Canadian Mortgage News & Canada's Mortgage Trends

3-Year Fixed Rates Break 5%

"Quick close promotions" are still going strong.  With a few exceptions, most of the best fixed rates today are with non-bank lenders offering big discounts to borrowers closing within 30-45 days.

If you're hunting for a fixed rate, the sweet spot currently seems to be with 3-year mortgages.  A few lenders are now offering 3-year fixed mortgages at under 5.00%, with good privileges to boot.

The above rates are generally not available at the banks, however, so the best bet is to call a mortgage planner to start your research.

Padding Your Rental Income

The Vancouver Sun recently wrote a piece about quashing real estate myths.  One of the myths they dispelled is the ability to make money from a Vancouver rental property.

With the average Metro Vancouver home selling for $568,127, an 80% LTV 40-year mortgage might run you $2250 a month. Then you have taxes, maintenance, etc. When all's done you might need $3,000 a month to be cash flow positive. Yet market rents might bear only $2500 a month.

What do you do?  How about build a micro-house in the backyard?  Vancouver-based Smallworks will build you a nice 300 square foot bungalow (maybe in your laneway?) for about $71,000.  Get a mortgage on it for $350 a month, charge $895 a month rent, and voila!  Income gap closed.

We say this half in jest, but some people are really doing it.  If a lightbulb is going off, check your zoning first.

Mortgage Jobs Database - Free Until June 30

CMT's Mortgage Jobs Database is coming soon!

If you're hunting for a job with a broker, lender, or mortgage industry supplier, CMT's Mortgage Jobs Database will be the first place to look.

If your company needs to advertise a job, you'll be able to do it quickly and cost effectively--while reaching thousands of qualified mortgage professionals from across Canada.

Job postings will appear on CMT for 60 days, and be featured in two places:

1. On CMT's Mortgage Jobs Database page; and,
2. As a post on CMT's homepage

Job postings are totally free until June 30, 2008 (two per company maximum please).

The Mortgage Jobs Database will launch next week so send us your job postings now!

Post a Job

Mortgage Bytes

Commentary

• A prominent lender sent this email out recently:

"We are seeing some borrowers take on the risk of Variable rates, when based on their profile they should be in a fixed rate mortgage.  When the BOC starts increasing interest rates, your customer’s options for locking in may not be as attractive as they are today.  And that could end up costing them more money over the term than it would if they choose to lock–in today.

• Did you know the Canadian government guarantees 100% of CMHC-insured mortgages and 90% of privately insured mortgages (up to $200 billion)?  That's according to the Star's Ellen Roseman.  She thinks Ottawa should cut back its mortgage insurance guarantees because of growing risk.  Star Article

40-Year Amortizations

• The Bank of Canada's Mark Carney told Members of Parliament: "We have concerns with the increased prevalence of very long amortization and higher value mortgage products. They add to momentum in the housing market and if everyone has a 40-year amortization mortgage, then you just have higher housing prices."  Nonetheless, Carney feels Canada is not following in America's footsteps.  He said housing problems are "not possible in our system, to the U.S. magnitude."
• Scotia's Derek Holt says 40-year amortization risks are "misunderstood."  He says "these new products actually extend near-term credit quality and the housing cycle by offering flexibility in a shock environment and bringing in new buyers."
• In Jonathan Chevreau's look at 40-year amortizations he says "If you can't afford a home, rent and save money for a down payment."  He suggests couples save $10,000 a year using tax free savings account. Then, "with well-chosen investments, the tax-free growth should [result in] a 25% down payment on a home in a few years." Sounds good on paper.  But three years of saving $10,000, and a 10% return, yields about $35,000.  If that's used as a 25% downpayment it implies a house price of $139,000.  With Canada's average house at $314,279 that isn't going to buy much.
• Finance Minister Jim Flaherty said he's "watching" the recent "tendency...to longer amortizations and smaller down payments."  He suggests it's not a problem now but "could become a concern over time."

Interest Rate Trends

• Economists think the U.S. is finished cutting rates for a while. If so, and IF Canadian bond yields are also near a bottom, the only way fixed mortgage rates will fall much more is if spreads narrow.
• “The story for 2009, and potentially 2010, is inflation. With inflation we will have higher interest rates." -- CIBC's Benjamin Tal.  Globe & Mail
• Mark Carney says the Bank of Canada has had to cut rates more than it normally would because big banks are hesitant to lower rates much more.  TheStar.com
• Expect the Bank of Canada to cut rates 1/4% on June 10 before pausing, says BMO Senior Economist Michael Gregory.
• "Trading in federal funds futures suggests investors expect the (U.S.) Fed to start raising rates again as early as this fall to deal with inflation."  Globe & Mail
• According to the Star, TD expects a 1/2% rate cut in both June and July, with no hikes until next year.  (That seems surprisingly aggressive.)

Housing Trends

• TD economist Craig Alexander reminds us that home prices can change fast.  "The U.S. went from double-digit gains to outright (price) contraction in a matter of six months. That is a bubble bursting."
• "There's a sense in the market that the worst is over as far as the subprime-mortgage market is concerned in the U.S." - CIBC's Benjamin Tal   The Province
• CMHC forecasts a national rental vacancy rate of 2.8% for 2008.
• In Alberta, new real estate listings leaped 36% in the first quarter versus last year. Nationally they rose 6%.
• 48% of Canadians would consider buying a condo.  Last year the number was 39%.

Industry News

• Lender stock prices might not fare well with a weak economy says Andrew Bell.  BNN Story
• CHIP reverse mortgage originations were up 10% in its latest quarter, versus the prior year.  CHIP's average interest rate spread (rate charged - cost of funds) on reverse mortgages is 3.27%.  The average loan-to-value of a CHIP reverse mortgage is 36%.

Miscellaneous

• The Supreme Court of Canada reserved its decision on the Lipson (interest deduction) case in order to write its opinions. A transcript of the decision was announced Tuesday.  We'll post a copy once received.
• CAAMP has launched www.mortgageconsumer.ca, its new consumer education site.
• Ottawa is Canada's #1 "Best place to live" according to Moneysense.  Victoria, BC is #2 on their list.
• From the "every-little-bit-helps" department:  Scotiabank will round up debit purchases to the nearest dollar and then deposits the change in your savings account.
• Canada need not fear stagflation.
• 40% of Canadians pay interest on their monthly credit card balances.  The Telegram

Rates to Reverse Upward - CIBC

Mortgage rates will climb at least 1% next year if CIBC is right.

Economist Jeff Rubin expects "a material acceleration in inflation in Canada over the next 12 months."  He thinks that "should reverse the current direction in Canadian interest rates."

CIBC still feels the Bank of Canada may announce another rate cut this year, however--probably 1/4%.  That would bring the BoC's cuts to 1.75% since December 2007.  But Rubin says "markets will be surprised at how rapidly the Bank is compelled to take back those easings."

CIBC's call is a timely reminder of the obvious, that interest rates don't always go down.  With so many homeowners choosing variable-rate mortgages these days, it's important those people realize that they may be faced with a decision in 6-12 months.

As rates go up, so do variable-rate mortgage payments.  The exceptions are variable-rate payments that are fixed at closing.  Variables are great for most people, but if your budget and equity are tight, it's possible you shouldn't be in one at all.  At the very least, you should be in a variable mortgage that has fixed payments.

Of course, variable mortgage holders can always lock into a fixed rate, but there's sometimes slippage.  Slippage is when fixed rates go up before you lock them in.

Keep in mind, fixed rates can go up any time.  Sometimes your lender will telegraph their rate increases to your mortgage planner, and sometimes they won't.  In any case, lenders will sure as heck not send you an email to give you warning.

Mortgage planners can always try to watch bond yields to give you an early signal, but that's not foolproof either.  (See "Predicting Fixed Mortgage Rates.")  The best mortgage planners in this country are often no better than chance at predicting rate turns.  (That's not an insult.  Even economists who get paid a lot more then us can't do it consistently.)

Of course, in addition to slippage, there's the challenge of long-term timing.  For conversation, let assume you could in fact foresee a 1% increase.  You surely can't see what's in store after that.  What if skyrocketing commodity prices cause a global economic slowdown after you lock in for 3-5 years?  Then rates go down but you're stuck in a crusty fixed rate that's milking you for extra interest payments.  Not good.

The moral is, timing interest rates is for gamblers--the same kind of gamblers that make $400 million a year for Bellagio.  If there's any chance your budget can't tolerate a 10%+ payment increase, and you're in a variable, you might not want to wait till the last minute to convert to a fixed rate.

Every case is different, though, so talk to your mortgage planner for his or her thoughts.

Mortgage Broker News

• We're hearing that reverse mortgage company Seniors Money Canada has suspended new originations.  A source in the company says the Australian bank that backs Seniors Money has been hard hit in the subprime fiasco and has curtailed its funding.  Seniors Money is supposedly on the hunt for a new domestic funder.
• According to Filogix, brokers funded 11.41% fewer mortgages in March versus one year prior.  However, they used mortgage banks a lot more...21.58% more than last year.
• Alberta's mortgage broker population has risen from 400 to 2,000 in the last 10 years, according to Invis's Gary Siegle.
• MGIC Canada is apparently making good progress in it's efforts to launch its mortgage default insurance business in Canada.  The company foresees "no material roadblocks to becoming a Federally regulated mortgage default insurer" and is optimistic it will receive its required licenses "in the next short while."
• The Star's James Daw writes:
• "It's possible banks will cut their fixed-rate mortgages by more if borrowers start swinging over to variable-rate mortgages...But banks will face less competition from smaller lenders that do not have a large base of deposits."
• "Clients of various subprime mortgage lenders could...have difficulty renewing or replacing their mortgages if their financial position has not improved."
• "In the present capital market environment the advantage of gaining liquidity via insured mortgage origination far outweighs the benefit to [Abode Mortgage] of generating fee income from uninsured mortgage origination." - Abode Mortgage CEO, Mike Linehan
• Abode Mortgage is now on board with AIG. Abode is using AIG's new auto-evaluation program (for apparently all of its mortgages) to accelerate or avoid appraisals.  Abode anticipates the majority of its mortgages will no longer require appraisals (and appraisal fees).
• Dominion Lending Centres, a national mortgage brokerage, has selected Filogix Expert as its exclusive point of sale system.  Dominion has been growing fast after launching roughly two years ago.  They now have over 60 franchises across Canada.
• Equitable Trust says it's facing fewer competitors in its core mortgage markets than it did a year ago.  This is expected to provide a long-term opportunity to improve interest rate spreads on the Company’s mortgage portfolio.  Equitable Trust is an alternative lender based out of Toronto.
• RBC had $124 billion of mortgages on its balance sheet as of Jan. 31, up from $108 billion a year earlier.
• Genworth Canada's earnings grew 15% last quarter.
• Interbay reportedly tightened it's lending guidelines somewhat.  Contact the company for details if you use them for commercial deals.
• Appraisal system provider, Solidifi, has scored an equity investment to help accelerate its Canadian and U.S. growth.  Solidifi operates Canada’s largest appraiser network.

The No Frills Mortgage - New From Merix

Why pay for something you don't use?  That's the idea behind Merix's new "No Frills Mortgage."

The No Frills is a product designed for people who know they'll never take advantage of pre-payment privileges, and would rather have a lower rate instead.

Before we get into the details, however, first a few general comments...

No frills mortgages have been around for a while, but always as private labeled products.  For example, Mortgage Alliance launched one last fall (backed by Macquarie) and Reactive Mortgages has offered one backed by INALCO.

It's a smart concept from a marketing standpoint, and Merix is brilliant for being first to offer this product to the industry as a whole.  As most of you know, borrowers are extremely rate sensitive these days.  Homeowners increasingly think of mortgages as commodities, despite facts to the contrary.  So when they see a rate 10 basis points below the market, their eyes open wide.

In some cases, bare bones mortgages serve as a lure to get clients in the door.  Once the client and lender/broker strike up a conversation the talk often changes to options and privileges, and those usually come with a cost.  Many clients interested in bare bones mortgages therefore end up walking out the door with a more fully-featured mortgage at a higher rate (no, this doesn't necessarily mean higher compensation for lenders/brokers).

In terms of stats, the numbers support bare bones products.  Merix cites statistics that only 33% of Canadians make lump sum prepayments, based on a recent CMHC study.  Accelerated payments are more prevalent, with 45% of Canadians making them.

OK.  Back to Merix. 

Here's a quick rundown on the new No Frills Mortgage:

• The product is designed for:
• First time homebuyers with limited ability to prepay
• People who want a readvanceable mortgage with a low-rate fixed portion that won't be prepaid
• Property investors who don't care about pre-payments given their deductible interest and cash flow needs
• The rate:  5.19% (as of today)
• No lump sum prepayments without penalty (3-months interest or interest rate differential, plus 0.25% of original mortgage amount times the number of months remaining in term)
• 10% annual payment increases are allowed (on the mortgage anniversary)
• Accelerated weekly or accelerated bi-weekly payments are allowed
• 30-day rate hold maximum
• No pre-approvals
• 95% loan-to-value maximum
• Up to 40-year amortizations
• The interest rate, term, and possibly insurance premiums can be ported without penalty to a new No Frills Mortgage on a new property

Now that this product is out there you might see a lot of 5.19% fixed rates pop up on brokers' websites.  If you're a typical homeowner that cares about pre-payments (we hope you do!), make sure to ask your mortgage planner if his or her rate quote includes pre-payment privileges.

If you don't care about pre-payment privileges (we won't scold you if you don't), then Merix's No Frills Mortgage might be right up your alley.

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Side Bar: 

There is a real reason behind this product's lower interest rate.  Mortgages are typically purchased by investors.  Investors don't like uncertainty.  Therefore they don't like the possibility of borrowers pre-paying their mortgages and reducing the investor's income stream as interest rates fall.  As such, investors need a hedge against the probability that people will pay down their mortgages early. 

In addition, lenders hedge to lock in rates before closing. 

There is a cost to all this, and that cost is reduced or eliminated with a no frills mortgage.  Hence, lower rates to the consumer.

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Side Bar II: 

According to one source...

• A 30 day rate commitment may have a 65% probability of closing and an average closing period of 20 days.
• A 45 day rate commitment may have a 50% probability of closing and an average closing period of 35 days.
• A 120 day rate commitment may have a 40% probability of closing and an average closing period of 52 days.

Each of the above has it's own cost that is built into the respective mortgage.

Millionaire Mortgage

Canadians are forever looking for ways to pay down their mortgage faster. That’s a big reason the Smith Manoeuvre has generated such interest. Yet when it comes to using tax deductions to reduce your amortization, there hasn’t been much competition to the Smith Manouevre.

That may be changing.  DPR Financial, a wealth advisory firm based in Cambridge, Ontario, has reportedly been having success with a new product it calls the Millionaire Mortgage. The Millionaire Mortgage is designed to create a portfolio of investments and generate tax refunds that can be used to pay down a mortgage faster.

In a nutshell, it works by using your home equity to finance a large unsecured line of credit (ULOC) which is separate from your mortgage. The ULOC is then invested in a portfolio of actively managed “segregated funds” (an investment similar to a mutual fund but with an approximate 25% maximum downside). The interest paid to support the investment loans is tax deductible and generates an annual tax refund that is used to pay down the mortgage.

Like the Smith Manoeuvre, the idea is to build a large and growing portfolio of investments and accelerate the pay-down of your mortgage.

As with any investment, there are both potential rewards and risks. Because of the Millionaire Mortgage’s intricacy (and because we’re not financial advisors) any questions about the products inner workings should be posed to DPR Financial directly. Their contact information is available on their website.

Please note: This is an informational post only and not a recommendation of any kind. Please do your own research and consult independent tax and financial advisors before acting on any financial information you read online.

Census Housing Data

Statistics Canada recently released some interesting findings from the 2006 Census.  The data is over a year or so old but a couple of things stood out.

First off, any theories of income growth supporting home prices seem to be out the window.  In real terms (i.e.  adjusted for inflation) Canadian incomes rose a whopping $53 from 1980 to 2005!  Meanwhile real home prices jumped ~60% or more in that same timeframe.  (about 1.9% a year after inflation, according to TD Economics.) 

[For those interested here's an inflation adjusted price change chart from Financial Planning & Personal Sanity.]

Other tidbits from the census (again, 2006 data)...

• 75% of Canadians owned their home.
• 25% rented.
• 58% of homeowners had a mortgage.
• The average monthly cost for mortgage, taxes, municipal services and utilities was $998.

More on 40's

In case you weren't tired enough of the 40-year mortgage debate, here are a few final thoughts...

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People generally choose 40-year amortizations for three main reasons:

a) Flexibility (e.g. in case they lose their job and need to maximize their cash flow)

b) Investment benefits (e.g. better cash flows on income properties)

c) More buying power.

Reason C is the main point fueling the recent debate over 40-year ams.

Yet, it should be acknowledged that if 40-year amortizations did not exist most buyers would instead get the best homes they could afford with a 25-year am. That means:

• They would still use the same 32-40% of their gross income towards housing.
• They would still have the same approximate monthly payment

With a 40-year amortization, the difference is that they’d have a higher value home and pay down less of their principle each month. It’s clearly a personal choice on how to spend their money.

No matter what amortization is used, however, Canadian lenders will generally not allow borrowers to spend any more on housing than the standard debt ratios allow. The borrower’s income is the limiting factor, regardless of the amortization chosen. 

40-year amortizations were designed for people who can pay their bills. We have yet to personally see a lender approve an income qualifying mortgage where the borrower couldn't afford the house. (Stated income may be a different case but that is another discussion.)

So the next questions are…

What effect do increased buying power and increased interest burdens have on our society?

If the net effect is negative, where do we draw the line? Do we outlaw interest-only lines of credit and high-interest credit cards? Do we force people at Best Buy to pay cash for their new plasma TVs? Do we stipulate in the Constitution how much Canadians are allowed to spend annually on interest?

These are not meant to be statements of opinion, but rather questions to ponder.