Mortgage Rates & Mortgage Broker News in Canada

Looking For A Mortgage Career?

Peruse CMT’s mortgage careers database, updated weekly at:  Canadian Mortgage Jobs

Need to post a mortgage job?  Follow this link:  Post a Mortgage Job

Credit Score Disclosure

Pulling a credit score is one of the first things a mortgage planner does before submitting your application to a lender.

Once the score is obtained, clients often want to know what their score is.  What many don’t realize is that mortgage planners generally can’t tell them.

Equifax, the main credit bureau in Canada, has very strict rules that restrict brokers from disclosing credit scores to borrowers.  Brokers who violate this policy are subject to termination of their license from Equifax—not a good prospect.

Equifax instead suggests that brokers refer borrowers to www.Equifax.ca if they wish to determine their score.  Equifax, of course, charges for providing credit scores.

Despite these rules, mortgage planners are always free to say whether your score qualifies you for the mortgage you request.  If the particular mortgage you desire requires a 680 Beacon score, for example, a mortgage planner is allowed to tell you whether your score is higher or lower than that number.

IMPP Expected to Continue

Last fall, when the credit markets were in near-panic mode, the government threw lenders a lifeline called the IMPP (Insured Mortgage Purchase Program).

The IMPP allowed the government to buy up to $125 billion of insured mortgages.  The goal was to add liquidity to Canada’s mortgage market.  At the time, lenders (and borrowers) were suffering from unprecedented interest-rate premiums due to perceived mortgage default risk.

That IMPP program is set to expire this week. However, there were various media reports last week with word that the government will renew it.

For those unfamiliar, here’s how the program works:

1. Lenders lend mortgage money to homeowners
2. Those mortgages are pooled together and sold to investors
3. The government issues treasuries
4. CMHC (a crown-corporation) takes that money and buys set amounts of the above mortgage pools—using auctions
5. In those auctions, lenders tell CMHC what they’re willing to pay in interest
6. CMHC buys the pools from the lenders with the best bids

The IMPP is expected to generate $372 million in profit for Ottawa this year.  In doing so, the government has minimal risk of loss because the mortgages are high quality and already insured.

Reports say the government is earning a 0.86% spread on the fixed mortgages it’s bought so far.  Apparently the spread is fatter on variable-rate mortgages, at 1.02%.

The Finance Department says about $3 billion of the $64 billion of mortgage purchases have already been repaid, with no reported defaults.

Observers had lots to say about the IMPP in the news last week. Here’s a sampling:

• “The government can borrow on a lower rate than the rate it earns on mortgages and because these mortgages have already been insured by the government, for an additional fee, the government is taking on no additional risk,” - Avery Shenfeld, CIBC chief economist (Winnipeg Sun)
• “It still is useful, it makes a profit for the taxpayer, there is no or extremely low risk for the government, it lowers the cost of funding for the banks, and that in turn lowers costs of borrowing, so it's hard to figure out what's wrong with it.” - Don Drummond, TD chief economist
• “It would be premature to cancel it at this point until we really see that we’re out of the woods.”  - Nancy Hughes Anthony, CBA CEO (Bloomberg)
• “We’ve always said we’d make a profit, I don’t think we’ve put a number to it,” - Jack Aubry, Finance Dep’t spokesman (Winnipeg Sun)
• “While circumstances have changed for the better, the program remains valuable. It lowers the cost of funds for the banks. Yes, not as much as at one time, given that spreads have come in, but it still helps.” – Don Drummond, TD chief economist (Globe)
• "The program is not a focal point for anyone. "It is a placeholder of sorts." – Eric Lascelles, TD strategist (FP)

As Lascelles implies, lender interest in the IMPP has waned over the last six months.  That’s because it’s now cheaper to get lending capital elsewhere in many cases (i.e.,  in the private sector)—and that’s to be expected in a healthy credit market.

1-Year or Variable?

Variable-rate mortgages are finally back to prime and it’s been a year in the making.

Not coincidentally, we’ve been coming across more people who are thinking about riding out a variable for the next five years.  It’s a gutsy call given future rate hike expectations, but some people are willing to take the risk.  For those people, it’s worth considering a 1-year mortgage as well.

The key with a 1-year is that you’re not locked into a variable rate for 4-5 years.  Instead, you get a similar rate now, while retaining the option to switch into a variable rate next year at (potentially) below prime.

A 1-year fixed also protects you against rates rising in the next year, should the Bank of Canada hike its overnight target before September 2010.

The risk with a 1-year is that variable rate premiums and fixed rates rise before your renewal. In 8-12 months you could theoretically face prime + 1/4% or more.  Few expect this, but anything’s possible. 

Despite the risk, and given the apparent probabilities, a 1-year near prime frequently makes sense over a variable.

_____________________________________________________

More About 1-years:  1-year and variable-rate mortgages are both funded in the short-term money market.  Therefore, they tend to move together over time.  This graph below shows prime rate compared to 1-year fixed rates over the last 10 years. (The 1-year rates are discounted 1/2% from posted).

If you’re thinking of taking a variable with plans of locking in when rates rise (not recommended, for reasons we’ve discussed here before), then a 1-year convertible offers similar benefits and more.

BMO Is The First Big Bank to Prime

BMO lowered it’s 5-year variable rate to prime (2.25%) today.

It’s the first of the Big 5 banks to offer variables at prime in about a year.

BMO’s press release calls it the “lowest rate in more than 30 years.” This apparently refers only to BMO’s own variable rates, since prime and “prime minus” are already being advertised by brokers.

Other banks will likely follow BMO’s lead, perhaps some sooner than others.  The prime – BA spread is wide enough to permit it. 

Terminology:  The "prime-BA spread" is simply prime rate minus the 30-day bankers’ acceptance yield.  In very raw terms, it represents gross lender margins on variable-rate mortgages. From this spread, lenders have to pay liquidity/risk premiums (when raising lending capital in the credit markets), customer acquisition costs, overhead, salaries, etc. The remainder is profit.

The prime – BA spread is currently at 1.95, whereas it averaged ~1.70% before the credit market went haywire last October. 

Incidentally, the 1/4% gap between today’s spread and the historical average corresponds to the 1/4% that lenders felt unable to pass along to consumers when the BoC cut rates last December.

Mailbag: Adding A Spouse to Title

Question:  Hi, I live in Toronto and would like to refinance a rental property. I’d like to add my wife to title so she can apply with me for the refinance. Can that be done; and would she need to pay land transfer tax? 

Answer:  There is no problem with you and your wife both applying for the refinance.  Your lawyer can add your spouse to title pretty easily when the refinance closes.  There should generally be no land transfer tax implications as long as the transfer complies with Ontario's spousal exemption. 

That said, it’s always wise to consult a lawyer and tax advisor for advice specific to your situation.

A 700 Credit Score Doesn’t = Good Credit

There’s more to a credit report than a score.

You can have good income and a 700 credit score (which is about average) and still not qualify for a mortgage.  The reason is that lenders generally look for one key factor: repayment history.

Suppose, for example, that you have a 710 credit score but only one credit account. Worse yet, that one account is a credit card that you’ve had for only two months.  Before that, you’ve had either no credit or bad credit (most likely, any bad credit would be from a few years ago, given your score).

In this case, your 710 score may not get the job done.

Lenders often want to see a minimum of 1-2 years of satisfactory payment history and at least two “trade lines” (loans or revolving credit accounts).  A trade line can consist of a major credit card with a $1,500+ limit (a rough rule of thumb), a revolving credit line, a reported lease, or an instalment loan (like a vehicle or investment loan).

So, if you have no credit and you hope to apply for a mortgage, start building credit pronto.  Get a credit card (even if it’s secured), a small instalment loan, a Futureshop card, whatever.  And don’t ever make a late payment.  Many lenders require squeaky clean repayment history for at least 1-2 years.

Of course, there are lots of exceptions to the above--including cases where a co-signor or alternative credit can make up for traditional repayment history.  (As noted in CMHC’s Newcomer program, “Alternative credit” can include things like proof of satisfactory rent payments and utility payments for 12 months).  Keep in mind, however, that alternative credit is an exception and not a rule.

Speak with a mortgage professional if you have questions about your own unique circumstances.

CMB Spreads Back to Normal

At the height of last fall’s credit panic, Canada Mortgage Bonds traded over 65 basis points above their regular government bond counterparts.

That’s significant because, like government of Canada (GoC) bonds, CMBs are supposed to be backed by the government and risk-free.

Things are much better now.  Investors are no longer jittery about Canada’s real estate and credit markets like they were 11-12 months ago. In turn, CMB spreads have shrunk back to a 21-basis point GoC premium (much more normal).

That, of course, is welcome news to the mortgage market. Not only are smaller CMB-bond spreads a sign of recovery, but they usually signify improving mortgage rates—particularly with non-deposit-taking lenders who rely heavily on the CMB for funding.

More from the Post

Inside the Tax Deductible Mortgage Plan (TDMP)

For several years, the Smith Manoeuvre has been used to convert non-deductible mortgage debt to deductible investment debt. Lots of twists on this strategy have evolved and one of the more successful ones comes from a company called TDMP.com.

We spoke with Sandy Aitken, President of TDMP, about how TDMP works and what drives his success in this market.

Here is that interview: 

Inside the Tax Deductible Mortgage Plan (TDMP)

New Bankruptcy & Consumer Proposal Laws

Canada’s bankruptcy and consumer proposal laws are changing today.

Among other things:

• It is becoming more onerous to file a bankruptcy if a consumer has "surplus income” or is a 2nd time bankrupt
• Automatic discharge after 9 months will no longer apply for those with surplus income
• The maximum for simple (aka., “Division 2”) consumer proposals has been increased to $250,000 from $75,000. That is apart from any principal mortgage. 

These changes are meant, in part, to encourage debtors to make proposals to creditors as opposed to going bankrupt.

From a mortgage perspective, one obvious implication is that people with surplus income will need to wait longer to get a mortgage after bankruptcy.

We had an opportunity to speak with Eric Putnam, a Senior Financial Coach with BDO New Beginnings, for details on how the new law will play out.  Eric is an expert on insolvency rules and regularly advises Canadians coast-to-coast on how to deal with debt and improve their finances.

Here is that interview:  New Bankruptcy & Consumer Proposal Law

Rates Drive Home Sales

CREA says home prices are up an average of 11.3% nationwide versus last year. Given the recession we just went through, that’s nothing short of stunning.

Economists say cheap mortgage rates are the main factor.

"I think [low mortgage rates are] having the effect of putting people into homes at an earlier stage than would have otherwise been the case," Scotia economist, Derek Holt, told the Globe.

Buoyant consumer confidence is also playing a role.  Yet, as CIBC economist, Ben Tal, believes, employment is more important than consumer confidence.

“If I don't have confidence that I will have my job tomorrow, you can offer me a 0% mortgage and I will not take it," he says. "If you know your job will be there, you jump on it. That's what's happening. People know this will not last forever."

But Holt warns:  "I do worry, longer term, not even that far out--two or three years from now--once short and long interest rates are probably higher...whether a lot of those mortgages will be as easy to carry as they are right now…”

"The kind of strength we've seen of late isn't necessarily sustainable."

(Globe Article)

Trust Your Gut

If you’re a mortgage planner, you can’t be afraid to trust your gut feeling when encountering unusual situations.

If a client hesitates when you ask them a direct question (like “How many properties do you own?” or “Where is your down payment coming from?”), be on alert.

If something just doesn’t seem “normal,” it’s your obligation to ask questions continuously until you feel confident you have the facts.  Then, send the client an email summarizing what they told you. That confirms you understood them correctly, gives them another opportunity to correct any misstatements, and puts everything on the record.

The last thing you want to do is send in a deal with inaccuracies, or worse yet, fraud.  When your internal alarm bells are going off, do whatever is necessary to protect your lenders, your clients, and your reputation.

RECA Study Sheds Light On Consumer Views

The Real Estate Council of Alberta (RECA) released a study this month about how consumers perceive mortgage brokers. 

Among other things, it noted that:

• “Consumer understanding of compensation and relationships in the mortgage brokerage industry varies considerably.”
• With brokers, respondents felt “they were receiving elevated customer service and obtaining better mortgage rates and terms than they would obtain independently.”
• “It was not so much the rate as the overall terms and conditions of the mortgage that is of key importance.”
• “Consumers have little concern for how a broker gets paid as long as it is not by them. Most consumers are aware that the lender pays commission.” 

With respect to that last point, regulators deserve credit for bringing compensation into the open through disclosure forms and other rules.  As with any advice-business, potential conflicts do exist in a minority of cases and consumers need to know about them.

In sum, RECA’s research was a very positive reflection on our industry.  Mortgage practitioners can take pride in the value they add and the degree to which professional mortgage planning has evolved.

_____________________________________________________

About RECA: Established in 1996, RECA regulates mortgage brokers and real estate professionals throughout the province of Alberta. Its mandate is to protect consumers, enforce Alberta’s Real Estate Act, and promote professionalism and integrity in the industry.

Updated Term Review

Here’s the very latest mortgage term review, updated to reflect notable rate developments of the past two months.

Brace for Aggressive Rate Hikes in 2010 Says Laurentian

That’s according to a research report last week from Laurentian Bank.

In it they state:

• We think most of the tightening will occur after the jobless rate has peaked (in the first half of 2010) and before total and core inflation get back to the 2% target (in mid-2011).
• The first hike cannot occur before the third quarter of 2010 in our view.
• An aggressive tightening – rather than a gradual one – will be necessary because rates are extremely low.
• A “measured pace” would not be appropriate to "normalize" rates when the starting point is virtually zero.
• “For argument’s sake, if we assume the Bank hikes by 25 basis points for each of the 12 fixed interest rates decisions in a year and a half starting in July 2010, the overnight rate would be only 3.25% at the end of 2011.”
• “3.25% could well prove to be too low for an economy that would be running at a decent pace with inflation already at the 2% target. This means we are likely to see a mix of 50, 75 and even 100 basis points hikes…when the time comes!”

In sum, Laurentian Bank suggests rates could jump 3%+ in the next few years, starting in 9-12 months.

Do others agree?  Well, if they do, not many are putting it on the record. 

Real estate bear, Garth Turner, is one exception.  He says BoC chief, Mark Carney, “knows he’s playing a high-stakes game of rate roulette, aware ultra-low rates can do as much damage as good.”  Turner believes Carney will be “adamant” about controlling real estate and inflation with higher rates.

If rates do start ramping up next year, it could have two meaningful implications:

1. Canada’s real estate market would no longer have interest rates as a support mechanism. 
   
   (This recent Royal LePage survey reinforces how critical low rates have been for sustaining home demand:  Link)
2. Highly-leveraged homebuyers (with little savings or equity) could be in for some hurt. 
   
   Let’s consider, for example, a homebuyer taking out a $250,000 mortgage (including default insurance).
   
   He or she jumps into a 3.35% three-year fixed rate with a 35-year amortization.  All is dandy.
   
   Then, rates rise 3% in the next 36 months and payments jump 39%…from $1,008 to $1,401. 
   
   If he or she has a high total debt ratio (for example:  42-43%), a $400 payment increase would inflate the borrower’s debt ratios like a balloon. That could:

A)  Strain or break the monthly budget; and/or,

B)  Force him/her to renew with the existing lender at “rack rates” (i.e.,  whatever average-Joe renewal rates the lender is offering at the time.)

The borrower would probably be unable to switch to another lender with a better deal because a 39% higher mortgage payment would push the total debt ratio over the 40-44% limit.  For similar reasons, he/she wouldn’t be able to refinance or move and port their mortgage. This would be the case even if income rose the typical 2.3% a year (the average annual income increase over the last 10 years). 

There are naturally exceptions to the above, but you get the idea.

Long story short, rates can and do go up.  Once we start seeing more robust GDP and inflation reports, you’ll see more economists increasing their rate projections.  While some people are advising to buy now because rates are low, not everyone should take that advice.

Commercial Real Estate Recovery Near, Say Execs

The Globe recently interviewed four of the biggest commercial real estate executives in Canada. 

They had this to say about commercial financing:

Pierre Bergevin, Pres. & CEO, Cushman & Wakefield

• “I think what we consider normal is between 18 to 24 months away."
• Lenders are still financing, but rates are 60 to 80 basis points higher than spring 2008.
• Financing is typically being capped at 65% LTV
• A replacement to commercial mortgage-backed securities must be found to add liquidity to the commercial market

Mark Rose, Chairman & CEO, Avison Young

• “Normal” is 12-18 months away
• The bellwether will be rising employment figures
• New forms of mortgage-backed securities will arise to fill the gap in commercial financing.
• Lenders will soon get comfortable with LTVs over 60-65%
• "All it will take is just one lender to jump in to get the ball rolling. Someone will see a competitive edge in making 70% financing available and everyone else will start to follow. Then it will go to 75% and then 80%.”
• “I doubt if we will ever get back to the days of 100% financing no matter how overheated the market gets.”

Stefan Ciotlos, Pres., CB Richard Ellis

• "My view is that recovery will start for real in the second quarter of 2010.”

David Bowden, Pres., Colliers International Canada

• "We have bottomed out but I think we are a year to 18 months away from real recovery."
• Private lenders are “leading the way” and “seeing great opportunities in Canadian real estate…I am certain their success will encourage traditional lenders and investors to follow.”

Xceed Votes For Bank Status

In a special shareholder meeting today, stockholders of Xceed Mortgage voted to convert to a chartered bank.

Pending OSFI approval, Xceed Mortgage will become “Xceed Bank” (“Banque Xceed” en Francais). 

Chairman, Ivan Wahl, didn’t have a firm timeline for federal bank approval, but said he hopes to operate as a bank by Xceed’s first quarter.

Earlier in the day, Xceed posted a $7.5 million quarterly loss.  Its stock fell 14.7% on the news.  Xceed attributed the loss primarily to a “difficult funding environment.” (See details in its report.)

Here are a few other nuggets from today’s earnings release. Xceed said:

• "Sufficient financing to fund uninsured mortgages remains either unavailable or uneconomic…”
• All new originations in its pipeline are insured mortgages. 

(This has been the case for a while with Xceed, which was a big subprime lender just a few years ago. It will try to get back to that line of business if/when it receives chartered bank status. Then it can use deposits, in part, to fund a new lineup of non-prime mortgages.)

• “We believe that being a deposit-taking financial institution will provide Xceed with a new avenue of accessing stable capital at a reasonable cost, which will significantly increase the company's underwriting capacity.”
• “Some Canadians, even if they have maintained their monthly mortgage payments, are still having problems renewing their mortgages if their overall credit condition has not improved sufficiently for them to qualify now for an insured mortgage. This is particularly true for non-conventional, uninsured mortgages.”
• Xceed “is unable to finance renewals of many uninsured mortgages at their maturity as the result of the market conditions, including for customers with good payment records.”
• For the time being, Xceed’s strategy is to continue focusing on “originating mortgages that qualify for insurance and for sale under the Canada Mortgage Bond Program…”
• Gains from new mortgages were “down as a result of spread compressions from intensified competition during the late spring and summer housing market.” 

(That’s not surprising. For many lenders, margins in the insured mortgage business are garbage, and slowly getting worse. There are various reasons for that:

1. Funding costs are still higher than normal for non-deposit-taking lenders.
2. Most insured mortgages are a dime a dozen. (i.e.,  For the most part, consumers see little differentiation among them.)
3. The ease of comparing mortgages on the Internet is driving borrowers to be highly rate-sensitive.

The net effect: eroding lender margins.

___________________________________________________

Xceed Mortgage Corporation, based in Toronto, is a Canadian provider of insured residential mortgages. The company has about 46 employees and $2 billion of mortgages/assets under administration.

Xceed's shares trade on the Toronto Stock Exchange under symbol XMC.

BoC Keeps Rates Steady

The Bank of Canada is holding firm on interest rates, as expected.

At its rate meeting this morning, the Bank kept Canada’s key interest rate at a record low 0.25%.

It reiterated expectations of flat rates until July 2010, saying:

“Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010…”

The Bank also seems untroubled about inflation, stating that the overall risks to its inflation projections are “tilted slightly to the downside.”

Looking further out, analysts are still mixed in their rate forecasts.  RBC Global Management economist, Patricia Croft, says "A rate hike is in the cards by the third quarter of next year."

She maintains: "By this time next year, the world could be in a vastly different place."

To that end, the BoC is somewhat in agreement, stating: “the second half of 2009 could be stronger than the bank projected…"

Scotia Capital economist, Derek Holt, however, feels there is no indication that inflation could spike anytime soon.  He says he wouldn’t be surprised if the Bank of Canada keeps rates on hold “for the remainder of 2010.”

Until we see more one-sided economic news, the longer-term future of rates will remain blurry.  In the short-term, however, prime rate is not going anywhere.

The BoC’s next interest rate meeting is October 20.

Home Trust Builder Program

Home Trust recently re-launched its conventional Builder Program. 

The program is designed (among other things) to help people finance the construction of a new home.

Here are a few of the details:

• The Builder Program is conventional financing. Therefore, you’ll need a sufficient down payment, as per below.
• Home Trust finances up to 65% of the total cost of a project, on an as-completed basis (i.e.,  Home will lend up to 65% of what the house will be worth after construction is completed.)
• Home Trust advances up to 75% of the land (lot) cost as a first draw
• The next three draws are typically 40%, 70%, and 97% minus the typical ~10% lien holdback
• Builders must have a good track record and be Tarion-approved (no self-builds allowed)
• The property must receive a Tarion Warranty
• The program is limited to major urban centers in Ontario

President, Nick Kyprianou, says Home is doing a lot of infill projects as well as new builds.  This makes the product a potential solution for people who plan to buy a home, tear it down, and put up a new one.

Incidentally, Home had a builder program before, but it wasn’t highly publicized.

Detailed guidelines are not presently available because Home Trust treats each deal on a case-by-case basis.  Speak with a Home Trust approved mortgage planner for complete details.

BoC Announces Rates on Thursday

The Bank of Canada’s next interest rate announcement is this Thursday.

Action Economics expects “the BoC to maintain the 0.25% rate floor and reiterate the conditional commitment to keep the floor intact through June of 2010.”

Bloomberg’s survey of 21 noted economists backs that up.  Every economist who was polled forecasts no change to the BoC’s 0.25% target rate.