The credit score, also referred to as a “FICO score,” is a mathematical formulae created by Fair, Issac and Company.

The credit score is used by most companies to decide if the applicant is a good credit risk or not. Equifax and Trans Union will calculate the numbers from the credit report and generate a number between 300 and 900.

A low score indicates a bad risk. A score of 700 or more puts the applicant in the lenders’ good books.

 How scores are calculated:

How Clients Can Improve Their Credit Score

1. Order a copy of the credit report, review it carefully and correct any significant errors.
2. Pay bills on time.
3. If there is a questionable credit history, they could open a few new accounts and use them responsibly, paying them off on time.
4. Avoid opening accounts without intention of using them. Having five or six of the same credit card type (e.g., Visa), is not favourable.
5. Having a credit card or instalment loan can help boost a credit score, as long as the balance is not too high.
6. Keep balance low in relation to available credit. If the credit limit is $10,000, keeping the balance below $2,500 (or 25 per cent of the limit) will improve the score. Balances of more than $7,500 (or 75 per cent of the limit) will decrease the score. Going over the limit has an even more negative effect.
7. Pay off credit card debt instead of moving it around to lower rate cards. Moving balances to other credit cards (i.e., “balance transfer”) and closing an old account can hurt the score.

Forecasts are that housing market activity will remain comparatively weak during the remainder of 2009. The forecasts suggest that moderate recovery of housing demand may commence during 2010.

• According to the Canadian Real Estate Association, the dollar volume of resale activity may total just over $100 billion in 2009, and $110 billion in 2010, sharply lower than the $160 billion recorded in 2007.
• According to Canada Mortgage and Housing Corporation, housing starts may be in the range of 60,000 units in 2009, and just slightly more in 2010. This would be far below the average of about 229,000 units per year seen during 2004 to 2007.

The available forecasts of housing activity have been used to generate forecasts of mortgage activity: slowing housing activity implies a significant downshift of mortgage demand.

• The volume of outstanding residential mortgage credit is forecast to continue growing, but at a slower rate than in recent years. For 2009, the growth rate is forecast at 7.6%, followed by 7.0% growth in 2010. By contrast, the growth rate was 12.4% in 2007 and 10.4% in 2008.
• About mid-2010, the volume of outstanding residential mortgage credit in Canada would pass $1 trillion, and the total at the end of 2010 would be $1.04 trillion.
• The volume of annual approvals (including new mortgages, transfers of existing mortgages between lenders, and refinances) may fall to about $150 billion in 2009 and $160 billion in 2010. During 2007 and 2008, approval activity exceeded $200 billion per year.

Source: Canadian Association of Accredited Mortgage Professionals – “The Canadian Residential Mortgage Market During Challenging Times”, April 2009

Welcome to the “now” …

Last week, CIBC Senior Economist Benjamin Tal said “it will be a while before we see a variable rate discount again…the new normal will be Prime or Prime minus 0.25%”.  This is our reality.

What are rates going to look like in the future?  It’s a question we as Mortgage Specialists are being asked frequently.  All anyone can provide is an educated guess because the mortgage market is changing daily as is the consumer reaction to this news, and ultimately, the government’s reaction.

Most analysts believe that rates should be decreasing, for the short term, some of their commentary being:

“Mortgage rates are expected to be relatively stable throughout the last quarter of this year, remaining within 25-50 basis points of their current levels. Posted mortgage rates will decrease slightly in the first half of 2009 as the cost of credit to financial institutions eases. Rising bond yields, however, will nudge mortgage rates marginally higher in the latter half of 2009.”  CMHC

“Some further monetary stimulus (i.e. rate cuts) will likely be required to achieve the 2% inflation target over the medium term.” Bank of Canada

“Credit market traders are pricing in a 100% chance of a 1/4% cut and a 53% chance of a 1/2% cut by year-end. “  CEP

Why are rates coming down?  One reason, according to TD economist Pascal Gauthier, is because the U.S. economy may “record its worst performance in decades, retreating by around 3% in Q4, with the Canadian economy mirroring this performance with a 2.5-3.0% decline, the worst since 1991.”  Moreover, the Bank of Canada’s worst enemy, inflation, is currently no longer a clear and present danger to our economy.

What does this mean for you as a home-buyer? 

If you currently have a variable rate mortgage at Prime Minus, then your monthly mortgage payment amounts should have decreased dramatically due to the large lowering of Prime Rate.  You are in great shape.

If you are a in the process of purchasing a home now, variable rates are typically at Prime Plus One, which is on the high side compared with what we have seen in the past 6 months or so.  Depending on your preference, a variable rate mortgage still offers a lower rate than the current fixed rates being offered.

If you’re in the market for a new mortgage, contact your Calgary and Southern Alberta MBN Mortgage Specialist and we can help you examine your options and arrive at a strategy best suited to your needs.  Good advice in markets like these is imperative when making a choice on rate, term, type of mortgage, and amortization.

MBN Mortgage

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