% down to qualify at the Bank POSTED 5 year fixed rate (if you were considering a shorter term or a Variable Rate mortgage). Many Banks are using this policy even if you have more than 20% down payment. In effect, many of us are being forced into a 5 year fixed rate mortgage…. and which product do banks make the most profit on? You guessed it… 5 year fixed rate mortgages…. read here for a little more insight.

Rental property Investors will also be affected. Let’s face it, company pension plans are a thing of the past for most of us… (sometimes I wish I had a government job)… So what’s someone without a company pension supposed to do? RRSP you say? Well, if your RRSP is anything like mine, then you are better off going to the racetrack or Las Vegas …. At least you’ll have a good time spending it. Real estate has been a proven winner over the last 10, 20, 40, 100, 300 years and probably longer…. The rents are usually indexed with cost of living and over time, the mortgage is eliminated giving you income and an appreciating asset. Last year, the govt got out of lending on rental properties with less than 20% down… It’s now a little harder to buy that investment property…

2- Refinances to 85% loan to value… Just one year ago, we were able to refinance our homes up to 95%… This options was not used by many… Then it was reduced to 90%… now it’s 85%… This won’t affect many of us but it will affect some.. Most people refinancing up to 85% or 90% were doing so to consolidate higher interest debt or to cover some emergency expense. How is this helping to lower our personal debt levels? This move will just force us to carry and borrow with those higher interest rate products… (are seeing a pattern here?)

3- Secured lines of Credit or Home Equity Lines of Credit (Heloc) are no longer available over 80%… This change really doesn’t affect many of us as most lenders stopped offering this product long ago and even when it was being offered, the costs were prohibitive. This is a non-event.

Who will benefit from these new Mortgage rules?

So who really benefits from making it harder to qualify for a mortgage? The answer is simple… Canadians will be forced to carry more debt on their credit cards, unsecured lines of credit and other high interest rate products… There are NO rule changes or policies in place for these products… Don’t forget, credit card purchases totaled around $260billion last year…. In case you’re wondering, the total outstanding mortgage balances in Canada is around $1trillion.

The new rules won’t slow the credit seeker from getting another credit card and buying that new surround sound stero or hot tub or new car, etc..

So why did the government choose to make even further changes to mortgage rules? The answers are obvious to me but I will let you decide.

Posted January 17, 20113 Comments Consumer Debt

New Mortgage rules… let’s make it an annual event!

The Minister of Finance, Jim Flaherty, announced some changes to Canada’s mortgage rules that come into effect March 18, 2011…… these rules apply to hi-ratio insured mortgages… those with less than 20% down payment….

-The maximum amortization is reduced to 30 years from 35 years.

-The maximum loan to value available for refinancing your home is 85%, down from 90%.

-Secured lines of credit (or HELOC’s Home Equity Lines of Credit) will not longer be insured meaning the maximum loan to value will now be 80%.

Click here for the official government announcement.

Not the first time for mortgage rule changes.

This is becoming an annual event with the Government:

–In 2008, the Govt reduced 40 year amortizations to 35 years, eliminated the 100% loan to value mortgages and the interest only mortgages.

–In 2010, the Govt brought in some of their biggest changes yet…borrowers would have to qualify for variable rate mortgages or short term mortgages at Bank posted rates…Self employed individuals would now have to qualify with traditional income verification if they were in business for more than 3 years…. Refinancing would be capped at 90% loan to value, down from 95% loan to value… and investment properties or rentals would require a 20% down payment…

(By the way, the govt also announced they would be standardizing mortgage prepayment penalties… we STILL haven’t seen any announcement… Mr. Flaherty, you want to help Canadians? Change the mortgage penalty calculations!)

Has the govt gone too far?

Apparently, rising personal debt levels are the driving force behind these changes… The govt wants to make sure we don’t borrow more than we can afford…. But with mortgage defaults well under 1.00% (that’s extremely good), why would the govt pick on mortgages? After all, wouldn’t any Financial Advisor recommend that you consolidate your high interest credit cards, lines of credit, car loans, student loans and other personal debts into a LOWER RATE product?

Why isn’t the government making changes to loans, unsecured lines of credit, credit cards….? All these products have higher rates of interest and higher rates of default. Think about this for a minute… we are making it harder for Canadians to take lower interest rate products (mortgages)… Where will they go? Yes, that’s right… directly to the higher interest rate products…. Credit cards, loans, etc…. (I think I might buy some Bank stock today… or any other financial institution that offer credit cards or loans.)

So let’s see if I’m getting this straight…. we want to stimulate the economy and spending so we’ll keep interest rates low… but we are concerned about rising personal debt levels so we’ll make it tougher to get a mortgage (even though mortgage defaults are extremely low)… but we’ll keep those high interest rate loans, credit credits, etc as is….. Is this making sense to anyone?

We’ll be sharing more on this latest announcement in the coming weeks…

Posted December 15, 20101 Comment Mortgage Rates

Higher Bond yields are bringing higher fixed rates..but that’s not all.

Some of Canada’s major banks have raised their 5 year fixed mortgage rates… but not their posted rates. It’s become common practice for the Big Six Retail banks to show a posted 5 year fixed rate ….but in the past few years the Banks have also started to advertise their so-called ‘special’ rate.

The ‘special’ rate has increased by 0.25% to 4.19% to 4.29%, depending on which Bank you visit. Of course, these rates are still much higher than the true discounted rates available through Mortgage Brokers. Wholesale 5 year fixed rates are still around 3.69% to 3.79% (these will probably go up in a few days by 0.25%). But this is nothing new.

What’s different this time is that the Posted Rates didn’t go up. We’re not sure why, but here is one definite result of this move…your mortgage prepayment penalty will not decrease, which is the usual effect of an interest rate hike. That’s right, if you have a closed fixed rate mortgage to payout, your penalty is either 3 months interest or Interest Rate Differential (IRD).

IRD is calculated many different ways now and we are hoping the Federal Govt’s announcement of a standardized prepayment penalty will come soon (we hear it could come this spring). Currently, Banks use formulas that include the Posted rate to calculate your penalty. This calculation has become a lucrative source of revenue for the Banks. Reports of 6, 10 and even 14 months worth of interest have been charged to unsuspecting borrowers. Record low rates means record HIGH penalties. Come on Federal Govt, we need this change now.

As an aside, Variable rates are still around 2.25%…. this larger gap between fixed and variable is going to make Variable more attractive.

Posted December 13, 2010 Mortgage News

TD taking action with new collateral mortgage

No, the hand-cuffs are still on if you took a TD Mortgage recently.. yes, they are still being registered as a collateral charge and not the normal, conventional charge…

But I heard from a good source that TD is working on changing their policies to allow for the transfer-in of collateral mortgages. That would mean that TD would accept collateral mortgages from other financial institutions should new clients wants to bring their mortgage to TD.

But how does this help a TD client that is up for negotiation with their mortgage when TD knows they cannot transfer that mortgage out without having to pay new legal fees to move that mortgage? The borrower loses their leverage to negotiate…it’s really that simple… here’s a great article from Gail Vax-Oxlade telling us what she thinks about TD’s new collateral mortgage. Remember, collateral mortgages are not accepted by other financial institutions for transfers….

This subject isn’t going away… we will see if other Banks will follow TD’s lead and go with a collateral mortgage charge or whether they will accept collateral mortgages for transfers. Stay tuned for more on this major shift in mortgage registration.

And who will pay that extra cost to transfer mortgages in and convert them to TD’s collateral charge? For now, it’s TD picking up the cost, but does anyone really expect that to continue? At some point, that cost will most likely be passed to the consumer.

TD is taking a big risk.. maybe it’s a calculated risk… they certainly have the deep pockets to pay for this.. at least for a little while…. I’m sorry to say it looks like the TD borrower is going to lose out in the end.

Posted December 10, 2010 Mortgage News

Vacancy rates fall in Canada…there’s an opportunity here.

Here’s some interesting stats from Canada Mortgage and Housing Corp. Apartment vacancy rates are down…

The national vacancy rate is 2.6% compared with 2.8% from October 2009. CMHC attributes this to the economic recovery.. according to CBCnews.ca.

We are also hearing reports of Real Estate Investment Trusts (REITs) buying up properties as they expect the rental market to remain strong.

And here’s one more article about the Florida housing market… 90,000 homes and condos were bought by International Investors… read more here.

Add in historical low mortgage rates and this looks like a good time to buy an investment property…. Consider that a $250,000 mortgage will carry for around $1072/mth based on a 5 year fixed rate of 3.79% (lower rates are available but we’re using a higher rate for illustration purposes). Something to consider….