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605 Brock Street N, Unit 12 Whitby, Ontario L1N8R2

Canadian Mortgage News


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The Future of 85% LTV Bundles

Posted on October 11, 2013 at 10:34 AM Comments comments (19)
Federally-regulated lenders cannot lend more than 80% of a home’s value without the borrower getting mortgage insurance. But a few banks have developed a way around that.
What they do is loan the borrower 75-80% loan-to-value as a first mortgage. Then they facilitate a 5-10% LTV second mortgage with a separate private lender.
This allows for financing totalling 85% LTV with no insurance fee.
Optimum Mortgage, a division of Canadian Western Bank, had just such a product—until recently. It was called the Opti-85 Bundle, and here’s why it was pulled from the market.
According to Lester Shore, Vice President, Optimum Mortgage:
“The interpretation of the maximum loan-to-value ratio section of regulation B20, specifically the section that deals with structuring a mortgage or a combination of a mortgage and other lending products that exceeds the maximum loan-to-value limit, is presently under review by the regulator.
With an abundance of caution, we’ve chosen to withdraw the Opti-85 Bundle Program until such time that the regulator provides further clarification on this section.”
Brock Kruger, a spokesperson for banking regulator OSFI, says that OSFI does not prevent combo mortgages in general. He adds that mortgage combinations totalling 85% LTV “could technically be onside, but this is highly dependent on other conditions. For example, one must also verify whether the principles laid out in (regulation) B-20 are being met in their entirety.”
Equitable Bank is another lender offering an 85% LTV bundle mortgage. We haven’t heard any talk whatsoever about it pulling this product. Indeed, given Equitable’s conservative nature and prudent underwriting, one has to assume that it believes it is in full compliance with B-20 as written.
Home Trust used to offer an 85% bundle but stopped a while back. “We were being prudent from a risk standpoint,” says President Martin Reid. (Home Trust does, however, allow second mortgages behind its first mortgages.)
Interestingly, Reid notes that 85% bundle mortgages actually perform better statistically than standalone 80% LTV mortgages. That’s because “the lender in second position tends to keep the mortgage current.” The second mortgage lender doesn’t want the borrower to default, in which case the first mortgage lender would have priority if the property was foreclosed on.
In any case, hopefully Optimum puts its Opti-85 mortgage back on the market. It would be sad to see these products regulated out of existence. 85% bundles offer a valuable alternative for borrowers who don’t qualify for traditional insured mortgages, and who don’t have a 20% down payment.
The truth is, these products are not a hazard. They are carefully underwritten and the bank or trust company (who’s lending against the first mortgage) does not incur a meaningful degree of extra risk.
It is the second mortgage lender, which lends its own uninsured capital, that takes the brunt of the risk. And, as mortgage professionals all know, second mortgage providers tend to be extra vigilant risk-conscious lenders.
Rob McLister, CMT
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Rate Hikes and Housing: TD Research

Posted on September 8, 2013 at 10:10 AM Comments comments (0)
August 30, 2013 Rate Hikes and Housing: TD Research
In just a few short months, long-term mortgage rates have burst higher by almost ¾ of a percentage point. People naturally want to know if the hikes are sustainable, and how they’ll affect the overall housing market. TD Economics weighed in on these points in a report last week. Here’s a quick overview of the implications TD foresees, and some observations of our own…

  • Future Rates: TD projects a 2.25 percentage point jump in 5-year bond yields by 2017. That would peg 5-year fixed rates at roughly 5.74%. Given economists’ poor forecasting record, this number is a pure shot in the dark. But it’s still a worthwhile number to use when stress testing your mortgage. That aside, one TD assertion that most would agree with is that future rate “increases are expected to be…gradual.”
  • Securitization: The report notes that, “…The recently-announced changes to the amount of mortgage backed securities that will be guaranteed by CMHC will…lead to somewhat higher costs in funding for financial institutions.” As we wrote on August 6th, this impact won’t be extreme for most lenders (and consumers).
  • The Variable Advantage: TD concludes that even if one assumes an abnormally high variable rate like prime + 1.00%, a variable-rate mortgage has still “yielded a lower average interest rate over a five year term (than a 5-year fixed) since the late 1990s.”
  • The Best Rate Forward: According to TD’s analysis and rate projections, “…Locking into a 5-year mortgage rate would yield the lowest average interest rate over the next five years.” But TD analyzes just four other term scenarios including a 5-year variable and five consecutive 1-year terms. TD’s report does not touch on options like the 4+1 strategy (i.e. choosing a 4-year fixed and renewing into a 1-year fixed). The 4+1 is a decent play today with 4-year fixed terms near 3.09% (i.e., 30 bps below most five-year fixed offers). If you do the math, one-year rates would need to be above 4.80% at renewal for a 5-year fixed to beat the 4+1 strategy. That’s over two points higher than today, which makes it a good gamble given how modest inflation and growth have been (and are projected to be).
(Source: TD Economics)
  • Rate Impact on Housing: TD’s research finds that “every 1 percentage point increase in interest rates leads to an immediate increase in sales of 6 percentage points as buyers rush to take advantage of lower rates, followed by a 7% decline in the months that follow. Hence, the net impact is a 1 percentage point permanent decline in existing home sales due to every 1 percentage point increase in interest rates.” By our calculations that’s about 4,500 lost sales a year per 1 point of rate hikes (based on CMHC’s sales projections). That is not catastrophic by any stretch, and frankly it seems like an underestimate, if anything.
  • Income Gains: TD expects that 3-4% income growth will “help offset much of the impact of gradually rising rates”
  • Mortgage Affordability: The report states, “…Affordability using the 5-year posted rate (is) at the worst it has been in almost 13 years. And, if 5-year interest rates were at more normal levels of around 7%, housing would be unaffordable to the average Canadian household.” There’s just one caveat. That statement is based on posted rates (i.e. those rates that no one pays). “Using the 5-year special mortgage rate, housing affordability in this country is actually at its most favourable level since early 2000’s,” TD says. How long it remains that way is another question. Complacency can be devastating to one’s budget, so mortgage stress testing is once again key here.
Here is TD’s full report link if you’d like to read more. Rob McLister, CMT

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Variable vs. Fixed Rates - The Latest

Posted on June 5, 2013 at 10:46 AM Comments comments (0)
As many as 85% of new mortgagors are choosing fixed rates, says CAAMP. It makes you wonder, what is it going to take to get that number back to its historical average of ~65%?
For one thing, the fixed-variable spread (i.e., difference between fixed and variable rates) needs to widen. With today’s typical 5-year fixed at 2.84% and discounted variables at 2.45%, that spread is currently ~39 basis points.
As a rough rule of thumb, when the fixed-variable spread hits 100 basis points, demand for variables noticeably increases. Spreads are currently a ways off from that point, but we may inch closer this summer.
Despite prime rate being stuck at 3.00% for 1,000 days now, floating rates have slowly been improving. They’re being aided, in part, by falling short-term funding costs. The 1-year LIBOR (chart below) is a very rough proxy of these. (Click to enlarge – Chart by Quotemedia) The proof is in lender offers, and the latest comes from RMG Mortgages. Last week it launched a prime – 0.50% product (more on that below). That’s the biggest variable discount of any national lender since 2011, when they hit prime – 0.90% (or better). The fixed-variable spread is also widening because of slightly higher long-term rates. The 5-year yield (which leads fixed rates) hit a fresh 4-month high today at 1.53%, before falling 6 bps on concerning news that U.S. manufacturing contracted. (Click to enlarge – Chart by There’s no way to tell if the recent spurt up in bond yields has staying power. Considerable resistance lies above at the 1.55% to 1.60% level. Yields have been rebuffed twice before when attempting to pierce that range. Until they do, odds are low that 5-year fixed rates and the fixed-variable spread will increase significantly. More on RMG’s New “Low Rate Basic” Variable
  • Rate: Prime – 0.50% (2.50% today)
  • Term:  5 years
  • Lump-sum prepayments: 20% annually
  • Payment increase option: 20% annually
  • Loan-to-value:  High-ratio insured only
  • Conversion: Can be converted free of charge to a Low Rate 5-year fixed or standard 5-year fixed
  • Penalty: 3% of outstanding principal
  • Increase & Blends: Not available
  • Maximum Mortgage: $750,000
  • Online Account Access:  Not available
  • Pre-Approvals: Not available
  • Portable: Yes
  • Rate Hold: 90 days
RMG’s rate is solid but some will be skeptical about the restrictions of this product. Given the above-average penalty, it’s a product geared to people who expect minimal changes to their mortgage for five years. That includes the minority of variable-rate borrowers with less than 20% equity. That said, you can reduce the penalty by converting to RMG’s standard 5-year fixed (with its normal 3-month interest/IRD charge). The penalty is also partially rebated when a client gets a new mortgage from RMG within 90 days of discharge. Rob McLister, CMT
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First-Time Down Payments

Posted on May 13, 2013 at 10:02 AM Comments comments (0)
A wide majority of first-time buyers-to-be plan to put down less than 20%, according to new data from RBC/Ipsos.
Here's the breakdown of their expected down payments:
  • 10% or less (62% of respondents)
  • 11-20% (26% of respondents)
  • More than 20% (12% of respondents)
Over half of newbie homeowners will likely pay the maximum default insurance premium to buy their home.* That maximum ranges from $2,750-$2,900 per $100,000 of purchase price (i.e., 2.75%-2.90%), depending on the source of down payment.
If home prices rise 2% a year (a rough rule of thumb for the long-term growth rate), buyers can easily make up that insurance premium in a few years. If prices drop, it's just one more thing that eats into their equity if they have to sell. ********* How long do young buyers expect to save for their first down payment?
  • 53% say “up to three years”
  • 25% say between four and six years
  • 16% say seven years or more
  • 6% say they’ll never save enough to buy a home
Prospective first-time buyer term choices:
  • 39% prefer a term over five years
    (versus 22% of all prospective buyers)
  • 38% prefer a 5-year term
  • 23% want a term less than five years.
Of Canadians in general:
  • 14% of homeowners said they should have made a bigger down payment.
  • 29% of prospective borrowers (42% of first-time buyers) are considering a hybrid mortgage (e.g. part-fixed and part variable). But far fewer (just 7% according to CAAMP) actually choose hybrid mortgages.
  • Just 5% of homeowners admit to choosing the wrong type of mortgage. (From our experience, far more complain about their financing than 5%. Many don't realize they've taken an inferior mortgage until they learn of their lender's policy on penalties, porting, blending a rate, converting a rate and so forth. Those lessons typically come after closing, when it's too late.)
Survey details:  These findings come from an RBC/Ipsos Reid poll conducted between January 31st and February 8th, 2013 on behalf of RBC. The sample was 3,005 Canadian adults from Ipsos' Canadian online panel. * This is the maximum default insurance premium for fully qualifying borrowers (i.e., those who can prove their income). Rob McLister, CMT
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The Market Pulse from Genworth

Posted on May 13, 2013 at 9:59 AM Comments comments (0)
Last year’s mortgage regulations shrank the overall high-ratiomortgage insurance market by about 15%, according to recent estimates from Genworth Canada.
Those rule changes also eliminated high-ratio refinances and contributed to a 15% drop in housing sales last quarter versus Q1 2012.
Genworth CEO Brian Hurley spoke today on BNN about the pulse of the market. Here are some of his insights of note (our comments in italics): 
  • As an insurer, "We make money by getting the risk right." That means "We've got to get the properties right," he told BNN.
    (If one is to read into this, and if history is a guide, we can expect more scrutiny on appraisals and property types as the market slows. This is especially true in richly valued markets like the Greater Toronto Area and Vancouver.)
  • "Our two factors that drive our business performance are delinquencies, driven by unemployment (a very high correlation), and the size of our claims…(as) driven by home price declines."
    (As a result, Hurley hinted that Genworth is now focusing more on employment quality in its underwriting.)
  • Genworth has been extra careful about insuring condos with a large investment component—typically those with small unit sizes.
  • For the next few years "the mortgage market is going to be flat," he predicted. It will be "a couple of years until we see [the mortgage market] back to the 5-6% growth rate.”
  • Genworth is seeing 24-25% average gross debt ratios (GDS) for first-time buyers
    (That may seem surprisingly low and well below the normal maximum of 32-39%. But CAAMP found that the average GDS of an insured fixed-rate borrower was 22.5% in 2010—the latest marketwide GDS data we know of.)
Other factoids from Genworth Canada’s recent earnings reports and conference call:
  • Genworth says it now controls about one-third of the mortgage insurance market.
  • Only about 60% of mortgage delinquencies actually require Genworth to pay a claim. The rest are “worked out” or otherwise resolved.
  • Genworth’s principal balance of insured mortgages was approximately $150 billion at year-end 2012 and 2011. The company had previously estimated its 2011 insurance in force at $204 billion. That’s quite the botched estimate for an insurer that's expected to know its exposure. At least it tried to be conservative by overestimating, versus underestimating. On a positive business note, this leaves it and Canada Guaranty with a combined $150 billion of insurance they can write (and still fit under the federal cap), versus CMHC’s $34 billion.
Rob McLister, CMT
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OSFI Considering Mortgage Amortization Changes

Posted on May 13, 2013 at 9:15 AM Comments comments (0)
Federal policy-makers are exploring additional mortgage rule tightening, CMT has confirmed.
A spokesperson from Canada’s banking regulator, The Office of the Superintendent of Financial Institutions Canada (OSFI), verified that it is looking at the issue of limiting amortizations to 25 years on conventional mortgages (those with 20%+ equity). Currently, those “low-ratio” mortgages can have amortizations up to 35 years.
OSFI is “doing some preliminary consultation with financial institutions” on the matter, said the spokesperson. Those communications appear to be behind the scenes with banks and federally-regulated trust companies. OSFI will not be issuing a public statement in the very near term (i.e., next week). The regulator added, “We are working to determine the desirability of some changes given current conditions in housing markets and recent trends in household indebtedness.” “A decision in that regard would be taken once we hear back from the industry. Any proposed changes to our mortgage guideline that may result from this work would be subject to a public consultation process.” Officials from OSFI, the Department of Finance (DoF) and the Bank of Canada have been working together closely. Their aim is to stabilize housing, moderate debt levels and reduce economic exposure to rising rates. When implementing the last set of mortgage changes in 2012, Finance Minister Flaherty made it crystal clear that he considers it “desirable” to make home buying more difficult. In December, he told reporters: “Less demand, lower prices, modestly, in the housing market are much better for Canadians than a boom followed by a bust. So I'm all for a soft landing.” But real estate has been more resilient than many expected. And some at the DoF are not satisfied that housing is slowing fast enough. Recent data show national home sales down roughly 15% year-over-year. Mortgage volumes have dipped as well. But home prices are marching stubbornly higher, hitting a new record high in March according to Canadian Real Estate Association (CREA) figures. There’s every reason to suspect that the DoF will keep applying air brakes until the housing plane has no more lift. Then it becomes a question of whether home prices glide lower or break into an all-out dive (a lower probability). This article is in follow-up to Friday’s story: Death Sentence for Extended Amortizations?Rob McLister, CMT
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Flaherty Talks Another Bank into Higher Rates

Posted on March 20, 2013 at 9:38 AM Comments comments (1)
On Friday, Manulife Bank posted its lowest rate ever on a 5-year fixed mortgage, 2.89%. It lasted for four days.
When our big brothers at the Department of Finance (DoF) caught wind of it, they dialed up Manulife and swayed the bank into raising its rate back to 3.09%.
“We don’t want a race to the bottom on mortgage rates by our financial institutions…,” said Finance Minister Jim Flaherty, as quoted by Bloomberg. “I had one of my staff call (Manulife) and indicate my displeasure.”
Manulife responded today by saying: "After consulting with the Department of Finance, Manulife Bank has withdrawn the (2.89%) promotional campaign and reverted to our previous posted rate." So now we have Manulife, the 10th largest bank by assets, being told by bureaucrats how to price its mortgages. Two weeks ago, BMO got the same call. Where does this end? The DoF seems set on breaking the knees of home prices, one way or another. With it so intent on regulating real estate transactions, will the next round of headlines read: "Ottawa Legislates Price Ceilings on the Sale of New Homes?" (Yes, this is an exaggeration...I think.) The Political Reaction In an interview with Canadian Press, NDP Leader Tom Mulcair called Flaherty’s actions "Banana Republic behaviour,” saying the minister has no right to interfere with a free marketplace (somewhat ironic commentary from the NDP, but that’s another matter). "Either we have a market or we don't," Mulcair added. "The banks have huge profits. The idea that they shouldn't be able to give a break to consumers is ridiculous and the idea that the Minister of Finance would basically be trying to create some kind of a cartel among the banks and the financial institutions as to what they can offer consumers by way of interest rates is I think completely inappropriate, completely wrong..." Liberal interim leader Bob Rae expressed similar sentiments, calling the minister’s actions “ridiculous.” The DoF is now asking banks to use their rates as tools to regulate the housing market. That’s not their role. Banks, as private sector entities, have an obligation to legally maximize profit. It's their job to set rates as high or as low as may be required to achieve that goal. Banks have every right to compete as hard for mortgages as the myriad of other lenders currently advertising 2.89% or less. One might argue that banks benefit from selling government-backed insured mortgages, and that they should therefore defer to the Finance Minister’s wishes. But all lenders sell insured mortgages. Why single out just the banks by compelling them (and only them) to advertise artificially high rates? Moreover, what if rates continue lower and stay low for years? Or what if home prices dive after the spring market? In these cases, governmental rate tampering would prove pointless, with the sole effect of taking money from borrowers' wallets (through higher interest) and transferring it to bank coffers. Prudence Misdefined Each time banks advertise sub-3% five-year fixed mortgages, Flaherty exhorts that lenders be “prudent.” But lowering rates (to match one’s competitors and reflect market-wide improvements in funding costs) is not “imprudent.” Lending to borrowers who don’t qualify for a mortgage is imprudent. There’s a difference. Some suggest that when big banks advertise low rates, it fuels excess home demand. But few people see 3.09% and say “I can’t afford a house” and then see 2.99% and say “Hey, I can afford a house.” A one-tenth of a percentage point rate reduction lets someone qualify for less than a 1% higher purchase price (based on standard debt ratio calculations). That is far from bubble-inducing. Behind the Hype When banks advertise rates that are already widely available, they’re not triggering a “race to the bottom” as the minister suggests. Rates are driven lower by market forces—which currently include shrinking mortgage volumes, narrowing spreads and falling funding costs. Micro-pricing adjustments by individual banks, however large those banks may be, barely impact market demand—and only in the short-term. If anything, it is Flaherty’s own public crusade against rate promotions that is raising the profile of low rates. It’s sparking more consumer mortgage interest than any bank advertising could. Indeed, if it weren’t for all the media attention Flaherty has caused, sub-3% rates would just blow over. But instead, a small number of buyers may now actually rush to get a mortgage “before the government bans 2.89%,” as one of our worried readers expressed today. Patience… Mr. Flaherty doesn't want spiralling home prices to lead to a real estate collapse. And that’s completely understandable. But a few tenths of a percent off rates will not trump market fundamentals in determining where home prices go from here. At this stage, the real estate market needs time to digest all of the mortgage restrictions from 2012 and find its own equilibrium. And we’re already seeing signs of that with inventories building for the last three quarters and sales down sharply. If the market doesn’t self-correct, the DoF, in its quest to moderate home prices, has the ability to tighten lending regs further. At least in that case, market-wide regulation would apply to all mortgage providers equally, and not just handicap the banks. As I wrote in the Globe & Mail yesterday (story link), consumers are the losers here. If a bank customer pays one-tenth of a percentage point more as a result of Flaherty’s actions, that’s $1,200 more interest over five years on a $250,000 mortgage. So far, the other bank on Flaherty’s radar, BMO, hasn’t caved to the pressure and is still advertising a 2.99% five-year rate. It’s refreshing to know that some bankers are brave enough to give consumers a fair shake and do what they're paid to do: sell mortgages. Rob McLister, CMT
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BoC Decision: Lower for Even Longer

Posted on March 11, 2013 at 9:15 PM Comments comments (0)
Canadian macro-economists are mostly in agreement that the overnight rate should go nowhere in the next 9-12+ months. And the Bank of Canada gave no indication today that such projections are off the mark.
The Bank left Canada’s core lending rate unchanged at 1% for the 29th straight month, with no change in sight.
Part of the Bank’s reasoning is reflected in these comments from its statement:
  • “Total CPI inflation has been somewhat more subdued than projected in the January MPR as a result of weaker core inflation and lower mortgage interest costs...”
  • “The Bank expects…the debt-to-income ratio [to stabilize] near current levels.”
  • “…Residential investment is expected to decline further from historically high levels.”
  • “With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target.”
For an excellent deciphering of the Bank’s press release, click here.
Today’s announcement shed little new light on the timing of the next prime rate change. Of course the BoC is still suggesting that the next rate move is up, but others, like David Madani of Capital Economics, aren’t so sure.
On Sunday, Madani said the "inevitable" rate hikes that so many predict could actually be pre-empted by policy loosening. He noted:
“Given the recent spat of weak economic data, below target range inflation and the presumably widening output gap, the market's ruling out of interest rate cuts makes little sense.”
For now, as long as the 5-year bond yield stays under or within the psychological 1.50% to 1.60% range, there’s little danger of any notable rise in rates. After this morning's rate announcement, bond yields remained flat at 1.32%.
The next BoC rate meeting is April 17.
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TD Takes Heat for its Collateral Mortgages

Posted on January 30, 2013 at 10:50 AM Comments comments (2)
Author: Rob McLister, CMT
Published: January 28, 2013
Link to original article provided below

Collateral charge mortgages got more bad press on Friday after CBC’s Marketplace ran this report. The gist of it is that collateral mortgages "effectively trap you at the bank," says the CBC (which is not entirely true… more on that below). TD Canada Trust, which sells only collateral charge mortgages, was caught in CBC’s crosshairs. An undercover reporter went into a TD branch with a hidden camera, asking the mortgage rep what made TD mortgages different than those at other banks. After being questioned in four different ways, the TD rep finally disclosed that TD’s mortgage was a collateral charge, saying:

"This could be considered a con for clients who want flexibility to have the choice of transferring out (to another lender).”

CBC approached TD corporate for comment, but TD apparently wouldn’t respond about its collateral mortgages on camera.

Collateral charges are designed so that you don’t need to pay refinance fees if you add more money to your mortgage. But they’re also criticized because, in most cases, they force you to pay legal/registration fees to switch to another lender (due to the way they’re registered). In turn, that roadblock helps the lender retain more customers.

Even TD itself does not accept collateral mortgages from other lenders. In its mortgage guidelines (which we obtained freely off the Internet) TD says: “Collateral mortgages (e.g. Manulife One accounts and Scotia Total Equity Plan accounts) are secured by collateral mortgages and cannot be transferred [to TD].”

It should be noted, however, that a handful of lenders currently pay legal fees to attract business from people with collateral mortgages. ICICI Bank (for status brokers) and Royal Bank (according to a rep we spoke with) are two such lenders.

One of the bones CBC picked with TD was that its collateral registration is not disclosed to clients until the customer is signing in the lawyer’s office, at which point it's too late to switch lenders. CBC might have been referring to old documentation, however, because TD’s approvals now clearly disclose that their mortgages are a “COLLATERAL CHARGE.” (Whether the borrower reads this disclosure and understands it, and whether the TD rep or broker explains what it means, are separate issues.)

Collateral mortgages are useful and can save you roughly $500 to $800 in legal costs if you:
a) have a high likelihood of refinancing before maturity, and
b) the lender approves you for those additional funds (a big caveat).

But they also have potential drawbacks, over and above the additional switching cost:
  • Since they’re often registered for more than the mortgage amount, collateral charges can sometimes prevent you from obtaining a second mortgage or a secured line of credit elsewhere (unless you pay any penalties and fees required to leave the collateral mortgage lender, or unless that first lender reduces the mortgage amount it has registered and permits secondary financing).
  • Title insurance premiums can sometimes be higher for a collateral mortgage than for a regular mortgage.
  • In some cases, defaulting on another debt owed to a collateral mortgage lender can put your house at risk. That’s because that lender can theoretically seize your home equity if you don’t pay that other debt. (This is called “offsetting” in legal parlance.)

A number of other lenders sell collateral charge mortgages besides TD. They do so even if the borrower wants just a regular mortgage with no line of credit. Such lenders include ING Direct, National Bank and various credit unions, for example. And most of these lenders don’t give you an option to refuse this type of registration.

All in all, collateral mortgages are right for some but clearly unsuitable for many. A few years ago, TD said that “20 times” as many customers refinanced with them versus leaving for another lender. But that figure has to be less now, given that government rules prohibit refinances above 80% loan-to-value, and given that home price appreciation isn't what it used to be.

To that extent, the net benefit of collateral mortgages is questionable for most of today's borrowers.

Rob McLister, CMT

Link to original article:
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Canadian Mortgage Rates Hinge on the Americans

Posted on January 25, 2013 at 2:27 PM Comments comments (0)
Link to original article at bottom of page.

Author: Rob McLister, CMT

If you want to know what’s moving Canadian mortgage rates, watch the American news. The reason? Canadian bonds are 95% correlated with American bonds (Treasuries) and bond yields are 97% correlated with 5-year fixed mortgage rates. (See: Yields and Fixed Mortgage Rates) In other words, Canadian rates are married to U.S. rates. So it’s no wonder that our mortgage rates are being shifted by things like the U.S. debt ceiling and fiscal cliff. Below is a list of factors weighing on mortgage rates right now:

Rates are in a tug of war between bullish factors (those lifting yields) and bearish factors (those depressing yields). Here’s a current summary of each:

Bullish factors for rates
  • Cliff relief: The U.S. dodged a full-scale swan dive off the “fiscal cliff.” As a result, relieved traders have been selling “safe” bonds and rotating into riskier assets. There may be more of that to come, especially if debt ceiling talks progress better than expected.
  • Spring Market: Bond and real estate seasonality are sometimes underestimated. As the prime homebuying season approaches, fixed-rate mortgage demand could help support yields.

Bearish factors for rates
  • A U.S. Econoflop: Congress’s new tax increases are growth and job killers. And, the wasted opportunity to cut spending means future U.S. “austerity” measures could be more severe.
  • Debt Ceiling: In a few months, Congress will face its next big decision: raise the debt ceiling for the 41st time in 30 years, or let the U.S. default. The latter isn’t likely but the thought of it could perpetuate the safe-haven trade (i.e. keep people from dumping bonds and driving up yields).
  • Euro-risk: Europe’s three years of debt turmoil has been upstaged, but not eliminated. European central bank liquidity is a Band-Aid solution and Spain and Greece are in depression.

Wildcards for rates
  • Rating agencies: The New Year’s fiscal cliff compromise cut just $12 billion in U.S. spending, while adding $4 trillion of new debt. Credit rating agencies must be shaking their heads. Without budgetary tightening by spring, another downgrade is not unthinkable. Losing another AAA rating would either seriously damage the Treasury’s “risk free” reputation and spike yields, or compel investors to buy U.S. Treasuries in knee-jerk fashion (like in August 2011).
  • U.S. and/or Canadian Outperformance: Most traders expect low rates to stick around. But if employment improves significantly and traders sense that the Fed is abandoning its commitment to hold down rates, all bets are off. The historic Treasuries rally will unwind and yields will lift-off.

At the moment, there is maximum uncertainty. While nobody expects major rate increases near-term, a 20-30 basis point increase would shock no one.

So if you need a mortgage in the next six months, don’t hesitate to lock in at today’s epic low rates.

Rob McLister, CMT

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