Archive for July 2008

THe following is an article written by Merix Financial.

MERIX Comments on Changes to Government Guaranteed Mortgages:

There has been lots of discussion in the news about the recent changes to government guaranteed mortgages announced by the Minister of Finance.

However we believe the majority of Canadians do not understand what exactly it means to remove the “government guarantee” from some of these lending programs.

We’ll explain…

Many Canadians generally understand how mortgage insurance works.  We’re not talking about mortgage life and critical illness insurance, we’re talking about mortgage default insurance.  This is the premium that is applied to your mortgage amount and is paid to a mortgage insurer, who in turn agrees to insure your mortgage with your lender in the event you default.  In other words, it is protection for the lender incase their customer cannot make their payments.  This is a mandatory insurance for mortgages higher than 80% of the home value.

Well that’s great, but what happens if a lot of people all of a sudden can’t make their payments and the insurer who is supposed to protect the lender is unable to cover their insurance obligations?

Enter the government guarantee.

The Canadian government will guarantee up to 90% of the mortgage amount against insurer default.  So, this is security for the lender in the event the insurer defaults.  This Government Guarantee is in place for CMHC (Crown Corporation) as well as the private insurers, such as Genworth Financial Canada. 

The government guarantee is also a criterion for high ratio loans to be sold into the Canada Mortgage Bond program, which is a relatively new cost-effective funding source for banks and mortgage lending companies.  These Bonds are bought up by investors all around the world due to their higher yield than Government of Canada Bonds combined with their “government guarantee”.

So what has changed?

Well, the Finance Minister looked to our southerly neighbours as well as across the pond and noticed some pretty dire scenarios which begged the question: Are we guaranteeing mortgages that are a little too risky?  After an analysis of the mortgages that fall within their guarantee, recent trends, and industry consultations, the Minister of Finance decided to cease guaranteeing high ratio mortgages with the following characteristics:
- LTV ratios in excess of 95%
- Amortizations in excess of 35 years
- Non-amortizing mortgages (Interest-Only Mortgages).
- Applications where the beacon score of both borrowers is less than 620.

How does this affect me?

If you are a current homeowner, who is happy in your home and have no intentions of moving in the near future than this probably doesn’t affect you.  However if you are a prospective homebuyer, looking for 100% financing and a 40 year amortization then your financing options are becoming a little more limited.  Most of the big chartered Banks and many lenders have already pulled the above products.  Other lenders, such as MERIX are offering these products until October 13, 2008 (please speak with your mortgage originator concerning rules around this deadline).

Let’s take a closer look at the 40 year amortization phenomenon:

Why is it appealing when borrowers know they are paying many thousands of dollars in interest over the life of their mortgage? Well there are a couple of predominant reasons:

1. New homeowners are increasingly concerned more with their payment amount than the house price or the interest cost over the life of the mortgage. It’s a decision made largely on cashflow.
2. The vast majority of people who take 40 year amortizations actually qualify for 25 year amortizations but choose the former and accelerate their payments, which reduce their amortization to 32 years.  Registering their mortgage with a 40-year amortization helps protect them in the future should they need to decrease their payment.

From a purely mathematical perspective, according to the Ministry of Finance:
“Reducing amortization from 40 years to 35 years on a mortgage loan of $200,000 with a 6 per cent interest rate results in a $41 increase in a borrower’s monthly payment, but the borrower will save $49,000 in interest payments.”

Looking ahead…

If the decision to take 40 year amortizations is based on cashflow, then we’d suggest $41 per month on its own will not cause any major disruptions in the housing market.  The reality is that new mortgagors will have to spend a little more in their monthly mortgage obligations but the impact to the housing market will be isolated to those who needed the 40 year amortizations and 100% financing to qualify for their mortgage.  As a replacement for 100% financing, we may see the increase in popularity of Cashback mortgages once again.  The 100% financing programs have all but made CashBack offers obsolete, however they may be a decent option for some people once again - even if the interest rate is higher.

In the short term, we may see a small spike in homebuying and refinance activity as people try to accelerate their timelines in order to take advantage of these fleeting offers.  This may keep the market relatively strong through 2008.  In the medium to long term, we don’t expect these changes to have much of an impact to the housing market.  35 year amortizations are still available and for that matter 40 year amortizations will still be available by some lenders, such as MERIX, for those customers who have the minimum 20% down payment for conventional financing.

For more information about 40 year amortizations, we encourage you to read “Why 40 Year Mortgages Aren’t 40 Years Long”, by Peter Vukanovich, President, Genworth Financial Canada.  This article can be found here: http://www.genworth.ca/mi/eng/downloads/HT_April_2008.pdf

MBN Mortgage and Mortgage Intelligence is an approved originator of Merix Finanical mortgages.

Real estate has been an outstanding investment in most parts of Canada over the past few years. Home valuations have broken through the peak of their 1989 “bubble” in many areas of the country. That’s good news for Canada’s 8.5 million homeowners - over two-thirds of whom (68.4%) own their home, the highest rate since 1971 according to Statistics Canada.* At the same time, we’re seeing a rise in home renovations, with approximately 40% of Canadian homeowners saying that they intend to spend $1,000 or more on renovations in 2008, according to the Canada Mortgage and Housing Corporation.**

These two factors are intersecting with a third trend - rising levels of Canadian consumer debt. Total debt is now equal to a new record of 131% of household income after transfers and income taxes, as reported in a study by The Vanier Institute of the Family. This compares to only 91% in 1990.***

As a result of these three major trends, Canadians who have built up the equity in their home over the last few years are borrowing against that equity in record numbers. Consider this: if you have equity in your home, you can take advantage of attractive mortgage rates to save on interest charges. Compare current mortgage rates with the rates charged on your other debts. Get professional advice
to determine whether it would pay to do some refinancing– whether it’s to consolidate your existing debt or to roll in expenses for important projects, such as home renovation.

Many savvy homeowners are also working with their mortgage advisor to acquire second properties, make investments or pay for their education. You may also want to consider refinancing your existing mortgage. If your mortgage is coming up for renewal, this is the perfect time to tap into your home equity at today’s excellent rates. Even if you are in the last year or two of your mortgage, it may make sense to renegotiate your mortgage now and roll in all your debt at a low rate. Or, you may be able to access funds through a second mortgage.

Your best option – have a mortgage professional outline your options for using your mortgage to consolidate your debt and increase your cash flow.

*The Daily, 2006 Census: Changing patterns in Canadian homeownership and shelter cost, Statistics Canada, June 4, 2008
** Renovation Spending Across 10 Major Centres Up by $2 Billion in 2007, CMHC, May 22, 2008
*** The Current State of Canadian Family Finances 2007 Report, The Vanier Institute of the Family, February 11, 2008

A home is the single largest purchase that most Canadians will make in their lifetime, yet many homeowners are unaware of the dangers posed by identity thieves when it comes to their investment. Unfortunately, real estate title fraud is on the rise. According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), real estate industry insiders now peg the average case of real estate fraud at $300,000. In comparison, the RCMP estimates the average
credit card fraud case in Canada to be $1,200.

Protect your self and your investment with these tips:
1. Check your credit reports, financial and bank statements regularly for inconsistencies, unknown charges and unauthorized credit inquiries.
2. Don’t give out personal information in person, over the phone or on the Internet unless you know who you are dealing with, how it will be used and if it will be shared.
3. Protect your mail, be alert to billing cycles and when bills or mail haven’t arrived.
4. Shred any documents or materials with personal or financial information prior to discarding them.
5. Seek advice from a real estate expert who is accredited and licensed in your area when shopping for a home.
6. Speak to a mortgage broker about how title insurance can help protect both the financial and emotional investment in your home.

The Bank of Canada announced this morning that it is maintaining its target for the key overnight lending rate at 3 per cent.  This typically correlates to Canada’s major banks keeping their prime lending rate stable, and currently at 4.75%. Good news for Canadian mortgage borrowers on variable rate mortgages or HELOC’s.

The bank of Canada cites three main factors in their decision to keep the overnight lending rate stable:

• Weakness in the US economy, expected to continue;
• Ongoing unpredictability in international financial markets; and
• Significant increases in many commodity prices.

Global financial markets and US economics are in line with analysts predictions in the April Monetary Policy Report, while commodity prices are outpacing many expectations.

According to the Bank of Canada press release from July 15, 2008:

“Although Canadian economic growth in the first quarter was weaker than expected, final domestic demand continues to expand at a solid pace. The economy is judged to have moved into slight excess supply in the second quarter of this year; excess supply is expected to increase over the balance of the year. High terms of trade, accommodating monetary policy, and a gradual recovery in the U.S. economy are expected to generate above-potential growth starting early next year, bringing the economy back to full capacity around mid-2010. Canadian GDP is projected to grow by 1.0 per cent in 2008, 2.3 per cent in 2009, and 3.3 per cent in 2010.”

The next key interest rate announcement will be on September 3, 2008.

It has been only a few days since the federal government announced the coming of the end for 40 year amortization mortgages and 100% or zero-down mortgage financing, and many lenders have began the cutting back their products.  

Institutional lenders including ING, BMO and CIBC (including their mortgage broker channel, FirstLine) are first out of the gate with the cut-backs, much .  These lenders announced the end of 40-year amortizations effective immediately in preparation for the October 15th deadline when Canadian Government insured mortgages will not see amortizations longer than 35 years.

Not all lenders are created equal- lenders like Merix Financial indicated today in a news release to brokers that they will continue to offer 100% financing and 40-year amortizations for the time being.

What does this mean to consumers trying to squeeze the most they can into their mortgage? It means that if you would like, or need a 40 year amortized mortgage or would like to keep your down payment money in the bank and apply for 100% mortgage financing, you should act quickly!

Have we noticed a change in the way lenders look at mortgage applications? Absolutely. As mortgage underwriting guidelines continue to tighten, the true value of a trusted advisor soars exponentially. We had a client in our office just today who makes great income, has an excellent professional job, but was experiencing much frustration in obtaining mortgage financing on her own. We sat down with her, looked at her entire portfolio of cash, assets and her plan for the property she was about to purchase and in an hour and a half, had restructured some debt, extended her amortization and used her short time in her profession as an asset, rather than as a liability. At the end of our time together, she was pre-qualified for her new home, and would walk away with over $340.00 more cash flow in her pocket.

Is the mortgage marker getting tougher? Absolutely. Are there still some excellent products that fit most borrowers? 40-year amortizations aren’t the be all and end all in the financing game. Like anyone good at their craft, the loss of a simple tool does not change the art of putting Canadians in homes.