Mortgage Rates & Mortgage Broker News in Canada

Canada Prepared For Rising Rates: CAAMP

Claims that Canadians are taking out risky variable-rate mortgages and borrowing more than they can afford “are not based on actual data” and “are misinformed.” That’s according to CAAMP, who issued this study of 40,000 mortgages from 2009:  Revisiting The Canadian Mortgage Market…

Despite rising home prices, first-time mortgagors took out “far less” than they could afford last year, says CAAMP.

"The vast majority of Canadian mortgage borrowers are not taking on undue risks. They have factored rising interest rates in to their mortgage decisions," stated Jim Murphy, president and CEO of CAAMP.

CAAMP ran simulations to estimate what would happen if the Bank of Canada hiked rates 3% over two years (and fixed rates rose 1.25%).

It found that income gains should offset much or all of the increases in mortgage payments that most Canadian’s would experience.

"The bottom line from the simulations is that even though mortgage payments will probably rise for most borrowers, the increase in their incomes will more than offset the higher payments," said CAAMP chief economist Will Dunning. “All in all, the degree of risk from rising mortgage rates appears to be small and manageable,” he writes.

A key finding in the report was that 86% of Canadian home buyers took out fixed rates in 2009.  Here’s a breakdown of the terms they selected:

• 5% chose 1- to 2-year terms
• 20% chose 3-year terms
• 5% chose 4-year terms
• 70% chose 5- to 10-year terms

Other notable findings from the study:

• 5%:  Number of Canadian households who purchase a home each year.
• 50-60%:  Number of those who are first-time homebuyers.
• 0.03%:  Percentage of first-time home buyers (compared to all home owners) that are “pushing the envelope” by getting mortgages they may not be able to afford.
  
  CAAMP estimates these “at-risk” borrowers amount to 4,000 households out of 13,250,000 in Canada.
  
• 10%:  Annual growth rate of mortgage debt in the last five years.

”This growth rate was far in excess of growth of incomes and therefore mortgage debt has become a growing burden for Canadian households,” CAAMP said.

CAAMP attributed this growth to rising home prices and increased home ownership. 70% of households now own homes, versus 63.6% in 1996.

• 5.425 million:  Number of Canadian mortgage holders.
• 22.3%:  Average GDS ratio of a home buyer in 2009
  
  32% is the traditional GDS maximum. This stat is a pleasant surprise. According to CAAMP’s findings, most Canadians appear to be underbuying, not overbuying--as some critics charge.
  
• 32.8%:  Average TDS ratio of a home buyer in 2009
  
  Similar to GDS above, this is well below the standard. 40-42% is the typical TDS maximum.
  
• 0.44%:  Current percentage of mortgage holders in arrears.
  
  CAAMP says arrears averaged 0.50% in the 1990s. Mortgage arrears are highly correlated with Canada’s employment rate. Reduced hours/pay and separations/divorce are secondary factors. CAAMP says it “appear(s) most likely that the arrears rate is close to peaking.”

Dunning closed the report by writing: “Virtually every Canadian who is in a position to buy a home and qualify for a mortgage is well-educated and capable of assessing what is in their best interests, of looking forward, and of anticipating threats to their financial well-being.”

Let’s keep it that way by advising homeowners to remain conservative.

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Sidebar:  More details on the study above:

• Data was collected from a CAAMP survey of its corporate members
• Sample size was 40,000 mortgages totalling $10 billion
• This represents about one-sixth of total mortgage activity for home purchases in Canada.
• The mortgages were all funded in 2009
• The data included purchases only. No renewals or refinances.
• The vast majority of mortgages in the dataset are high-ratio and insured.

CAAMP’s Annual Mortgage Market Report - 2009

If there’s one mortgage report worth reading each year, it’s this one. CAAMP’s Annual State of the Residential Mortgage Market in Canada survey is perennially packed with timely statistics and trends.

Here are some of the more notable ones…

The mortgage market:

• 5,400,000:  The number of homeowners with mortgages.
• $186 billion:  Total estimated new mortgage volume this year (down 14% from 2008).

Mortgage activity:

• 27%:  Percentage of mortgage holders that got a new mortgage, switched their mortgage, or refinanced in the past 12 months.
• 47%:  Ratio of people who got mortgages this year with an amortization over 25 years. (Last year the number was 50%.)
• 34%:  Share of new mortgages arranged by brokers (vs. 35% last year).
• 88%:  Number of people that stayed with their current lender when renewing or refinancing.  (Only 12% left! Many of these people lost money by choosing to sign their lender’s renewal letter. Remember, renewals are negotiable. Ask your lender for their best deal and then call a mortgage planner to compare.)
• 9%:  Percentage of Canadians “dissatisfied” with their present mortgage. (For the many who choose to blindly stay with their lender, ignorance is bliss.)

Homeowner equity:

• 48%:  The average loan-to-value of Canadian mortgages.
• $130,300:  The average mortgage balance in Canada.
• 80%:  The ratio of mortgage holders with over 20% equity. (This is a somewhat reassuring statistic for people who fear a bursting real estate bubble.)
• 1%:  Approximate percentage of Canadians mortgage holders whose home is worth less than their mortgage

Typical mortgage terms selected by Canadians:

• 62%:  Chose 4- or 5-year terms (56% chose 5-year terms)
• 11%:  Chose terms over 5 years
• 27%:  Chose terms less than 4 years

Type of rate:

• 68%:  Chose a fixed rate
• 27%:  Chose a variable rate
• 6%:  Chose a hybrid mortgage (part fixed / part variable)

Rate shopping:

• 1.91:  The number of quotes people get (on average) when shopping for a new mortgage
• 4.74%:  The average 5-year fixed mortgage rate over the past 12 months
• 1.23%:  The average 5-year fixed discount that banks offered over the past 12 months

Miscellaneous:

• 30%:  Ratio of mortgages funded by mortgage-backed securities (MBS). (This is a huge leap from 17% two years ago.)

CMHC’s 2009 Housing Observer

CMHC released its 2009 Canadian Housing Observer yesterday.

Most of its findings are dated back to year-end 2008, but it contains some interesting tidbits nonetheless.

One key takeaway is the massive importance of Canada’s real estate industry. It’s a point that can’t be overemphasized--with housing-related spending accounting for 1/5 of our economy.

The mortgage business is no small potatoes either.  As of December 31, 2008, there were $903 billion worth of mortgages outstanding in Canada.

If you’re a trendspotter, you’ll find it interesting that chartered banks approved 74% of outstanding residential mortgages in 2008.  That’s down from 2007, when the number was 79%. (Five percentage points of market share is a sizeable change for one year.)

It will be interesting to see if banks regain some share in 2009. Banks had an enormous advantage over non-banks in terms of funding costs this year. That’s due to banks being flooded with low-cost customer deposits (as investors pulled out of other assets). As a result, 2009 saw banks become more aggressive than ever.

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.

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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.

Boring But Effective

That’s how a recent IMF paper characterized Canada’s mortgage market.

Among other things, it compared Canadian and American mortgages and listed several key differences.  Here are the big ones:

• US mortgages typically don’t have pre-payment penalties.  Canadian mortgages usually do (except for “opens,” which are more expensive).
• Canadian mortgages are portable. Portability is rare in the US.
• US mortgages often have higher origination costs (thanks to “points” and fees) than Canadian mortgages.  According to the study, Americans pay $3000-$5000 on a typical purchase, while Canadians pay about $1800.
• Rate holds are usually free in Canada. American lenders commonly charge for them.
• Mortgage insurance in Canada covers the entire loan amount. In the US, it usually only covers losses above a LTV ceiling (above 80% for example).
• In Canada borrowers must pay the entire insurance premium up front. In the US, borrowers pay it monthly and can cancel it when LTV falls below the required threshold (e.g.,  80%).
• In foreclosure, Canadian lenders have recourse in a borrower’s non-home assets. In the US, that’s usually out of the question due to legalities or costs.
• Most US mortgages require payments to be made at the beginning of every month. In Canada, we have weekly, bi-weekly, semi-monthly, and monthly payment options.

Some other notable statistics and conclusions:

• Deposit-taking institutions held 62% of Canadian mortgage debt at the start of 2009.
• Just 29% of Canadian mortgages are securitized, versus 60% in the US.
• 45% of Canadian chartered bank mortgages are insured.
• Home ownership in the US and Canada are both about 68%, despite US homeowners receiving a mortgage interest tax deduction.
• Canada has fewer options than the US when it comes to mortgage terms over 5 years. The author says that’s due to a five-year maturity cap on government-guaranteed deposit insurance, and the Interest Act’s prepayment penalty limit.

CMHC’s 2009 Mortgage Consumer Survey

CMHC recently surveyed 2,507 new mortgage consumers.  Here’s what they found:

• 70%:  Feel now is a good time to buy a home in Canada
• 1/3:  Expect to move in the next five years
• 73%:  Used their own resources (savings, equity, or RRSP) for their down payment.
• 1/3:  Have previously requested their credit score from a credit bureau.  (Wow.  2/3 have not?)
• 87%:  Believe that 40% is the maximum ratio of monthly gross income that one should spend on debts and housing (It’s interesting that so many people know this. This 40% figure is, of course, a general lender guideline for maximum TDS.)

What matters to homeowners:

• “Getting the best rate”:  This was the number one thing that made customers satisfied with their lender or broker.
• “Service”:  The top reason driving customer satisfaction with brokers.
• “A good relationship”:  The top reason behind customer satisfaction with lenders.

Other interesting market share stats:

• 90%:  The number of people up for renewal who stayed with their existing lender.  That compares to 83% in 2007.  (This is absolutely stunning. Either lender retention departments are getting much better or people are getting more complacent.  In this competitive market, you’ve got to shop around—or, better yet, get a professional to do it for you.)
• 25%:  The number of mortgages originated by mortgage brokers. CMHC said it was 27% in 2007 (See CMHC’s 2007 Mortgage Survey).  (The banks seem to be making a comeback for the time being. They’re most definitely getting more competitive. In addition, we’re seeing a lot of smaller lenders harness the power of the net to drive new business.)
• 44%:  The number of first-time buyers who got their mortgage through a broker.  (This is up sharply from 35% in 2007.)

Click to enlarge. 

Source:  The chart and all data are courtesy of CMHC.  For a summary of CMHC’s complete findings, click here.

Pre-payments Less Critical Now: Prospera

“The ability to make lump sum [mortgage] payments is much less critical to the consumer – especially in today’s economy.” 

That’s the conclusion of Prospera, a prominent BC credit union.

Prospera commissioned a survey of 603 BC adults in April.  The poll was conducted on Prospera’s behalf by Ipsos Reid. 

Among other things, it found:

• 60% of respondents under 45 years old said they’d be willing to forgo some mortgage payment flexibility in exchange for a lower interest rate.
• 59% were unaware that mortgage rates are typically higher when large lump-sum pre-payment privileges are offered.
• Mortgage payments comprise about 25% of the average Canadian family’s monthly expenses.

These figures seem believable enough.  From the inquiries we get, most borrowers seem less and less concerned about big pre-payment privileges, despite their potential value. 

On the other hand, people do seem to want at least some level of pre-payment ability (5-10% for example).  Very few tell us they don’t care about pre-payments “at all.” 

(Then there are those who absolutely must have a 15-20% lump sum pre-payment option.)

Not coincidentally, in conjunction with releasing these survey results, Prospera launched a brand new no-frills mortgage.  It’s geared to people who “know they will not take advantage of pre-payment privileges and would rather have a lower interest rate.”  Prospera calls it the myStyle Mortgage and it’s currently priced at 3.59% for a 5-year fixed. 

The myStyle Mortgage is just the latest in a series of no-frills launches over the past year.  It’s been said before and we’ll repeat it.  No-frills mortgages are a growing trend and lenders who don’t offer them will give up a lot of revenue over time.

Crisis Is Over: CIBC’s Avery Shenfeld

“America’s banking crisis is over,” says CIBC economist, Avery Shenfeld.

He says the market now believes “the fear of failure has been shaken out of the system.”

Avery made the remarks in a research report released Friday.  He expects the US banking crisis will soon “fade out as a concern for anyone other than the affected banks’ shareholders.”

As we reported in Saturday’s TED spread post, some lending indicators do seem to be getting back to “normal,” albeit slowly.  That said, it could be a while before things like variable-rate premiums and lending criteria loosen up to their pre-2008 levels.  Some industry watchers feel the latter (lender guidelines) could remain tighter than normal for a few years or more.

CAAMP Spring 2009 Mortgage Survey

CAAMP recently released its annual spring survey of the mortgage market.  The report is always chock full of notable mortgage stats.  Below are some of the highlights…

Mortgage Originations

• 46%:  The percentage of borrowers securing new mortgages who used a broker (43% used a major bank.)
• 61%:  The ratio of mortgagors who renewed their existing mortgage at a major bank (It’s too easy to sign a renewal letter. Don’t be tempted!)

Housing & Mortgage Market

• $138,000:  The average Canadian mortgage
• 55%:  The percentage of Canadians who think it’s a good time to buy a home right now
• 5%:  The approximate number of Canadians who actually expect to buy a home soon
• 9.1 million:  The number of homes that are owned in Canada
• 5.35 million:  The number of homeowners with mortgages (i.e., 5.35 million people on title to a home who have a mortgage in their household)
• $739 billion:  The total of all outstanding mortgages on these homes
• $150 billion:  The estimated volume of new mortgage approvals in 2009 (including new mortgages, transfers of existing mortgages between lenders, and refinances)

 

Home Equity

• 2%:  The percentage of Canadians with negative home equity according to CAAMP (Admittedly smaller than we expected.)
• 72.3%:  The average home equity in Canada (67% greater than in the U.S.)
• 48.7%:  The average loan-to-value in Canada
• 15%:  The percentage of Canadians cashing out equity in their homes over the past 12 months (57% of these people used part or all of the funds for debt repayment/consolidation; 45% used part or all for renovations or home repair)

Mortgage Characteristics

• 36%:  The percentage of borrowers who opted for variable-rate mortgages in the last 12 months (With rates near a bottom, the trend towards variables may reverse--if it hasn’t already.)
• 68%:  The percentage of Canadians with fixed-rate mortgages
• 1.68%:  The average discount borrowers received off of posted 5-year fixed rates (This seems to reflect a time when spreads were wider. With posted rates at 5.25%, there is no way the average Canadian is getting 3.57% on a 5-year fixed today.)
• 4.83%:  The average Canadian’s mortgage interest rate (down from 5.41% in CAAMP’s fall 2008 survey)

Amortization

• 17%:  The proportion of current mortgages with an amortization over 25 years
• 46%:  The percentage of mortgages initiated in the last two years with an amortization over 25 years

Market Health

• 18%:  The number of households with family members who lost a job in the last six months
• 3%:  The percentage of mortgagors indicating they could not afford a $50 increase in their payments
• 0.36%:  The ratio of mortgages in arrears for over 90 days (still steady and modest)

CAAMP President, Jim Murphy, believes Canadians have what it takes to withstand economic challenges:  “With only a very small number at risk of not being able to pay or refinance their mortgages, our overall market is very strong.”

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About This Survey

According to CAAMP, data used in this report was obtained from various sources, including an online survey of 2,000 Canadians. One-half of the sample (1,000 Canadians) were home owners with mortgages and the remainder were renters, home owners without mortgages, or others who live with their families and are not responsible for mortgage payments or rents. The survey was conducted by Maritz (a national public opinion and market research firm) for CAAMP, during March 2009.

About CAAMP

Established in 1994, the Canadian Association of Accredited Mortgage Professionals (CAAMP) is Canada’s national mortgage industry association. CAAMP has over 12,000 members, consisting of mortgage lenders, brokers, insurers and other industry participants.

Mortgaging near the Edge

People aren’t locking in mortgage rates far enough in advance.

That’s the conclusion of a new study by ING. 

ING’s research was performed by Angus Reid and they found the following:

• 40% of Canadian mortgagors surveyed said they secured their mortgage rate just 30 days or less before closing.
• 27% waited until 31-60 days before closing.
• Those who instead locked-in 120 days in advance saved 0.18%--or $1,800 over five years--on average. (Assuming a $200,000 mortgage and 25-year amortization)
• 27% of mortgage holders let their mortgage auto-renew without researching a better rate.  Disgraceful!  In Quebec the number was 36%.

ING VP of Lending, Marting Beaudry, says, “Securing a rate guarantee, even before you start looking for a new home or your existing mortgage comes up for renewal, is a quick and simple way to save your money on mortgage interest payments over the long term.”

That is absolutely true and ING has one of the best rate-holds in the business.  However, borrowers are far smarter than some give them credit for.  They’ll likely find an even better way. 

People know that 30-day “quick-close” specials are where they’ll get the best rates. It is not a stretch to foresee borrowers making increasing use of rate-holds as a free option, and then moving their application to whomever has the best “quick-close special” for their needs once they’re within 30-days of closing.

It’s a practice that may tick off a lot of lenders because there are real costs involved in underwriting applications and hedging rate holds.  Cancellations are expensive.  If adopted en masse, this could also throw many mortgage planners’ “funding ratios” right out the window.