Guess What?

Mortgage rules didn’t change (for once).

Thankfully big Government (with a capital G) didn’t put its paws on the market this time, and will allow the market to determine its direction.

After reducing amortization from 40 to 35 to 30, essentially killing the business-for-self market, reducing refinancing from 95% to 90% to 85% valuation, mandating that qualifying for anything other than a 5-year rate is done at the 5-year posted, and killing the 0-down deals, the Government has decided NOT to do anything drastic like increase minimum down payment to 7% or 10%, and/or anything else.

I agree with most of the moves they already have made, I disagree with any further action.

So, on that note, let’s keep the market active and buoyant!


OTTAWA (Reuters) - Canada’s federal budget on Thursday did not include any measures to tighten mortgage rules further as a means of cooling down the housing market.

“The government continuously monitors housing finance risks and takes action when necessary. Adjustments to the rules for government-backed and insured mortgages were announced in July 2008, February 2010 and January 2011,” the budget document noted without hinting at similar new steps.

Household debt, largely the result of mortgage borrowing, is the biggest domestic risk to the economy in the view of Bank of Canada Governor Mark Carney.


Interesting Paragraph.

I found it interesting to read the following paragraph in an article titled “Mortgage War Combatants Losing Taste For Battle”:

BMO is trying to rebuild its market share in the mortgage market, after losing considerable business over the past few years. The bank is employing a strategy of low rates up front, hoping to attract customers who also want to move accounts, while hoping to make bigger margins off customers down the road when they refinance.

The reason why I bolded that part is simple: BMO is hoping to make more money off its customers when they refinance. We know that about 70% of first-time buyers do not make it to the end of their 5-year term (on average they break at the 3.5 year mark). We also know that BMO’s mortgage offer of 2.99% does not allow a client to shop their mortgage around as you can only exit the agreement by selling your home. SO - was this a slip of the tongue by BMO? I surely would not want that strategy to be publicly known!

Oops. Yet another reason why term AND rate are equally important.


What Do Low Rates Mean In Five Years?

Let’s take a look at what today’s ultra-low 5-year rates mean to your balance and payments upon renewal. Let’s face it: many of our purchasing decisions are driven by payments, then amount and rate (let alone terms). Nowadays we’ve enjoyed 2-3 years of consistently low rates which has not always been the case. You’d be surprised to find out that your payments will almost certainly rise after your renewal, if rates creep up back to normal levels.

Example 1:

$350,000 mortgage
5 year fixed 3.29%
30-year amortization
Monthly payments
Semi-annual compound interest
PAYMENT: $1526 per month.

Assuming that’s your scenario, in 5 years your balance would be $312, 671.00 at renewal time.
$312, 671 mortgage
5 year fixed 4.49%*
25 year amortization*
Monthly payments
Semi-annual compound interest
PAYMENT: $1728 per month

Pretty staggering, no? $200 more per month with a $38,000 lower balance.

The question then becomes how do you prevent this? Simple: by using your allowable limits on pre-payments. Each mortgage carries with it a pre-payment clause on both the principal and the monthly payment. IF you can afford to (and how can you not?), and set your payments in this example at $1728 from the outset, then your balance is $12xxx lower ($299, 512) and assuming a rate of 4.49% at renewal, your payment would be $1656/m. This is, of course, assuming you wish to pre-pay $198 more from the outset.

The objective of this post is to show you, the borrower, how pre-payments can help you AND how rising rates will affect those payments.

Email with any questions is always welcome.


What May Curtail Housing Market?

Many have been wondering how and why our market has been so resilient. Time and time again you hear of a bear-market analyst predicting doom & gloom, a bank economist saying we’re overheated (and then dropping their rates to record levels), and many industry-watchers assessing that we’re headed for a downfall. Yet, nothing so far has meant we’re going to have a correction.

Until possibly today’s front-page headline “Ottawa Targets Mortgage Risk” from the Globe and Mail.

As I wrote not too long ago, CMHC is nearing its lending limit of $600B. What this essentially means is that government-backed mortgages (less than 20% down in most cases) may no longer be available. We also have Genworth and Canada Guaranty, but CMHC is the backbone of our mortgage market. (example: did you know that many lenders still go to CMHC even over 20% equity deals?). What will happen if, or when, that tap is turned off? Simply put: banks will have to start either self-insuring their mortgages and taking on the risk OR will be declining everything except the creme-de-la-creme.

Let’s face it: not every client is an A1 client but many clients (99% of them actually) pay their mortgages. CMHC turning off its tap is like the Royal Bank suddenly saying that it won’t issue any more credit cards or lines of credit. Furthermore, the Office of Superintendent of Financial Institutions (OFSI) and TD Bank have both recently called for much stricter mortgage rules including raising down payment, eliminating cash-back mortgages, reducing HELOC Loan-to-values, and amortizing HELOCS.

The other day I had a somewhat difficult time getting a 25% down, 810 beacon deal approved. Why? Because the client was self-employed. I got it done of course, BUT, the client posed the question: “why is…


What BMO can’t do for you.

There’s much ado about nothing, so it seems. BMO has relaunched its no-frills 2.99% mortgage rate on a 5-year term. Let me summarize what you CANNOT get from Bank of Montreal:

1. You cannot move out of this mortgage to another financial institution at all without selling your home.

2. You cannot double up your payments.

3. You cannot skip a payment.

4. You cannot get a line of credit attached to the mortgage, it must be separate.

5. You cannot pre-pay more than 10% towards the payment and 10% towards the principal per year.

6. Your interest-rate-differential penalty is one of highest in the business (more on that in a future blog post), so IF you ever sell, and go elsewhere, be prepared for a huge cost.

Any questions?


Finally! Code Of Conduct Regarding Mortgage Penalties

As of November 5th 2012, federally regulated financial institutions (or, lenders we’ll call them, specifically residential lenders), will be forced to abide by the new “Code of Conduct” which can be found here. This is nothing short of a great first step, however hopefully not the final step. Let’s first recap why this is such good news for you, the current or potential borrower:

  • Lenders will need to implement financial calculators on their websites which will provide estimates as to mortgage pre-payment penalties
  • Hire trained staff and announce 1-800 toll-free lines which will be responsible for providing this information via telephone
  • Provide information in “language that is clear, simple and not misleading”
  • Provide annual information for borrowers that include such items as how to pay the mortgage faster, dollar amount that clients can repay per year, pre-payment penalty explanations and calculations, and other amounts the borrower must repay on top of the pre-payment penalty, amongst other information
  • When a borrower is pre-paying their mortgage, the lender will now be forced to explain in detail how they arrive at their calculation, provide information as to how penalties may change, and the period that the penalty is valid
  • Increase borrower awareness

The code of conduct is a great first step. The second step that I propose is the standardization of mortgage pre-payment penalties. Currently there are three ways an IRD is calculated: standard, discounted, and posted. Lenders make millions on the backs of Canadian borrowers who were not informed of the various methods of calculating penalties, which can vary widely from bank to bank. Why not enact legislation that gives the clients maximum fair penalties? Although the code of conduct will take effect November 5th, and it has been in the works for two years now, what about…


Buying first then selling? Consider a Bridge Loan.

In this white-hot market, there will be situations where someone will buy a home before they sell their home. As a result, when in the throws of competition with other bidders, it may be impossible to match up your closing dates. Alternatively, if a new property you buy will require work, you may want to close your first deal sooner than you move out for time to renovate. And finally, it may just be more convenient not to have the new buyer waiting at your doorstep for you to move out. Consider a bridge loan in this case. A bridge loan simply means you’re “borrowing” the down payment and closing costs from the equity in your home, only to pay it back when you sell. Let’s look at a real-life example I recently had:

Clients were selling and moving out on Feb 28th, and had $220,000 from the sale of their home. Their purchase was closing on Feb 24th, and they were putting down the total amount towards down payment, and using their deposit on offer ($40,000) towards closing costs. We worked with ING Direct on this deal, who “lent” the money from their sale, for their purchase. The one important thing to know is the following: Before you CLOSE your purchase, you must have a firm bonafide sale agreement in place with no conditions to get approved for a bridge loan. Firm and bonafide means you must not have any conditions on your offer (mortgage, financing or status inspection).

A bridge loan usually costs prime PLUS 2-3%, and some lenders charge a nominal fee such as $250.

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