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And the credit tightening continues….

It’s official… CMHC just announced further changes to their mortgage rules along with more details of the rule changes announced February 16.

-Qualifying mortgage rates…..up til now, borrowers were qualified on the contract rate of the mortgage or the 3 year rate ….on April 19, that will change to qualifying at the posted rate of the chartered banks …..Effectively, the govt has increased the rate without increasing the rate….quite a magic act…

Let’s think about this for one minute… we have been hearing about the devastating affect to consumers and the housing market should interest rates increase by 1.00% or more… well, the new qualifying rate is 5.39% as of today vs. 3.79% or 3.89% for a 5 year fixed contract rate….  but there’s more.. read on..

-Business for Self individuals will now have to qualify with traditional income validation if you are in business for more than 3 years… the logic is that the majority of self employed individuals can provide traditional income documents and that the business for self programs were for a small segment of the population…

This new change really leaves me scratching my head…. With 20 years experience in the Financial Services industry, I can tell you that the trend is for more Canadians to become self employed.. more contractual workers, less ‘Employees of a company’…  And one of the benefits of being self employed is that there are certain tax advantages that are not available to employees…resulting in a lower net income…

A lower net income will mean you better be able to come up with a 20% down payment because you won’t qualify under these new Mortgage rules that will be administered by CMHC…. I can only hope that the govt will be able to act just as quickly if they see the housing market slow down…

Don’t get trapped with dumb Bank ads…

Watching the Olympics the past few weeks meant I had to endure watching tons of RBC commercials… I normally reach for the clicker and change channels but gave up after they kept popping up every 10 mins.

One commercial in particular really bugged me… have you seen this one? The young couple are looking at a house with an old kitchen.  And then their RBC Mobile Mortgage Specialist suggests they split their mortgage … “part variable and part fixed…  to save money.”

Ok, can anyone tell me what that means?  ‘…To save money'”.   So splitting your mortgage will save you money?  Really? How? Who says?  Show me statistical data to support such a claim…

I remember that when these split mortgages became available at the TD Bank (I worked there in the 90’s), it was great idea to reduce how much business would leave the banks… Ask anyone that has been in a split mortgage what happened when it came time to renew the 2 split portions…you lose your leverage to negotiate the rate because you cannot transfer your mortgage out until both maturities match….

The result….you get whatever rate the Bank wants to offer at maturity….  BEWARE…. this is bank Kool-aid again… I don’t drink it…

Here’s another recent article about Bank commercials from Ellen Roseman of The Star.  This ties in with the bank ads portraying many of us idiots…

Federal Budget brings standard mortgage penalties

Minister of Finance, Jim Flaherty released the 2010 Federal Budget yesterday… There were a lot of headlines in the media but for the most part, very little change for the average Canadian…

Here are the numbers….

One change I did like is the standardization of mortgage prepayment penalties… No details were released but this could be welcome news for tens of thousands of Canadians that are in a fixed rate mortgage and can’t get out…..

You’ve been hearing about the govt stimulus plan… record low interest rates to help out Canadians… and then you contact your bank to see how much  you save… it’s good news.. your payment on a $250,000 mortgage with a 5.25% rate will drop by $189/mth with a 3.89% rate… it’s so exciting… that’s $11,340 over a 5 year term…. but WAIT… now you get told there is a penalty.. and it will cost you $13,000 to break your mortgage….

Sound unbelievable?  Call your bank to see how they calculate their penalties…   Those who have already done so know the reality of these numbers…..  The govt forgot about helping existing homeowners… the tens of thousands of taxpayers that needed and wanted a break…

How do you feel about the Big Six Banks reporting  Billion $ profits in the first quarter?   After all, didn’t the govt offer financial support to help the banks in case they ran into trouble?    Profit is good.. but not like this.. not at this time.. not when average Joe or Sally homeowner can’t benefit…

Expect fixed rate increase of 20bp to 30bps as 5 yr Bonds up to 2.70%

Fixed rates could increase as the 5 year Bond yield jumped to 2.70%….this is up 21bps from a week ago… The spread now is 1.19% between 5 yr fixed rate and the 5 yr Bond… normally, lenders want to see a 1.35% spread …. if the Bond market continues to stay at this level or increases further, we will see fixed rates rise.

The U.S. employment stats also came out today…..unemployment held steady at 9.7% which is better than analysts expected… This will also put pressure on the Bond Market… Canadian employment figures come out next week…

Remember, fixed rates has historically increased sooner than the Bank prime rate which affects Variable rate….. This could be the beginning of the slow but steady rise in rates…. It’s certainly not time to panic but we should pay attention…

Bank of Canada rate stays the same…yawn..

Mark Carney, the Bank of Canada Governor, kept the overnight rate at 0.25%…(yawn…)…  The rate that affects all Bank Prime rates and Variable Mortgage Rates has remained at this level since April 2009….

In the announcement, the Bank of Canada stated they were concerned about inflation increasing a little faster than they had forecast.   The Economy also grew at an annualized rate of 5% in the fourth quarter of 2009….. (personally, I think it would be surprising to see it continue to grow at this pace…. )

Governor Carney has repeatedly stated he will not increase the rate before June… well June is approaching and some of the Economists are starting to forecast for possible rate hikes as early as June… but nothing too drastic..

One rule of thumb or interesting historical trend is that fixed rates usually increase first or before the variable rates rise….we’ll be watching the bond market (bonds affect fixed rates)….

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