Archive for July 2008

On Wednesday July 9, the Honourable Jim Flaherty, Minister of Finance, announced measures to facilitate the long-term stability of Canada’s housing market, largely to ensure that the Canadian market does not bubble like the US.

The Finance Department had loosened standards for government-backed mortgages in the summer of 2006, allowing more mortgage insurers to enter the market and raising the maximum allowable amortization period to 40 years from the standard 25 years. 

Mortgage loan insurance is paid by the mortgage borrower and protects the lender in the event of default. Mortgage insurance is typically required for home buyers who do not wish to put a 20 percent down payment, typically required in Canada.

As more mortgage insurers entered the market — from two in 2006 to at least six in 2008 — more Canadians started to take advantage of the lower monthly payments in those extended amortization periods. But the higher costs from extended interest payments raised concerns among consumer advocates and even government officials.

In August 2007, the American sub-prime mortgage market crashed, and many of the measures introduced today are preventative measures to ensure the same does not happen in Canada.

Highlights of the measures include:

• Fixing the maximum amortization period for new government-backed mortgages to 35 years;
• Requiring a minimum down payment of five per cent for new government-backed mortgages;
  Establishing a consistent minimum credit score requirement; and
• Introducing new loan documentation standards.

These measures are slated to take effect October 15, 2008, allowing existing approvals- with a typical 90 day expiry- to be used or expire.

Canadians who currently hold mortgages, or are applying for mortgages which are not considered Government-backed will not be affected by this change. 

It is interesting that Canadian mortgage arrears are consistently low, and are currently at 0.27%, according to the Canadian Association of Accredited Mortgage Professionals.

These changes will affect only marginal borrowers who either have weak credit, or inadequate income, or both. Typical clients of MBN Mortgage are not likely to see many significant changes.

What are the overall effects on the market? Deputy chief economist at BMO Capital Markets Doug Porter, said of the recent changes “it’ll take some steam out of the market and overall we’re going to see fewer people able to afford houses”.

According to the official press release,

“The measures announced today will build on the strength of Canada’s housing market. According to the International Monetary Fund, the increase in house prices in Canada is based on sound economic factors such as low interest rates, rising incomes and a growing population. A recent Statistics Canada report concluded that home ownership is at record levels, with over two-thirds of Canadians owning their own home.

For more information, view these press releases from the Canadian Association of Accredited Mortgage Professionals. 

Press Release: http://www.caamp.org/press-release.htm#canprotectmarket

Mortgage market backgrounder: http://www.caamp.org/download_docs/News-release_can-protect-market_bkgrder_Eng.pdf

CMHC notes that housing starts fell in June, even though the number of new construction projects remains high, the Canada Mortgage and Housing Corporation said Wednesday.

CMHC economist Bob Dugan says that “despite the decrease in June, total housing starts remain at high levels. This is mostly due to the multiple segment, which has been continuously above the 100,000 unit threshold since the beginning of the year.”

Seasonally adjusted urban starts dropped five per cent in June over the previous month, the CMHC said. Ontario was the sole region in the country where urban starts increased, climbing by 10.8 per cent to 77,900 units in June.

June urban starts in Atlantic Canada reached 8,500 units, down from 9,700 in May. In Quebec, starts decreased from May’s 45,600 starts to 40,300 units in June, and starts fell in the Prairies from 38,900 to 31,200. Starts in B.C. declined from May’s 34,700 to June’s 31,400.

Urban multiple starts – apartments and condos – fell in all regions except Ontario, where they increased 30 per cent.
The CMHC estimated rural starts reached a seasonally adjusted rate of 28,500 units, matching May’s figures.

This is one of the most common questions from our clients who have extra cash. Should I invest the extra cash now, or should I pay down my mortgage, and then invest for the future? The simplest way to look at the effects of both scenarios is to consider the cost of borrowing, and the return on investment.

If the return on your investment yields a higher return than the cost of borrowing on your mortgage, investing the cash now will put you further ahead in the long run. With Canadian interest rates for mortgage financing quite low, look for investments that can yield a higher return, and invest your capital there. To take this one step further, consider leveraging your cash into investments or even using borrowed funds from low interest mortgages to invest.

This is only a general rule of thumb to consider when determining what to do with extra capital that you have, the normal risks and evaluations of any investment decision need to be considered.