Interesting Things Going On

Not too long ago a minor financial crisis hit like a tsunami, wiped out one of America’s largest banks, and nearly crippled the world’s economy. I say minor with major sarcasm, of course. Back in the “good ol’ days” of 40-year amortization mortgages, the best available variable rate was Prime-.90, with some lenders even offering Prime-1% or better. Then the crisis happened, and lenders felt a squeeze and raised their variable rates from Prime-.90, swiftly to Prime+1%. This was a bad time to take a variable rate, as the difference between variable and fixed was too close to call. Overall the market (not just real estate but the entire financial market) was in a dizzy, gyrating like a roller coaster up and down. Lo and behold, Canada emerged rather unscathed. Sure, a few billion here or there with bailout money helped things out, but since the turmoil is behind us, lenders began offering generous pricing on variable-rate mortgages again, slowly going from +1, all the way down to (almost) pre-crisis levels at a base rate of Prime-.75. If they say “the trend is your friend” in investing, then many were led to believe that we would return back to the -90 days.

Until this week.

Suddenly and without much warning, CIBC Firstline Mortgages announced on Monday that it was raising the discount from Prime-.75 to Prime-.50. Slowly other lenders followed, with ING being the latest last night to Prime-.65. What is to blame for this change? Merix Financial’s Chief Economist put it into three points:

1.  ARM margins are thin.  Short term BAs (Bankers Acceptance) are pricing in a BOC rate increase in July or possibly May.  So cost of funds for ARM are high.

2. ARM liquidations are higher due to the amount of conversions to fixed and…


An Open Letter To Corinne Schindler

Dear Ms. Schindler,

Your recent note entitled “Understanding the difference between Mortgage Specialists and Mortgage Brokers” was quite interesting to read, I must admit. Interesting because I wondered out loud how Royal Bank, Canada’s largest and most prominent mortgage lender, would allow you to misinform your prospective clients.

Let’s start at the beginning, shall we? In your note, you open the argument by stating that a client tip is to interview mortgage brokers and “ask for their set up costs”. Asides from the poor grammar, perhaps you don’t know that mortgage brokers don’t charge any set-up costs? A commission is not a set-up cost. A commission is what we get paid but don’t charge the client. When / if a client asks me, I’m always upfront with this information, and on a regular basis, I can beat RBC’s rates.

You then go on to say that mortgage brokers “set you up with an insititution based only on the lowest rate…”. Really? That’s interesting. I recall just yesterday setting up a 40-year amortized mortgage for my client, yet the rate was Prime-.55. I’m sure you could beat the rate, but can you offer this type of flexibility to someone who is self-employed? Didn’t think so. Your “tip” (if I may call it that) to ask the broker about prepayments and the like is pure common sense. Thanks for sharing. Your advice regarding insurance is completely off base. I not only offer life and disability, but we have partnered with a very thorough and experiences insurance and financial planning partner, Tri-Delta, for our needs in that respect.

...one thing, they don’t only sell RBC products, they sell, all other banks’ as well…

Third is your point on credit bureaus. As a mortgage agent (not broker, perhaps you need to learn about…


Prime Rate Stayed Put

The Bank of Canada left the overnight lending rate unchanged this week, but hinted that a July rate hike could be possible. I’ve been preaching to clients that now is the time to pay down that mortgage, while the rates are this low (and the principal/interest breakdown is almost 50/50 in some cases). The following is a report from RBC Economics on the announcement:

Bank of Canada leaves rates unchanged, inflation to hit target sooner

As expected, the Bank of Canada maintained the policy rate at 1.00% today. The tone of the statement, however, was much more upbeat than earlier in the year. The outlook for the global economy was seemingly upgraded and there was no discussion of “elevated” risks to the outlook as there was in the March 1, 2011 Bank of Canada statement. More important was the upgrade to Canada’s growth forecast in 2011 to 2.9% from 2.4%, which engenders a return to the 2% target of both the headline and core inflation rate in the middle of 2012. This is a change from the previous forecast that these inflation rates would return to the target by the end of 2012 meaning that the window for the rate to hit the target will close sooner than previously thought. This means that the Bank will have to restart its efforts to reduce monetary policy stimulus if policy is going to limit the upside risks to the inflation outlook.

The Bank cut its forecast for growth in 2012 to 2.6% from 2.8% in the January update. This cut put the growth rate back to the level expected last October. In 2013, the Bank expects the economy to grow at its potential rate of 2.1%. The discussion of the global outlook, outside of Japan, was characterized as “more firmly entrenched”, “solidifying”,…


What is a Vendor Take-Back?

Another client of mine came to me with the idea of offering the seller a “vendor take-back” on the purchase, and with that, avoiding CMHC mortgage insurance. Allow me to explain the scenario:

The client wants to buy with $240,000 down, but only had $40,000 down payment. That’s not quite enough to get the 20% level. Therefore the client needs the vendor to “take back” $40,000 of the mortgage, so the $40,000 that he has as a down payment will be enough for 20% of the remainder of $200,000.

So the mortgage is set up like so:

Purchase Price: $240,000
VTB: $40,000
Amount needed to be financed: $200,000
Down payment: $40,000
Mortgage: $160,000 + $40,000 VTB

The breakdown of the mortgage goes like so. The vendor allows to be put in “2nd” position, and at a fully open interest-only rate of 4.5%, compounded semi-annually. The 1st mortgage of $160,000 was also semi-annually compounded, but closed 5-year fixed variable. The client is generating a healthy savings amount per month and has $800/m coming in in rental income. Payments are as follows: $693/m for the 1st mortgage and $221/m for the VTB mortgage.


The vendor could always request that the loan be paid out without adequate notice, so borrower is scrambling to refinance (added cost). This is probably the biggest risk in a deal like this, since it’s unlikely they would want to give out the money for 5 years (to match the 1st mortgage). As a result the borrower will have to save up the funds to pay the loan off, over and above their monthly minimum payments.

Overall it’s not a bad idea but not a terribly popular one. Although it saves the client on CMHC, the risk as stated above could be too…


Not Just Rate

A client and I have been discussing his renewal coming up in June. He’s not too happy with Royal Bank so wanted to explore the option of going with me as a broker. This individual is rather savvy financially and clearly knows “the game”. As rates have jumped up this week, he started to discuss the possibility of perhaps going fixed instead and at the very least getting a pre-approval. I offered him a very competitive rate to which he countered in email that another broker’s website was offering .10 basis points below. Now, I’m all about being competitive, but if I can’t get a rate, I just can’t get it. I quickly inquired from the broker about the rate and terms, and sure enough the offer was for a “quick close” only, within 30-days. Furthermore, a pre-approval rate offered was .10 higher than my original pre-approval offer!

I guess where I’m going with this is the following. I will try and get you the best rate. If you shop around, that’s great, I encourage it. However be wary of brokers offering a lowest rate on their site, as more investigative work will oftentimes rule your deal out from that rate. My beef with banks is how they are offering these quick-close specials, or “cmhc-only” insured mortgages, thus penalizing clients for not taking out insurance. Of course their answer is simple: the mortgage is securitized, therefore their risk is less. Makes sense in a financial model but not in the real-world model. I prefer lenders who offer one rate and one rate only, and that’s the best rate. No premiums, add-backs, specials etc.

So remember, it’s not always just rate. Find out more to see if it makes sense for your deal.


Newcomers Welcome!

I would imagine being a newcomer to Canada must be an overwhelming feeling. Lucky for them there are many flexible financing options that do not exclude them from entering the real estate market almost right away. First, a great read for any newcomer is CMHC’s Guide to Housing for Newcomers. It is full of renting and buying information, areas to consider, costs, housing types etc. Problem is it’s 51 pages and possibly dated on the financing side, since it was last updated in 2007.

In the past, whenever someone wanted to put down 5% on a mortgage, they always needed 1-year credit. Sometimes on exception a lender would be willing to go 6-months credit with a load of documents upfront. Allow me to introduce you to MCAP’s “New Start” Program. Even with no credit, MCAP will allow for as little as 5% down financing on 30-year amortization. All the client requires is stable employment, a landlord and bank reference letter, and have been in the country two years or less.

This is a fantastic product that I have used on a few occasions so far, much to the client’s delight. I’ve been able to secure them a very strong rate from MCAP, but more importantly, get them into a property they can build equity in and not pay rent.

Contact me today to find out more information.


Fixed Rates Are Rising

The Government of Canada 5 Year Bond Yield is increasing steadily which means a steady increase in five-year fixed rates. TD Bank already increased to 4.39%, as did Royal Bank. The 5-year “posted” rate has gone up to 5.69% effective next week. How this impacts you, the borrower, is two-fold:

1. To qualify for a variable rate mortgage will be tougher.
2. The decision whether to fix or not becomes more complex.

As many of you know, qualifying for any rate other than a 5-year fixed is done using the 5-year Government of Canada “posted” rate. Today that rate is 5.34%. The Government essentially wants to make sure you can afford a mortgage at 5.34%, even though you are only paying 2.25% or better at today’s going rate. So the higher the posted rate goes, the harder it is to qualify.

The decision whether to fix or not goes a little further. My money remains on the variable side, if you can afford paying at the fixed side. What I mean is that if your payments are $871/month on variable at 25-years for $200,000, then consider paying $1095 instead. The extra amount will attack principle, your payments won’t change when prime rate goes up, and you’ll pay your mortgage faster. Win-win.

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