Jan
25

We Aren’t Doing So Poorly Afterall…

Much hype lately has been about how over-extended Canadians are with their debt-to-income, how we use our houses as “ATM"s for high-tech toys, vacations, and other luxe items we couldn’t normally afford and how rising rates will spell doom to the market and our equity positions.

However, a study by CAAMP has found quite different results:

* Vast majority of borrowers holding highest risk mortgages have considerable room to absorb interest rate increases

* Assuming a 5 per cent interest rate (1 per cent increase on fixed and 2.5 per cent increase on variable mortgages)
o the average gross debt service (GDS) would increase to 24.6 per cent and the average total debt service (TDS) would increase to 33.7 per cent
o Less than 1 per cent of these highest risk mortgages would have TDS ratios of 45 per cent or more
o Applying these results to the broader population, there might be about 800 to 950 buyers whose mortgages were funded during 2010, with variable/adjustable rate mortgages, whose TDS ratio would be 45 per cent or higher

* Among the high ratio loans approved in 2010 - with the reduced amortization period (30 years versus the prior 35 year limit), a small minority (about 2 per cent) would have TDS ratios above 45 per cent and those loans would probably not qualify. Some of those consumers would still be able to buy, by buying lower priced homes.

* Unaffordable premium increases are a negligible risk factor at present and in the near-to-medium term future. Recent discussions have focused on this negligible factor.

* Most mortgage defaults stem from reduced ability to pay mostly because of job loss or reduced income. Over-extension - adding more debt after taking a mortgage - is another risk.

* A…

Jan
21

Mortgage FAQ time!

This is an excellent question. Kudos to Stan for being rather innovative in his financing, however there are two major drawbacks to why this can’t work:

1 / The secondary lender market usually charges 6.99% on exception, or 10% to 14% as a standard, for their rates. Remember, secondary lenders stand behind the first lender - the bank - and are more open to risk. They are exposed to a change in the marketplace, and the primary takes their money first if a power-of-sale situation happens. Therefore, the rates are high and the lender fees can be quite prohibitive also.

and

2 / Primary lenders almost always as a rule do not allow for secondary financing in their contract commitments. By most, I mean the “Big5” and typical mortgage lenders such as MCAP, Laurentian Bank, National Bank, Merix Financial etc. Home Trust and Equitable Trust explicity do allow for secondary financing but must be first made aware of it.

Therefore, it couldn’t and wouldn’t work, but I respect the attempt!

Jan
18

Quoted in the Globe and Mail.

Lovely to get some attention from national press regarding latest mortgage changes along with my client Graydon Hall!

http://www.theglobeandmail.com/report-on-business/economy/housing/ripple-effect-of-mortgage-changes-may-slow-economy/article1873775/

Jan
17

New Mortgage Rules! (again??)

First, to summarize the new changes;

1. Maximum amortization goes from 35-years to 30-years on high-ratio mortgages (that is, those with less than 20% down).

2. Maximum refinance goes to 85% from 90% - that is, a client can tap into up to 85% of the value of their home.

3. Home Equity Lines Of Credit (HELOCs) will no longer be insured by the Government - this mostly impacts Scotiabank with its 90% HELOC STEP product, but few other lenders.

The previous changes included elimination of zero-down mortgages, reduction of amortization to 35 years from 40 years, and reduction of refinancing from 95% to 90%. As well, business-for-self clients were impacted with tighter lending criteria. In 2006 the Government opened the floodgates by allowing for the above, and clearly it does not believe we as Canadians can control our borrowing, so it needs to put a strain on our habits.

Here’s what I (and many colleagues) think: these rules will not cripple the market, nor will they do much at all to changing people’s habits and borrowing intentions. Perhaps a reduced amortization will impact home bills by $95 on a $300,000 mortgage (as stated in this report by RBC), and increase income by about 5% to qualify for said mortgage. However it will not greatly impact lending by the lenders, nor borrowing habits by clients because we can still go to 44% of pre-tax income to qualify for a mortgage (with good credit), we can still get a 5% cash-back (thus refinances will exist at 90% loan-to-value), mortgages with more than 20% equity will still allow for 35-year amortization, and HELOCs were never easily obtained at 90% - rather, most lenders offered them to 65% / 75%, with MCAP going to 80%.

Jan
12

25 Year Chart

Firstline Mortgages, a division of CIBC, released this chart for brokers this week to hi-lite the 25-year history of Variable vs Fixed mortgage lending. What’s obvious is that rates in the past 10 years have been very low relatively speaking, and coincided with the housing boom that we have felt across Canada. Furthermore, once again this chart has shown the advantage of taking a variable rate as through lower or rising rates, it has been the clear winner.

A couple of points to note when studying this chart:

25 year prime vs fixed chart

  • the 5 year fixed rates are of posted variety, and not discounted. Example, the bank’s 5-year rate as of December 2010 is 5.19% when in actuality they were quoting 3.89-3.99% on a 5-year fixed! Nonetheless, when you price in a 1.25% to 1.5% discount, fixed rates are still going to be, on average, higher.
  • As well, the bank’s chart also does not reflect the best discounts available to prime (or premiums for a short while).
  • As a result the comparison is rather equal.

    Does it mean you should automatically take a variable rate because of this? When studying charts, a common investing theme is “The Trend Is Your Friend”. If that’s the case, then yes - go with the trend. However, a deeper look at the trend must be taken. When further thinking about it, wouldn’t it make sense that this chart cannot feasibly go lower? We have already been through a rather nasty recession and one short but heavy housing slump. Since our economy is rebounding, job creation is creeping back, it only makes sense that the Bank of Canada is going to ramp rates back up to their average, which is in and around 4.483%…

    Jan
    06

    Happy New Year!

    Happy New Year!

    ..or maybe not, depending on the rest of this blog post of course..

    A few major stakeholders have recently raised some eyebrows amongst the mortgage industry by calling for more (stricter) rule changes in mortgage financing. First and foremost was our PM who vaguely stated that the Government of Canada would do something “if deemed necessary”.  Second (and most puzzling) was Ed Clark, CEO of TD Bank calling for shorter amortization and tightening of rules as well. Mark Carney has chimed in saying we as Canadians are in too much debt - BUT - if he raises rates, that debt will be harder to carry, so he’s in a catch-22 situation (if he keeps the rates low, the debt will pile on).

    Here’s why Ed Clark from TD Bank is wrong: it is his financial institution that as of 3 months ago, allowed clients to very easily tap into more of their home equity, thus being in debt more, by registering client’s mortgages at 125% of their value. The way it works is: if the value of the home rises, client merely needs to contact the branch to increase their mortgage - very low cost alternative. Sounds great, right? WRONG. The alternative is the client must pay a lot more to leave TD (should they ever want to) and furthermore, do we really trust our clients to know when to turn that financial tap off?

    What the Bank of Canada should do is eliminate cash-back mortgages first - if they are indeed serious about making any changes. Remember when 0-down / 40 - year amortization mortgages existed? Well the 40-years is gone, but the 0-down is still here. Three major institutions (National, Scotia and Laurentian) all offer “Free Down Payment” mortgage solutions for clients. They word it…

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