Mortgage Bytes

A round-up of mortgage news and commentary from December…

General Mortgage News

  • Scotiabank Scotiabank seems to have stopped competing for mortgage market share, at least temporarily.  That’s according to the Financial Post.  Meanwhile, Scotia’s mortgage volume is up 11% YOY in its last quarter. Scotia is the #3 provider of retail mortgages in Canada and generates about 40% of new mortgages through its mortgage broker channel.
  • Finance Minister Flaherty on whether Ottawa will keep buying bank-held mortgages: “Generally speaking, if programs are not effective, you don’t continue with them.” (Hamilton Spectator)
  • “The best product to choose in a market like this is a 12 month convertible mortgage,” says broker Peter Kinch. The convertible he’s referring to allows you to swap into a variable-rate mortgage anytime. That may be of interest to those waiting for variable-rate mortgage discounts to come back.
  • Nova Scotia foreclosures are up 20% this year, to 438. That’s about 0.40% of the estimated 110,000 mortgages in the province.
  • Borrowers took to Facebook to protest banks’ reluctance to drop prime rate in line with the Bank of Canada’s key lending rate. (CityNews Story)
  • There are still ways to get 100% financing, but none of them make a lot of sense for most people. The “least bad” is getting a 95% LTV mortgage and borrowing the 5% elsewhere, but we usually don’t recommend it except for investors and/or those with sufficient assets. For most, it’s a risky market to have no equity in a home.
  • CMHC’s minimum credit score when using a borrowed down payment is 650.
  • 12 indicators of your property’s chances for price appreciation:  Post Story
  • Variable rate mortgages are more popular among older buyers than young, writes CEP.  Only 19% of buyers 34 or less got variables in the last year, versus 30% of buyers aged 35-54, and 27% of those over 54.

Commentary

  • TD-Bank TD’s Joan Dal Bianco on why the bank didn’t pass along the BoC’s full 3/4% interest rate cut December 8:  “We are still trying to earn something on this stuff. This has been quite the roller-coaster ride and it has not been too hot on the mortgage front. We just can’t take on the whole 75-point cut.” (FP)
  • “The rate of [mortgage] arrears was about double [today’s] level in the 1991-1992 recession, and even then we didn’t see widespread foreclosures. Keep in mind, any significant increase in foreclosures in Canada would likely be related to job losses and a weaker economy, and not affordability issues.” – Scotiabank economist Adrienne Warren
  • “The relatively low level of mortgage arrears in Canada is of no comfort to us. Delinquencies are a lagging indicator. Relying on them as a forecasting tool is like driving while looking in the rear-view mirror.” – Merrill Lynch economist David Wolf (CNews)
  • In a bad recession, CTV says, “the number of Canadians who could experience a foreclosure would top out at about three per cent.” That’s according to Tom Velk, an economics expert at McGill University.
  • CMHC CEO Karen Kinsley on the Globe’s risk mortgage story: Link
  • “There may be some people who could have purchased with a 40-year amortization and will be unable to if they can only get 35 years, but their numbers will be very small,” says CAAMP economist Will Dunning. “Rather than getting knocked out of the market, people will adjust their expectations — instead of buying something for $200,000, they buy something at $175,000.” (Chronicle Herald)
  • “Guidelines are no longer guidelines,” says Axioms’ Gord McCallum.  CMP reports that even though clients meet written lender/insurer guidelines, lenders are increasingly turning them down due for subjective reasons.
  • The credit crunch isn’t the end of the world for those with good credit. “There is a plentiful supply at reasonable rates for any borrower who can qualify,” says CAAMP President Jim Murphy.
  • “The people who are going to have difficulty in getting approved are the ones who have poor credit or a history of some late payments or collections. Note, I said difficult, not impossible. If your employment is such that your earnings come from self-employment, commissions, on–call and you don’t have a two-year history of income then your application will be more challenging, not impossible.” – Bob Quinlan, Mortgage Broker, Mortgage Alliance (Opinion250)
  • MetroNews on mortgage brokers.
  • The Edmonton Journal’s Gary Marr isn’t happy he chose a fixed rate. Story

Canadian Real Estate Trends

  • Home-Price-Trends Canadian home prices dropped almost 10% in November year-over-year. Sales were down 42%.
  • For the first time in years, condo builders are thinking seriously about building rentals. (Globe story)
  • Re/Max expects a 2% drop in home prices in 2009.  That’s it?
  • “I also expect many will wait out the market until the spring, for general economic and financial market conditions to (hopefully) stabilize.” – Scotiabank economist Adrienne Warren
  • This quarter is the first in 22 quarters where the absorption rate for big-city office space has fallen. (CEP)
  • Canadian housing starts are at a 7-year low.
  • Windsor, Ontario’s rental vacancy is 14.6%, followed far behind by St. Catharines-Niagara, ON at 4.3%, and Oshawa, ON at 4.2%. (CTV)
  • Vancouver, by contrast, has under 1% rental vacancy.
  • “There is no doubt the new City Land Transfer Tax introduced in 2008…had a negative impact on this year’s [Toronto real estate] sales. Only the politicians who imposed the tax seem surprised!” – Re/Max Condos Plus
  • Vancouver home sales are down almost 70% YOY.
  • Office space vacancy projections:  Colliers
  • Housing costs by city, as a percentage of the typical person’s gross income.
    • Vancouver:  74.8%
    • Toronto:  53.3%
    • Calgary:  47.3%
    • Ottawa:  43.3%
    • Montreal:  40.4%

Miscellaneous

  • Mortgage-Quiz Test your mortgage knowledge with this quiz from Genworth.  Only 25% of people get 80% or more.
  • The average Canadian has 12 mortgages in their lifetime. (Source: Mortgage Architects)
  • We all need to find a way to give back.  Chris Dopp, a mortgage broker in Collingwood, ON has his own way.  Dopp gave away 250 Christmas dinners to the needy last week.
  • Contrary to the government’s moratorium, zero-down loans haven’t disappeared. They’ve “simply being replaced by other products that could, in fact, be considered more risky to the client.” (CMP) One example is when a homeowner borrows the 5% from a high-interest line of credit as his/her down payment. Another way is to get a cash-back downpayment mortgage. Both methods are higher risk than the insured 100% financing they replace.
  • RBC Bank’s U.S. subsidiary provides up to 75% financing for Canadian’s buying in the U.S. They also recognize Canadian credit reports. (National Post)
  • There was a mortgage broker in Halifax who was recently telling people with bad credit to sell their homes before their mortgage matured. Otherwise, he warned, skittish lenders may not renew them due to the credit crunch. Well, unless your situation is really bleak, panic selling may be extreme. Before you take action, speak with a mortgage planner four months before your renewal date to see what can be done.
  • Buying a new home? Here are some fees to consider.
  • InYourBestInterest.com’s Hank Cunningham has a new book out, familiarly entitled In Your Best Interest. Apart from great fixed income coverage, it discusses the ABCP and subprime mortgage mess and talks a bit about Canada Mortgage Bonds.
  1. On the quiz, the only two questions I got wrong was the payment frequency one about which one pays off the loan fastest. I chose the Weekly Accelerated, but their ‘correct’ response is Bi-Weekly Accelerated. Could you explain why Bi-Weekly pays off a loan faster than Weekly?
    The other was the debt service ratio question, I figured they would round down as the housing debt service ratio I thought was 32% as a general rule, so I put 30%, but their answer was 40%. I guess I should have figured that one out coming from a business who makes money off mortgages.

  2. Your GDS (gross debt service) shouldn’t exceed 32%. The GDS only factors in your housing costs (mortgage payment, property taxes and heating expenses).
    The TDS (total debt service) shouldn’t exceed 40%. The TDS factors in your housing costs as well as all your other monthly credit related payments (car loans, credit card payments, etc).
    Having said that, the Genworth quiz wanted to know what percentage of your gross income can be used towards housing costs and other monthly payments which is the TDS so 40%.

  3. A weekly payment and a monthly payment will pay off a mortgage within days of each other. The weekly payment will save you roughly $2-5,000 over the life of the mortgage so not much of a difference. (The NPV difference would be zero)
    as far as payment “acceleration” goes if you increase your payments you will pay off your mortgage faster. It’s a simple fact.
    If you were to “accelerate” your monthly payment you would pay off your mortgage within days of an accelerated weekly payment and the difference in interest paid would be about $2-5,000.
    Borrowers should always setup their payments to come out on the same(or next) day as their paycheque if you get paid semi-monthly make semi-monthly payments if your paid monthly make monthly payments. That way your less likely to bounce payments. And if you want to pay your mortgage off faster simply increase your payments.

  4. Traciatim,
    As for the weekly accelerated vs bi-weekly accelerated, I’m not so sure why they assume bi-weekly saves more interest. To the best of my knowledge, bi-weekly accelerated and weekly accelerated both save the same amount of interest since they both allow the homeowner to make one additional month’s worth of payment.
    What most people don’t know is that if your mortgage allows for additional lump sum payments (most mortgages allow for up to 10-15% of the mortgage to be paid per year) then the best option is to use a monthly payment as opposed to an accelerated bi-weekly payment. Why? Because a monthly payment reduces your overall income commitment. Since mortgage interest is calculated semi-annually, you would simply need to setup an extra payment every 6 months with the money you would have been putting on the mortgage for a bi-weekly accelerated payment. The problem with this approach is that most people aren’t financially responsible enough to keep the money in a savings account and will spend it so by forcing them to put it on the mortgage, it ensures that the money is used for the mortgage and not elsewhere.
    Here’s a scenario to demonstrate:
    Monthly payment: $1000
    Total mortgage payments per year: $1000 * 12 = $12,000
    Accelerated bi-weekly payment: $1000/2 = $500
    Total mortgage payments per year:
    $500 * 26 = $13,000
    Average payment per month: $13,000 / 26 = $1083,33
    Monthly payments + lump sum payment every 6 months:
    Monthly payments: $1000
    Deposit $83,33 per month into a savings account and then make a lump sum payment of $500 every 6 months.
    Net effect: You earned a few dollars of interest on the $83,33 per month (probably $5 or $6 every year) instead of allowing the bank to earn money on that amount. However, if your situation changes, you have an extra $83 available per month that isn’t committed to a mortgage.
    My wife and I took it a step further by choosing a 35 year amortization instead of a 25 year amortization. This further reduces our monthly income commitment but we are putting aside the equivalent amount that would allow us to pay off the mortgage in 20 years. In other words, even though our mortgage payment was initially $1250, we have been putting aside an extra $500 a month and making $3000 lump sum payments every 6 months. We simply place the $500 into a savings account to earn interest in the meantime.

  5. Patrick not sure that makes sense
    mortgage interest is compounded semi-annually but is calculated either daily or based on your payment period.
    If you pay down the mortgage you earn a after return of whatever your mortgage rate is.
    If you put the money in a savings account you earn a after tax return of 1-2%.
    Kinda makes more sense to pay the mortgage.

  6. Patrick, flawed example. Your not taking into consideration the timing of the payment, i.e. paying extra towards principal bi-weekly, weekly, vs. once at the end of the year. You save more money paying the principal down every week or. bi-weekly vs. paying towards principal once a year.

  7. On the note about Banks not cutting prime rate in tandem with BoC rate cut:
    I’m sure if the swing was the OTHER WAY (up), they would have no qualms matching it, basis point for every basis point.
    Is that hypocritical or am I too simplistic? Does anyone have historical data on what banks did to their prime rates when BoC has raised/lowered theirs?

  8. Really? When I spoke to the bank, they told me that the interest was calculated twice a year and that the interest added was based on the balance owing at that time. In other words, if I owe $250,000 then they calculate the interest for 6 months and then add it to my mortgage and I pay that interest over the next 6 months. Based on that, I was making an additional payment the month before the calculation took place to reduce my balance owing just before the interest would be added. Although now that you mention it, I must have either misunderstood or have been misled since you do make me realize that despite credit cards having monthly comopounding interest, the interest is still calculated on the daily balance owing. I guess I’ll have to rethink our approach.

  9. Curious,
    If what has been said is true, then wouldn’t weekly accelerated be the better interest saving option over bi-weekly accelerated? Any reason why their quiz indicates otherwise? (is it a mistake on their end?)

  10. It looks like the quiz author made a small error in the question regarding payment frequency.
    Accelerated weekly pays down one’s mortgage the fastest. Albeit, the difference versus accelerated bi-weekly is really minimal.
    For example, take a $100,000 5-year mortgage at 5.00% amortized over 25 years. After five years the balances in each case are as follows:
    Accelerated Weekly: $85,148.39
    Accelerated Biweekly: $85,168.66
    (Calculations courtesy of Filogix Expert)

  11. Question. Let’s pretend for the time being I can afford to put an extra, let’s say, 200 dollars biweekly on top of my usual 700 dollar acc biweekly mortgage payments. Would it be better to make these lump sum payments biweekly so 100% of the $200 is going towards my principle, or better to just increase my actual mortgage payment $200 biweekly (I think that would mean a bit going towards both interest and principle, I’m pretty sure it’s all not going straight to principle paid this way). I am getting different answers from different people I ask at the bank, I don’t know why the answer is not consistent. I understand it’s more convenient to automatically increase the payments, but it’s not a big deal for me to make lump sum payments since I do it online and have to pay other bills anyway at the same time. Any thoughts?

  12. Hi Cora
    Either way will post directly to principal (its pal when talking about debt). Just bump up your bi-weekly payment.
    To calculate your interest take the principal outstanding from your last payment. multiply by your interest rate/365*14. This will roughly give you your interest charge for 1 bi-weekly period. lets say it totalled $500
    If you make your regular payment of $700 that means $500 will go to interest $200 will go to principal.
    If you bump up your payment or make a lump sum payment it won’t change the amount of interest charged so the full $200 will go directly to principal.
    One thing to consider is your payment privileges. I don’t know what yours are but generally your allowed to increase your payment up to 20% and/or make a lump some payment of 20% of your original mortgage balance. If you increase your payments it exercises the first privilege if you make a lump sum payment it exercises your second privilege.

  13. John, thank you so much for explaining this as clearly as you did. I also appreciate the spelling correction. No one likes walking around with “egg” on their face and have no one point it out :) I hope you and other posters enjoy their New Year tomorrow!

  14. Hi Cora,
    john explained it well.
    I guess the only real difference between the two scenarios is emotional. Some who do not have the mindset or the diligence to save or periodically pay extra payments will find, if automatically widthdrawn, suit their needs. Others want to be in more control (and vary their extra payment based on cash flow). Other want to pay it faster and don’t want to be bothered with the extra transactions, etc..

  15. Am I the only one worried by this article?
    Housing costs/GDS by city, as a percentage of the typical person’s gross income.
    Vancouver: 74.8% Toronto: 53.3% Calgary: 47.3% Ottawa: 43.3% Montreal: 40.4%”
    If the lending criteria ceiling is 32% GDS. What will happen when we need to renew our terms? Who will lend to someone with 40% GDS, or 75% GDS?

  16. I wouldn’t be too worried – household GDS would be a more telling measure than an individual’s GDS.
    Although I don’t have stats to back it up, it would seem to be a reasonable assumption that single-income households would be overrepresented among renters, and dual-income households would be overrepresented among homeowners.

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