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Canadian Mortgage News
|Posted on October 11, 2013 at 10:34 AM||comments (8)|
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:
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
|Posted on September 8, 2013 at 10:10 AM||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…
|Posted on June 5, 2013 at 10:46 AM||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 Investing.com) 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
|Posted on May 13, 2013 at 9:15 AM||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
|Posted on March 20, 2013 at 9:38 AM||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
|Posted on March 11, 2013 at 9:15 PM||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:
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:
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%.
|Posted on January 30, 2013 at 10:50 AM||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:
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:
But they also have potential drawbacks, over and above the additional switching cost:
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
|Posted on January 25, 2013 at 2:27 PM||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
Bearish factors for rates
Wildcards for rates
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
|Posted on January 24, 2013 at 1:28 PM||comments (2)|
Special to The Globe and Mail
Published: Monday Jan. 07, 2013
It would seem that regulators want to dissuade Canadians from buying homes with nothing down. Yet despite all of the recent changes, buyers can still get into the real estate market with little cash on hand.
Ottawa did away with Canada Mortgage and Housing Corp .-insured 100 per cent financing back in 2008. Home buyers with few savings searching for an alternative were left with cash-back down payment mortgages. (That’s where a lender gives you your 5 per cent required down payment, in exchange for a higher rate.) But those didn’t last long because in 2012, regulators barred banks from offering cash back for down payments.
Purchasing a home without your own down payment is often risky. One exception is when a borrower is well-qualified (apart from the down payment), has enough potential resources to withstand a loss of income and falling home prices, and is better off owning than renting. But exceptions are just that, and not the rule.
Young people use alternative down payment sources more often than most. Why? The main reason is a lack of savings. At a time when the average national home price has jumped to $356,687, the Canadian Association of Accredited Mortgage Professionals finds that more than one in four renters have less than $5,000 saved for a down payment. Yet, many of these folks are dead set on owning a home, so they end up using one of the down payment methods listed below.
Borrowing from other credit sources
When buying a home, you generally need at least 5 per cent of the purchase price as a down payment. Ottawa prohibits you from borrowing that 5 per cent from your mortgage lender if that lender is a bank or federal trust company.
Meanwhile, you’re free to borrow your down payment from a line of credit, personal loan or even a credit card. That’s right, if you’re creditworthy you can throw your down payment on a VISA at 20 per cent interest. Mind you, not all lenders allow this and the ones that do check that you can afford the extra debt payment.
One obvious problem with borrowing your down payment is the higher interest cost. Even if you use a line of credit, the interest rate on your down payment loan can be much higher than a regular mortgage, or have a riskier variable rate.
“Borrowing a down payment from less suitable sources is a potential issue,” acknowledges Gord McCallum, broker and president of First Foundation Inc. “Often times, with new mortgage regulations there can be unintended consequences that are worse than the problem they’re purported to solve, and this may be one of them.”
Getting a cash-back down payment mortgage
In many provinces, lenders that aren’t federally regulated (like credit unions) can still offer cash-back down payment mortgages. The few that actually do will give you 5 per cent cash to use for your down payment. You then need to cough up only your closing costs, which include legal and inspection fees, the land transfer tax and so on.
Not surprisingly, the interest rate on cash-back mortgages is well above a normal mortgage. But when you factor in the “free” cash, the overall borrowing cost isn’t that horrible. The main downside of a cash-back mortgage is that you have little equity cushion if home prices fall and you need to sell. And if you break the mortgage early, your lender can take back much or all of the cash it gave you.
Going forward, the days of cash-back down payment mortgages may be numbered. There is speculation that they’ll be eliminated in 2013–by either mortgage insurers, provincial regulators or both. For now, however, a handful of credit unions still offer them to people with strong credit, with Ontario-based Meridian Credit Union being the biggest such lender.
Using a gifted down payment
If you’re a young home buyer with a generous relative, you may be lucky enough to get your down payment as a gift. Most lenders will consider a gifted down payment if the donor is a parent, grandparent or sibling.
Unfortunately, while not an epidemic problem, it’s no secret that a small number of borrowers fraudulently claim their down payments as “gifts,” even though they fully intend to repay the money. That raises the risk level for lenders because the borrower’s debt obligations increase. Of course, both the borrower and giftor must attest in writing to gifted funds being non-repayable, but that is hard to police after closing.
RRSP Home Buyers Plan (HBP)
First-time buyers can borrow up to $25,000 from their RRSP as a down payment. But this is a very different kind of loan, for three reasons:
1. You’re borrowing from your own retirement savings, as opposed to a third party.
2. You don’t have to start repaying the loan until the second year after the year you make your withdrawal.
3. Even though Revenue Canada wants the funds paid back in 15 annual instalments, lenders don’t include those repayments in a borrower’s debt calculations. As a result, some people get approved for a mortgage only to find themselves caught in an annual cash crunch because they didn’t budget for their HBP payment.
The RRSP HBP comes with other perils. By draining your retirement savings, you risk losing years of tax-deferred investment gains. That’s a decision that some will later regret.
Moreover, any instalments that aren’t paid back on time are taxed as income in that year. And as many as one-quarter of HBP participants have missed or underpaid their instalments in the past.
Special lender and government programs
Various provinces and municipalities provide down payment assistance grants. These programs are typically for people with low or moderate income. Despite these borrowers being higher risk, in some cases, they’re permitted to buy a home with nothing down.
There are also specialized programs at individual lenders. For example, Canada’s biggest credit union, Vancity, currently finances an affordable condo project in Vancouver whereby it lends 90 per cent of the purchase price while the developer provides a 10 per cent second mortgage with no interest and no payments.
All of these down payment alternatives have one thing in common. They all come with some degree of added risk. It’s curious how Ottawa encourages people to have their own skin in the game, yet sanctions various substitutes to the traditional 5 per cent down payment.
If you do use one of these down payment alternatives, remember these two things: Buying a home without your own cash is not a decision to take lightly. And qualifying for a mortgage doesn’t mean can successfully carry one.
Robert McLister is the editor of CanadianMortgageTrends.comand a mortgage planner at VERICO intelliMortgage. You can also follow him on twitter at @CdnMortgageNews
Link to original article: