This week there are two headlines grabbing the attention of mortgage brokers, bankers and borrowers in Canada. Both have far reaching implications in the mortgage industry and it may not be a fluke that both are making headlines in Canada at the same time. On the one side we have the government of Canada expressing concerns about debt levels and the ease for borrowers to attain credit. The other news maker this week is an announcement by mortgage insurer CMHC, a Canadian crown corporation, that they are reaching their insurance limit of $600 Billion as set by the Canadian government. The resulting effect of this news is that insured mortgages in Canada could be harder to qualify for.

As a consumer it may be very confusing to understand what the concerns and implications are. In this post I’ll address Ottawa’s concern for tightened mortgage rules.

As Canadians we are proud of hockey, our multiculturalism, Celine Dion and our remarkable resilience in the face of global economic decline. Okay, maybe we aren’t so proud of Celine but it’s true, if you have an opportunity to travel abroad and talk business with anyone from outside of Canada there is a tremendous amount of reverence from all corners of the globe for our economic policy and strength. And that is due in large part to our prudent banking system. So if we have such a prudent banking system what is all this fuss about tightened mortgage rules and tightened credit?

Ottawa is becoming more and more uncomfortable with debt levels. Record-low mortgage rates being offered by Canadian banks and the ease with which some institutions are advancing lines of credit seems to be keeping finance minister Jim Flaherty up at night (by the way, the fact the Government is concerned about low rates is a clear indication of where they believe rates are going to be for the short to medium term).

So are Canadians really in that much more debt? The following graph sourced from a presentation by CIBC chief economist, Avery Shenfeld, show some interesting and revealing information about Canadians and their debt. The graph shows that since 2007 borrowers who are considered heavy debtors (see * definition) have piled 101.4% more debt over the last 5 years. Translation: if you owed $10,000 in 2007 you now owe $20,140.  While borrowers who are considered light to medium debtors have actually lowered their dependence on credit. Perhaps the more troubling statistic is that of those people who are heavy debtors 44% are 45+. These are the wrong kind of debtors, if the majority were in their 20s and 30s this wouldn’t be so bad as they are leveraging to start out their lives but its never good to have an aging population in debt.

And yet despite the increased number of Canadians who shouldn’t be in debt, I’m not convinced tightened rules is a good idea. It’s one thing for politicians to sit in Ottawa and make statements about credit but the reality on the street is that it has never been harder to qualify for a mortgage. I’m working with mortgage lenders and insurers every day and I can assure you that nothing and I mean nothing gets by them. The number of mortgages that went into default in Canada last year were only 0.38%.  Borrowers are required to dot every “i” and cross every “t” and credit is not easily given out like these reports would have you believe. In my experience credit needs to be earned these days.

The conspiracy theorist inside of me (or at least the political one) sees this as a political play to justify the tightening of CMHC rules or some other major change in the mortgage industry effecting borrowers and lenders alike. In the face of what might be an already slowing Canadian real estate market I’m worried about what these changes will mean. Stay tuned for my follow up commentary on CMHC reaching its limit and the implications to the mortgage borrower.

Do you have something add? I’d love to hear about your experience qualifying for a mortgage? Do you think it’s as easy as Ottawa would have us believe?

Christopher Molder – Toronto Mortgage Broker. Have a question about your mortgage or want to qualify, call me at 416.461.0204.

I love questions and I answer them all.

Yesterday Bank of Montreal announced a new fixed 5 year rate mortgage that has set a new all time low for mortgage rates in Canada. Is it the lowest rate? Yes. Is it the best mortgage? Maybe not. Watch the video below to learn why.

Click here to view the embedded video.

Bank branches sometimes promote them and you may have come across paper and online ads for them. So what is a cashback mortgage, and more importantly, who should consider them?

A cashback means that the lender will give you 5% of your mortgage amount back as cash. So, if you borrow $100,000 they will also lend you an additional $5,000. The cash can be used for anything however, it is really designed to help buyers who can’t come up with a full 5% down payment, the minimum down payment required to buy a home. If you are buying a home and don’t have the required 5% down payment through a cashback mortgage the lender would provide you with 99.75% of the financing (wondering why 99.75? It’s 5% of 95% financing giving you that 99.75% number). In exchange for the cashback a borrower is expected to pay a higher interest rate. Currently that rate is 4.99% as offered by the National Bank who are running a promotion.

If you’re stretching to buy a home and can’t come up with the required 5% down payment it’s tempting to think that 4.99% isn’t too bad. But once you break down the cashback offer you’ll find that it isn’t that sweet of a deal… at least not for you, the borrower.

Consider the following example (if the numbers below make you dizzy, just skip to the summary section):

Borrower A has her 5% down payment and requires a $250,000 mortgage to buy. Her mortgage is arranged with a fixed 5-year rate of 3.39% amortized over 25 years.

Borrower B couldn’t come up with 5% down payment so he opted to take $250,000 with a 5% cashback. This cashback gave him $12,500. In total borrower B receives $262,500. The cashback mortgage costs borrower B 4.99% for a 5-year term amortized over 25 years. Keep in mind that only $250,000 is registered as a mortgage for a cashback.

The following graph shows how much interest is paid by Borrower A vs. Borrower B each year given their different interest rates.

The graph shows that by the end of the 5 year mortgage term Borrower B pays $19,103 more in interest to the lender. Of course out of that $19,103 Borrower B is getting the benefit of $12,500 therefore, the cost is $6,603 ($19,103-$12,500). So the actual interest paid on a 5% cashback of $12,500 is close to 10.6% (($6,603/$12,500)/5 years).

It’s also important to note that after 5 years Borrower A‘s outstanding mortgage balance is $215,264 mean while Borrower B‘s outstanding balance is $221,233 (note: all figures are approximate).

The skinny

• The cashback in a 5% cackback mortgage costing approximately 10.6% per year to borrow over a 5 year period
• When a cashback mortgage comes up for renewal 5 years into the mortgage the outstanding balance is significantly higher
• If a borrower breaks their cashback mortgage during the 5 year term there is a clawback on the cash
• Over the entire life of the a cashback mortgage a borrower will pay more interest to the lender

For some first time home buyers the allure of stepping into your first home without needing a significant down payment can be very tempting. There maybe extreme circumstances where the 5% cashback mortgage should be considered to purchase but I wouldn’t advise anyone to step into a cashback mortgage. The premium for the extra funds is too high and if you can’t afford to save the 5% down payment then you are likely not financially ready to own a home.

If you have any further questions about cashback mortgages or any other mortgage product call me at 416.461.0204 or fill in the form below. I’m always available.

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I stand corrected. Earlier this fall I mused on my blog that fixed rate mortgages had run their course and would hold steady or trend upwards gradually into 2012 and beyond.  I thought that the period of ultra low fixed rate mortgage money was over  and that banks wouldn’t pass on rate discounts  to borrowers any longer but just this past weekend Merix Financial introduced a new fixed 5 year mortgage at 3.25%. This is the lowest fixed 5 year mortgage rate we’ve ever been able to arrange over the 34 years of our brokerage Tridac Corporation Ltd.

Apply below for your 3.25% fixed 5 year rate and I’ll follow up with you right away or give me a call at 416.461.0204ext2 to discuss over the phone. Keep in mind that my services are free of charge to you as I get compensated by the mortgage lender through a standard finders fee.

Not sure if you’d like to work with me? Read what my clients have to say.

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The Bank of Canada met this morning for the last time in 2011 to make their interest rate announcement. As was widely expected the bank left the prime rate unchanged at 3.00%. If you have a variable rate mortgage or a line of credit your monthly payment won’t change. The bank reported that conditions in global financial markets have deteriorated as the sovereign debt crisis in Europe has deepened. The recession in Europe is now expected to be more pronounced than the Bank had anticipated.

Closer to home, recent economic indicators in Canada suggest that growth in the second half of this year is slightly stronger than the Bank projected.

Although the crisis in Europe has effected bond prices, which are driving the yield down (typically a trigger for lower fixed rate mortgages), I am not certain that banks will be willing to pass on those prices to borrowers and I feel that fixed rate mortgages will remain unchanged and stable into the new year.

Click here to view the embedded video.

Son Of A Broker’s Pick Of The Week: The fixed 4 year at 2.99% offers you the lowest rate for the longest term and is the best bang for your buck today. Fill out a quick online application and I’ll be in touch shortly to set you up with a 120 day ratehold for 2.99%.

1 Year Fixed – 3.08%

3 Year Fixed – 3.29%

4 Year Fixed – 2.99%

5 Year Fixed – 3.39%

5 Year Fixed (must close by Jan 31st) – 3.29%

5 Year Variable P-.10 (2.90%)

50/50 Hybrid 3.25% (effective rate)

Prime Rate is currently 3.00%

Bank of Canada Qualifying Rate for High Ratio Mortgages 5.29%

The following is a graph I sourced from my good friends at Ratehub.ca which shows the recent convergence of fixed and variable rate mortgages. Starting late August 2011 it’s clear to see the upwards trend of variable rate mortgages converging with a relatively flat fixed rate market.

Source: Ratehub.ca

The number of Canadians carrying mortgage debt into their 70s was the hottest mortgage topic this week. A recent RBC poll showed that one-third (33 per cent) of older Canadians over the age of 55, have 16 or more years left on their mortgage term. This statistic makes me wonder if these older Canadians aren’t better off concentrating their limited cashflow towards a retirement nest egg rather than paying off their mortgage? At the age of 70 what good is it to have a free and clear home with no other assets to live off of?  I’d love to know the statistics on how many of these older Canadians who finally pay off their mortgages will have to go straight back to the bank to request a reverse mortgage in order cover the cost of living in retirement? It’s extremely ironic when you think of the life time spent paying for a mortgage just to have a free and clear home for the bank to register another mortgage on at the end of your life. Good for banks, bad for hard working Canadians.

Mortgage interest rates have stayed relatively stable as there has been some stability in the Government of Canada bond market over the past 2 weeks.

Click here to view the embedded video.

Son Of A Broker’s Pick Of The Week: If you require your mortgage in 2011 the 3.29% is a no brainer. I expect to see that rate continued into the new year.

1 Year Fixed – 3.08%

3 Year Fixed – 3.35%

5 Year Fixed – 3.49%

5 Year Fixed (must close by Dec 31st) – 3.29%

5 Year Variable P (3.00%)

50/50 Hybrid 3.25% (effective rate)

Prime Rate is currently 3.00%

The following graph compares the discounted weekly fixed 5 year rate vs. the discounted variable 5 year rate since January 2011.

Sourced from Ratehub.ca

This graph is sourced from my friends at Ratehub.ca and is sample of what type of mortgages visitors to their site were requesting last week.

Sourced from Ratehub.ca

Click Here to apply for your mortgage today.

The mortgage interest rate roller coaster continues to enthrall its riders yet again. The latest twist came as Sheryl King, an economist at Bank of America, predicts that Europe’s worsening sovereign-debt crisis is going to push the central bank to cut its key rate down to .025% or 2.25% in consumer terms.  Her report predicted that the Bank of Canada would be forced to lower the prime rate by -0.75% in early 2012 to prevent Canada from slipping deeply in to recession. While there is nothing to indicate at this point that she is correct it will certainly be something to look out for as the year comes to an end.

In the mean time the Eruozone crisis has been putting a squeeze on bond yields and I would expect to see fixed rate mortgages ease down slightly over the coming week.

THE SON’S PICK OF THE WEEK:  If Sheryl King’s musings are correct then you may want a piece of the variable pie. A way to stay in the game but hedge your exposure is to consider a 5 year 50/50 mortgage where have your principal is charged 3.59% and the remaining half is charge Prime (3.00%).

1 Year Fixed – 3.08%

3 Year Fixed – 3.28%

5 Year Fixed – 3.59%

5 Year Fixed (must close by Dec 31st) – 3.39%

5 Year Variable P (3.00%)

50/50 Hybrid 3.30% (effective rate)

Prime Rate is currently 3.00%

Rates subject to change at lender’s discretion.

Click here to view the embedded video.

Earlier this week Rob Carrick of the Globe & Mail wrote an article  Variable or Fixed? It’s no contest. As a regular observer and reader of mortgage news I am rarely enthusiastic about the media’s mortgage rhetoric however this week’s article was timely and perfectly expresses why in today’s market the fixed rate mortgage is king.  This coming from a mortgage broker who has arranged variable rate mortgage for the overwhelming majority of his clients.

To sum up why fixed rate mortgages are the way to go here are the highlight:

• Over the past 30 days lenders have decreased the spread on their prime minus mortgages due to thinning profit margins. Most variable rate mortgages today are priced at prime (3.00%) if you are lucky you might find prime minus 0.20 (2.80%).
• Fixed rate mortgages have held relatively steady since the end of August and a fixed 5 year is priced between 3.50%-3.60%.
• When variable rate mortgages were 2.25% 30 days ago vs. a fixed at 3.50% the difference of 1.25% was worth the risk of a variable rate mortgage for the majority of borrowers. Now that the difference between fixed and variable is only 0.50% it is difficult to justify the potential volatility of a variable rate mortgage.

Of course there may be reasons why a borrower would want to consider a variable rate mortgage under certain circumstances but today’s market is effectively pushing borrowers into fixed rate mortgages. Whats more I am anticipating a further drop to fixed rate mortgages as Canadian bond yields appear to be trending down wards which could cause a slight dip to fixed rate mortgages.

Here is a short history of Variable Rate mortgages discounts:

pre-financial crisis (2007): prime minus 0.9 to 1 percentage point (at best)

mid-financial crisis (2009): prime plus 1

post-financial crisis (2010-2011): prime minus 0.75 to 0.8

now: prime to prime minus 0.2

As a mortgage broker I am always observing and monitoring the Government of Canada 5 year bond yield to look for cues about where fixed rate mortgages are heading. The price of fixed rate mortgages has a direct positive relation with Government of Canada bond yields so that when the yield goes up interest rates move up.

In my industry we tend to get quite excited when bond yields lower because it triggers lower interest rates. As anybody will tell you the last 36 months have offered the lowest mortgage rates ever. This of course is great if you are borrowing money but we shouldn’t forget the flip side of the equation and the negative effects of a low bond yield.

In his book The Ascent of Money Niall Furguson writes about bonds and their importance to our wealth. He explains that in the developed world a rising share of wealth is held in the form of private pension funds and other savings institutions that are required to hold a high proportion of their assets in the form of government bonds. In 2007 a survey of pension funds in eleven major economies revealed that bonds accounted for more than a quarter of their assets. With every passing year, the proportion of the population living off the income from such funds goes up as our population gets older and older.

So while there is short term gain for anyone borrowing mortgage money to buy a home today we shouldn’t look at the low rates as such a positive for society as a whole. With our quickly aging society and suppressed bond yields which erode our senior’s wealth we must be mindful of what we wish for.

P.S. Niall’s book was made into a PBS television series. I’ve attached episode one for your viewing pleasure.

Click here to view the embedded video.

It seems like the trend of the shrinking spread is continuing this week. (Say that 3 times fast) Today, a number of lenders indicated that the spread on their variable rate mortgages was poised to shrink again pricing variable rate mortgages at prime (3.00%).

The culprit seems to be narrowing spreads. The spread is essentially the difference between the rate offered by a lender to a client minus the lender’s cost to fund your mortgage. The lender’s base cost for variable rate mortgages is typically a 30 day bankers’ acceptance (BA) yield. The following graph from Bloombergs.com shows that since early September those yields have increased.

Where could we go from here? We usually think of variable rate mortgages as prime minus x however there is nothing preventing lenders from being forced to increase the spread to prime plus in the current rate environment. Stay tuned for further developments.