Canadian Mortgage News & Canada's Mortgage Trends

Mortgage Bytes

• Correction:  Yesterday's story led to some confusion about N-Brook, for which we apologize. N-Brook is in a solid lending position and accepting new deals according to the company.
• Home prices in Canada's biggest cities are up 11.6% since November 2006.  Not coincidentally, Canadian mortgage credit is up a projected 11.7%.
• It's a record year for home sales in Toronto. Sales in 2007 are almost double what they were at the previous 1988 market peak. The average home costs $393,747.
• Edmonton's bull market in real estate is fizzling. Royal LePage says prices will increase 1% next year vs. 35% in 2006. Calgary and Vancouver are expected to rise 4%.
• There are reports that appraisers are getting more conservative in their valuations of Canadian homes due to the run-up in home prices and looming credit worries.
• 140 Ontario lawyers are being investigated for involvement in mortgage fraud.
• Laurentian Bank, like many lenders, had higher mortgage funding costs in the 4th quarter.
• Mortgage Alliance is now offering clients their credit reports and credit monitoring for a discounted fee.
• MortgageBrokers.com is now using Kendrik to help train it's mortgage agents.
• CIBC is promoting its cash-back mortgage in lieu of a rebate so Toronto buyers can pay their land transfer tax.  We'd rather have a rebate, other things being equal.
• TD now offers a "Green Mortgage" for the environmentally conscious. The rate is high at 1% below posted rates, however. You might be better off getting a loan somewhere else and donating the money you save to a "green" charity.

Moneyconnect Halts Lending

Moneyconnect is now the latest Canadian casualty of the subprime fallout.  The "non-conforming" lender has "Suspended new loan originations until further notice," according to a company release today.

The decision was a result of precarious money markets that made it impossible for Moneyconnect to get the capital to fund new loans.  GMAC, HSBC, and other lenders have already suffered similar capital-raising difficulties.

The news is especially disappointing since the Mississauga-based company had just launched it's lending operations this past February. 

The company says it will continue to honour its commitments to brokers and customers on deals in progress.  We wish the team at Moneyconnect the very best and will report back if/when they resume lending.

Canadians Buying U.S. Properties

Real estate in Canada may no longer be cheap, but real estate south of the border is on sale.  Canadians know it, and are using their powered-up loonie to snatch the bargains.

Anecdotally speaking, Canadian interest in U.S properties has doubled in the last year.  On our site too, Canadian inquiries about U.S. mortgages have soared recently. 

We continue to hear of U.S. homes selling for fractions on the dollar.  Our partners in Florida, for example, tell us that home inventories there keep rising.  As a result, average "days on market" are now 4-months+ in many places.  Most sellers are very open to negotiation.

Many Canadians are even finding values in beachfront, ski-resort, or golf-resort condos, and renting them out when they're not there.  (Be warned, the rental market down there is tough right now).

The downpayment for Canadians seeking U.S. mortgages ranges from 25% to 10% depending on the rate and terms.  Closing costs are often 2-3 times what they are in Canada, however--where 1.5% is the norm.

For a good overview of the U.S. mortgage process, talk to a top U.S. mortgage planner.  If you need a referral drop us an email.

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Side Bar:  If you own U.S. real estate and have worldwide assets over $2 million you're subject to U.S. estate tax when you die.  Yes, even if you're a Canadian citizen and resident.  Fortunately there are solutions according to the Financial Post.

In addition, if you generate U.S. rental income you have to report it in both countries.  You won't be double-taxed, however, according to the Edmonton Journal.

Cash Flow Dam

The cash flow dam is a strategy that converts your personal debt into tax deductible business debt.  It's similar in principle to the Smith Manoeuvre.

Until relatively recently, this strategy was used primarily by higher-net-worth clients.  Few others had heard about it.  Many that did know about it were uncertain of the tax implications.  That's all starting to change. 

Nowadays, big financial institutions are starting to get in on the act.  National Bank now has a cash flow dam webpage.  Investors Group is promoting it as one of their tax strategies. Even RBC has an article on it.

If you're self-employed and interested in the cash flow dam, consult a good tax advisor.  There's a lot of caveats.

From a mortgage standpoint, you'll need a line of credit or readvanceable mortgage.  We or any good mortgage planner can help with that.

FSCO Licensing Changes

Ontario has put teeth in the rules that govern mortgage brokers.  For many, the first exposure to these new rules will be with Licensing Link.

Licensing Link is the Financial Services Commission's (FSCO's) new online licensing system.  It launches for the mortgage industry on March 1, 2008. 

Licensing Link is basically a website that processes mortgage agent applications, transfers, and name changes. 

In addition, starting July 1, 2008 FSCO's website will--for the first time--list all mortgage agents licensed to conduct business in Ontario.  It should be a handy reference for any mortgage shopper wanting to check out their broker.

To be licensed in Ontario FSCO's upcoming rules will require that, among other things, agents:

• Work for only one brokerage
• Have no questionable background that would cast doubt on their ability to "deal or trade in mortgages in a lawful or honest way."
• Submit to a criminal background check
• Answer a variety of suitability questions
• Be financially solvent
• Have a servable mailing address in Ontario

FSCO will start informing approved agents of their new license numbers on March 1, 2008.  As a cost cutting measure, no hard-copy licenses will be issued.

Street Capital Breaks Ground

Mortgage brokers are compensated through finders fees paid by lenders.  After a mortgage closes, the broker gets a percentage of the loan amount for preparing and managing the client's file.

When the client's term is up the lender will try to get the client to renew.  If the client renews, the broker who brought the lender the business in the first place usually gets nothing.  That's because few lenders pay brokers anything on renewal.  If they do, it's likely in the form of trailer fees (a small percentage of the loan amount each year).

Now, thanks to Street Capital, there's a new model.  They're the first lender to automatically pay full commission to brokers when a client renews.  Mortgage planners who send deals to Street Capital no longer need to worry about the lender "stealing" their client.

It's a compelling prospect if you're a mortgage planner.  Other things being equal, it's a clear reason to send business to Street Capital.  In fact, Street Capital will likely see their mortgage volume soar in 2008 solely because of this policy.

Our take is simple.  Street Capital has opened the genie bottle and, in time, other lenders will surely follow their lead. 

Most brokers will agree, it's long overdue.

Mortgage Bytes

• 14 of 16 economists surveyed by Bloomberg predict the Bank of Canada will lower rates again on Jan. 22, 2008.
• A friendly reminder:  The mortgage industry slows down in the last week of December due to limited holiday staff.  Finalize loose ends and have documents in by Monday if you want to close a mortgage by year's end.
• "In the next 30 to 60 days I think more people will realize that variable-rate mortgages are a reasonably safe investment," says Mortgage Intelligence's John Schipper.
• Lender Tip:  Merix is offering a 5-year fixed mortgage with 1.5% cash back to help cover Toronto's new Land Transfer tax.  The offer is only good on GTA properties.
• Bush wants to freeze mortgage resets for five years in the U.S.  But is it a good plan?  Could it spark more problems?  Bush says, ""There is no perfect solution."
• Canadian Capitalist and Million Dollar Journey have a good series going on the "Do-it-Yourself" Smith Manouevre (Part 1  Part 2  Part 3).  Canadian Capitalist deserves extra credit for being one of the few sites that highlight the risks of this strategy.
• Thicken My Wallet lists the pros and cons of putting rental properties in a corporate name.
• Given the trend towards long amortizations, RE/MAX Condos Plus opines, "Generally, Canadians are a conservative bunch, but it is just a matter of time before we have the 'never pay it off' mortgage.'"  In Europe, this is better known as the 100-year mortgage. 
• Lender Tip:  GE Money lets you re-draw up to 120% of your original mortgage amount after one year if you qualify.
• MortgageBrokers.com offers RE/MAX agents a pension savings plan for referring business to its agents.
• Cid Palacio, BMO's vice-president of retail financing products, wants you to come on in and negotiate your best rate.  Getting a mortgage at a bank is more and more like buying a car.  Put on your haggling boots if you want the best deal. Fortunately, there are professionals to negotiate for you--except at BMO and Royal Bank where there is no broker channel.
• Toronto has 317 payday loan stores today versus 39 in 1995.  Only 1 in 5 payday loan clients have a mortgage.
• Is it a good idea to refinance and pay off your credit cards?  Not if you rack them up again.

Tied Selling of Mortgages

It's against the law for a bank to "make you buy another product or service as a condition for obtaining a mortgage."  That's called tied selling.

However, it's not a violation, according to a bank spokesman we talked with, for a bank to require you to open an account to qualify for a special mortgage discount.  Case in point is BMO's requirement that new customers open an account to qualify for its Toronto Land Transfer Tax rebate promotion.  The bank says that's perfectly fine from a regulatory standpoint.

Smith Manoeuvre Maintenance

People often ask about the steps required to perform the Smith Manoeuvre.  We've talked about the initial setup procedures before (see above link), but there's also ongoing maintenance to consider.

The example below shows the monthly steps required if you use FirstLine's Matrix mortgage.  The Matrix is one of the more popular Smith Manoeuvre mortgages so it's a fitting example.  These steps will differ slightly with other mortgages.

We've also included a hypothetical timeline to show the typical dates that transfers take place.

1. February 1:  FirstLine automatically debits your bank account on the 1st of each month for your mortgage payment.  (assuming you make monthly payments)
2. February 3:  FirstLine increases your line of credit (LOC) by the amount of principle you paid in your mortgage payment--typically by the 3rd of each month.
3. February 3:  You log in to FirstLine.com and electronically move these readvanced funds from your LOC to your bank account.
4. February 6:  The funds typically arrive in your bank account within 72 hours.
5. February 6:  You invest these funds online as you normally would.  (Some clients save another step by setting up their investment account to automatically debit their bank account each month. The debited funds are then automatically invested according to a pre-designed investment plan.)
6. February 8:  FirstLine automatically debits your bank account for required interest-only payment on your LOC.  This happens 21 days after your statement is printed.  (Statements are printed on the 18th of every month.)

That's basically how it's done.  After you do it initially, it takes about 5-10 minutes of your time each month to do the transfers. 

In addition, if you're self-directing your investments, you'll need to add whatever time is required to monitor those investments and find the best places to put your money to work. 

As always, we'll remind you that the Smith Manoeuvre is not suitable for everyone.  Moreover, we recommend using a qualified financial/tax advisor for the investing and tax aspects.  Consulting with a financial planner often entails no out-of-pocket expenses, saves you a lot of time, and may well provide better results.

Mortgage Bytes

• The Chronicle Herald says, "with no interest rate hikes on the horizon, there’s no reason to move over to a fixed-rate mortgage if you already have a variable rate mortgage."
• 28% of Canadians expect to carry a mortgage into retirement (Investors Group Study).
• Ameriquest Mortgage commercials are somewhat creative.
• "You need to hold real estate over long periods of time to ensure good returns. Holding for a year or two is always a gamble." - RE/MAX Condos Plus
• CIBC's Benjamin Tal says banks are outpacing non-bank lenders in mortgage growth for the first time in years.  That's largely because banks are getting more competitive on 5-year rates.
• Mortgage Product Tip:  Xceed Mortgage let's you purchase a 2nd home using stated income with no NOA's required. You may only need 5% down if you're credit score is 680+. Seasonal properties or cottages are not allowed.
• FSCO has published these FAQs about it's new Ontario mortgage broker regulations.