On the topic of mortgages

The topic of mortgages is high in everyone’s mind with the recent changes to the lending rules. While we continue to cycle through a prolonged global recession, the mortgage industry and the real estate market has remained at the centre of public commentary and policy changes.

On March 18, 2011 we will see the second round of changes restricting mortgage lending in Canada in less than a year.  This round will have an impact on first time how buyers because amortizations are reduced from 35 years to 30 years on high-ratio mortgages. Unfortunately some traditional lenders are putting the 30-yr amortizations on conventional mortgages a well.

These actions are being taken by the government to counter some of the following risk factors:

• 150% debt-to-income ratios , which is now higher than in the US

• Arrears levels at risk of rising
• Interest rates anticipated to rise
• High price of oil could fuel inflation
• One in ten Canadians would have difficulty absorbing an unexpected $500 expense.

Media stories aside, it is easy to forget that the housing market has been a vital component to the success of the Canadian economy during the past decade. In many respects, the real estate industry has helped to stabilize a faltering economy.  By allowing consumers an opportunity to purchase by taking advantage of low interest rates or to tap into their equity for either spending or investing purposes, the mortgage channel and real estate market has contributed positively to consumer spending and confidence.  

With all these changes, all the more reason why Canadians should stay out of their branch and seek the advice of independent mortgage brokers and agents.  Here is the value of using a mortgage broker:

1. On average consumers using a mortgage broker saved 19bps on their interest rates (Competition in the Canadian Mortgage Market, Bank of Canada Review, Winter 2010-2011, p.5)
2. Those who renewed or renegotiated recently with a Mortgage Broker reported an average rate decrease of 1.4 points, compared with 1.0 point among all renewals. (Maritz Research Canada, January 2011)
3. On average Banks offer better rates to new customers than to existing (same source as #1) yet those repeat bank customers are less likely to use the services of a mortgage broker.
4. Since 1992 changes to the Bank Act, the Big 8 (Big 6 plus Desjardins and ATB) now own more than 80% of mortgage assets in Canada. In the wake of that reduction in competition, the mortgage brokerage channel has grown by over 300% (from 10% to 30%).  This competition IS in the best interest of consumers.

Canada has been fortunate to have weathered the recession well. The country is operating on sound financial principals and our housing and mortgage markets will continue to remain robust. I encourage you  to deal with a mortgage broker. It’s been proven, and the stats support it, that we get better deals for Canadians.

Own your life,

Jessi

I have run some calculations to give you a better idea of the impact from these changes. The subject property is in the half million range ($500,000) which is a good example of a typical downtown condo. If the purchaser has zero debt (VERY rare), they would be able to qualify if they made the following:

• Using a 35 year amortization with 4% interest, he or she would have to make about $75,000. The average “family” in Canada already can’t afford to make this purchase. The average Vancouverite also cannot afford this property at present. They would require a co-signer or need to have above average income.

• Now let’s jump ahead when interest rates reach 5% and we can only use a 30 year amortization. Now this person or family must make about $85,000.

• How about we be more realistic and really look into the future by a few years. The property value goes up 50k to 550k, rates are now 6% and we still can only access the 30 year amortization. That same person now needs to make over $100,000 to purchase an “average” condo in Vancouver.

I don’t embrace these new changes. Restrictions on credit card lending should be implied instead.

Best regards!

This morning (February 28, 2011) the Canadian dollar hit a 3 year high of almost $103 in comparison to the USD. This is going to cause some damage for our export market. Inflation is currently clocked at 2.3% which is 0.3% higher than the government would like to see it. The overnight lending rate is generally increased to curb inflation. GDP (gross domestic product) is also higher than expected indicating a recent improvement in the economy. Again, an indicator that we could handle a small increase in the overnight lending rate.

Other than the high Canadian dollar, these factors should lead to an increase of 25 bps (basis points). All this only really affects the variable (floating) rates. Whereas the fixed rates are primarily dictated by the bond yield which has actually dropped slightly since the last big fixed rate increase. With this in mind and the inflation at our door steps, an increase in the overnight lending rate is expected tomorrow. I predict a 1/4 point but this is just a guess. We don’t expect much of a jump because our economy can’t handle it. We are still close to the lowest rates in Canadian history, floating rates really have only one place to go… up.

Please CLICK HERE to calculate the effects of this potential interest rate change on your mortgage payment.

Own your life,

Jessi Johnson

Vancouver is becoming unaffordable with the new mortgage rules taking affect March 18th.  Here are some quick details you might find interesting:

• The average person makes about 50k in Vancouver which already makes it viritally impossible to purchase even when using a 35 year amortization unless a partner or co-signer is involved.
• This typical person with roughly 5k in credit card debt can only purchase a 280k condo with 5% down (using a 4% rate & $300 strata payment).
• Lets now increase the interest rate by only 1% to 5% and reduce the amortization (according to the new rules) to 30 years to see what happens… Now this person can only make a purchase of 230k.
• You can’t buy a closet for that in Vancouver, the average condo in Vancouver sells for $390,935 according to the Real Estate Board of Greater Vancouver as of January 2011.
• When rates hit 6%, it will even become diffcult for two people to team up and buy condo in Vancouver.
• If you ask me, real estate sales outside Vancouver are going to raise sharply in the coming years.
• Projects sites like Mirra in Surrey (www.mirraliving.com) with condo’s starting around 150k are looking pretty good these days.

Although March 18th is the deadline, you don’t have to close before this date. As long as you have a secured deal (subjects removed and deposit paid), you can close after March 18th but before your commitment expires.

Please call us directly to discuss this topic or comment below.

Mortgage Rules changing March 18th

The new mortgage rules taking effect March 18th, I would like to clarify a few things. The amortization reduction from 35 -30 years is certainly affecting us the most.

• This only affects high ratio deals
• This does not affect you when putting 20% or greater down payment
• If you have a firm deal (subjects removed) on or before March 17th, this does not affect you
• You can even switch lenders or mortgage brokers after March 18th
• Just don’t alter the mortgage and return to the original insurer (CMHC, Genworth, etc)

With regards to the new mortgage rules taking effect March 18th, I would like to clarify a few things. The amortization reduction from 35 -30 years is certainly affecting us the most.

• This only affects high ratio deals
• This does not affect you when putting 20% or greater down payment
• If you have a firm deal (subjects removed) on or before March 17th, this does not affect you
• You can even switch lenders or mortgage brokers after March 18th
• Just don’t alter the mortgage and return to the original insurer (CMHC, Genworth, etc)

Questions? Call us at 604 628 5040

Finance Minister Jim Flaherty unveiled changes Monday morning to mortgage lending rules that would see Ottawa stop backing home loans greater than 30 years.  There are a lot of unanswered questions that I hope to have answers for tomorrow. I will update this post when I have more info. So what does this mean for the first home buyer?

$50,000 single person or combined family income
$5,000 debt (low average)
$300 monthly strata payments
4% interest rate
30 year amortization

With 5% down ($13,000), this person/family can purchase a condo up to only $260,000. Using a 35 year amortization, this person could buy a condo worth $280,000.

$20,000 is a significant difference when you are purchasing a property in this price range. That is enough to make or break a deal. But what about when the interest rate jumps to only 5%. Now this same person (use a 30 year am) can only buy a condo for $230,000. Or how about if this person wants the historically better variable rate mortgage? Now the purchasing power drops to about $220,000. You can’t buy a closet for that price in Vancouver.

Best regards,

Jessi Johnson

Will the mortgage rates go up or down?

It’s anybody’s guess. The age-old question is – do I opt for a fixed rate or a variable rate?  Headlines tell us the interest rates are going up and then the next day the news says the banks are cutting rates – it’s enough to make you wonder if anyone in the financial world really knows what’s going on.  It’s the market that really dictates what the Bank of Canada (BoC) does with the rates.

All indications are that we’re heading into a balanced real estate market. That means that interest rates will probably remain relatively stable and relatively low, as they are right now. So fixed or variable? Hands-down variable!

But there’s no rush to make the decision. With record low interest rates for both variable and fixed mortgages I can safely say that over the next six to 12 months the variable rate is still the way to go. Variable-rate mortgages will still outperform fixed-rate mortgages over the long-term. If you’re at all concerned about it, I can review your mortgage and advise you on the best way to proceed.

Also, if you opted for a fixed rate you may want to relook at it and crunch the numbers. We can then determine if you’re better off in the long run to pay the penalty and get into a variable rate.

Own Your Life,

Jessi

It’s not a bad thing to owe $1 trillion in mortgages

Don’t be scared off by the large amount of mortgage debt held by Canadians. It sounds like a large sum but perhaps we should be referring to is as an investment rather than a debt. Now that sounds better, doesn’t it? The $1 trillion dollars shouldn’t worry anyone. Yes, it is one type of debt, but a mortgage is really an investment in your future and will yield returns in the long term.

Most homeowners have built up good equity in their home in relation to what they owe on their mortgage and are managing their debt well.  That same report found that the majority of Canadians can afford to increase their mortgage payments by $300 a month.

Consumers also took advantage of low interest rates to borrow on their home equity to pay down other debt to improve their financial health – this is included in the $1 trillion dollars – this trend will likely continue while the rates remain low.  Other consumers borrowed for home improvements, which increases the equity in their homes.

This is really good news for consumers and for Canada. We’ve managed well through the global financial crisis, our banks are healthy and we’re managing our debt. Our interest rates remain low and the economy is stable. The housing market is trending toward balance, which is good news for first time home buyers. By next spring could well be in a buyer’s market as sellers lower their expectations and reduce the asking price of their homes.

So, don’t let that large good “debt” number scare you off. In fact, with the rates where they are, it may be a good time to look at your mortgage and possibly add to the $1 trillion number by borrowing on your equity to pay off some of your “bad” debt.

Until next time,

Jessi

Number of mortgage brokers in Canada continues to grow

If you know anything about the U.S. mortgage industry, then you know that mortgages brokers there have lost the confidence of the consumer public. It’s true there have been some shady dealings among brokers but the story is different here in Canada.

If you want the best rate possible then using a mortgage broker is your best bet. As a broker, I’ve always known this, and now it has been confirmed by Deloitte, a global consulting company. At one time consumers only came to us as a last resort, when they were turned down by the banks. But now we’re becoming the first choice among all consumers, whether you’re buying your first home, moving up or downsizing, or refinancing for home improvements. We attract prime customers who want options with their mortgages that a bank might not be able to give them.

The report also found that we brokers originate 38% of all mortgage loans through banks and non-bank lenders and we’re growing stronger.
That’s good news for you!  As lenders realize the power we have and the clients we can bring to them, they will naturally compete for your business. And with access to credit unions, trust companies, banks, non-banks and private lenders we can get you better than posted rates in most cases.

With all that said, don’t keep me a secret!

Until next time,

Jessi

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