Holy Moly! CMHC nearing its limit!

Good Morning!

I get the BNN market commentary email every day and it has a slew of great info both economically and with respect to the various markets at play. This morning I nearly spilled my tea when I read the following:

The Canada Mortgage Housing Corporation is bumping its head up against the ceiling and may need to apply for renovations to its $600-billion mortgage insurance cap. The Financial Post reports this morning that the CMHC is cutting back on the number of mortgages it insures as the value of its portfolio swells towards the limit of its government-backed mandate. And by government-backed, I mean tax-payer backed, by which I mean you and me. With debate still not settled over whether the Canadian housing market is a bubble, a balloon, or merely a little bloated, Canadians will be talking about this story today and asking about the risks of a $600-billion portfolio going suddenly bad and what it would mean for them. Granted, mortgage defaults in Canada sit at a puny 1 percent so the risk to the portfolio is next to nothing, but what happens when the CMHC hits the $600-billion limit? Would the government say “no” to a request to increase it, running the risk of killing a booming housing market? Can the CMHC change its business a bit to stay under the cap, say stop insuring loans with more than 20 percent equity? Calls for comment are in to the CMHC.

This is simply insane news. A number of things may happen in this case, one of which I am already seeing:

1. CMHC will cut back on the number of loans it insures. Although traditionally the lender ratios are maxed at 44/44, I have seen numerous files declined by CMHC at this…


Something’s going on at BMO…

Interesting activity at the BMO Economics and Mortgage departments. Here’s what I mean:

Late December 2011, BMO announces the Canadian housing market is headed for a cooldown. A little while later they drop their 5-year fixed rate to the lowest level EVER in Canada at 2.99% (of course with many many catches, but that’s why the fine print is so important to read). Fast forward another couple of weeks and now BMO is saying that the fears of a housing crash are rather overblown and we should not be worrying too much about what the IMF is warning us.

What’s your take on BMO’s stance? Are we headed for a correction? a crash? are you a first-time buyer waiting on the sidelines or competing in bidding wars?


Impact Of Higher Rates?

Everybody in today’s borrowing climate is getting a little too used to the idea that low rates are here to stay. I remind first-time buyers that these trends are cyclical, and we’re in an extremely low-rate environment that can only go one way. Up. Eventually. That being said it sometimes falls on deaf ears but numbers do not lie, and thus I’d like to present you some scenarios for when rates are higher, and what will happen. Reason being is I’m looking thru my 2007 mortgage renewals and I note that many clients opted then to take a 5-year fixed ranging from 4.95% to 6.1%, as back then those options most suited my buyers and refinancers.

So let’s say you buy a home today for $450,000 with 10% down, 30-year amortization and 3.29% 5-year fixed. (This is a pretty common scenario as it is in-line with average home prices in the GTA (give or take), and an overwhelming majority of my clients do not have the 20% down to avoid mortgage insurance.)

In this scenario, the payment today would be $1805 per month.

Now let’s fast forward 5 years down the road where your balance would be $369, 765 (assuming no pre-payments, of course). Let’s assume two things:

1. Best 5-year fixed is 4.95%. In this scenario your payment actually jumps to $1962 per month, and your future balance is $339,041.

2. Best 5-year fixed is 6.1%. Your payment jumps even higher to $2187 per month and your mortgage balance is $4000 higher at $343, 557.

Some may argue that after 5 years it may be wiser to take a shorter term and ride out the higher rate environment. Some may not need to take a shorter term as they’ve taken advantage of the various pre-payments available to them.…


Examining the 10-year fixed option.

A first-time buyer posed an excellent question for me this week about the new 10-year fixed vs the current 5-year fixed terms, and wondered what would the rate have to be in 5 years to make-or-break their decision. The answer; 4.35% thereabouts. The formula is simple. Run a mortgage amortization calculation for a hypothetical amount (in my case, I did $400K at 3.29%, 25-year amortization with semi-annual compound interest and monthly payments).

Here’s the math:

5yr fixed, $400K loan, 3.29% rate.
end balance is $343782

10yr fixed 3.89%
end balance is $283942

So what rate must you get better-than in order to achieve the same end balance upon your 5 year renewal?

Answer: 4.35% or better.

Reason: $343 782 maturity in 5 years
20 years amortization left
at 4.35% with that rate and term, 60 months later your end balance is $283 307 or a $600 difference.

The question is: where will rates head in the next 5 years? If you’re a betting man I’d bet on OVER for 4.35%. Traditionally 6.2% is an average 5-year rate. However we’ve been through some pretty rough patches lately economically so that average has gone down.  Take a look at this chart:


It’s an amazing 10yr chart showing the average 5-year rates. Having worked in the past 9 of the 10 years I certainly recall 7%+ commitments, and I remember when 4.35% was SUCH an amazingly low rate that people were jumping out of cars to take it.

Some things to consider about the 10-year option:

In Canada the penalty to break any 10-year term works like this: first 5 years is subject to I.R.D, or 90-days interest, whichever is greater, and the next 5 years is 90-days interest penalty only. These mortgages are of course…

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