Search This Blog

Monday, February 27, 2012


Not all debt is created equal – and not all debt is bad. In fact, you need some debt to establish a good credit rating. Being a responsible borrower means knowing which types of debt can help you reach your financial goals and which types leave you further behind. Good debt includes any investment or purchase that helps improve your overall financial position. Mortgage loans are considered good debt because they offer low rates on property that appreciates in value over the long term. You also build equity as you pay down your mortgage. Borrowing to invest is also considered good debt. Often, the interest expense on money borrowed for investments is tax deductible. And when borrowing to maximize your RRSP, you're investing in your future and benefiting from tax sheltered investment growth. Bad debt involves purchases where the value becomes lower than the original cost, and which can carry a high rate of interest, making them harder to pay off. Types of bad debt include high-interest credit card debt, car loans, deferred purchases, and cash advances. If you're unsure about your debt situation, set up a meeting with your mortgage broker. He or she can take you through your finances and advise how you can use your home equity to trade bad debt for smart debt, and give you some financial breathing room. The right refinancing package can help put an end to the monthly squeeze of too much credit card debt or too many loans, and help you get back into your financial comfort zone.

Friday, February 24, 2012


The Bank of Canada is warning of an impending housing price correction, putting Canadian mortgage holders at risk. In a four-part series of papers, economists at the bank said a drop in home prices could also impact overall consumption and the Canadian economy. In one of the reports, authored by Brian Peterson and Yi Zheng, the bank cautioned that the risk for fluctuations in house prices has “increased markedly.” The authors noted that house prices have risen sharply in most parts of the country over the past decade, with house prices reaching a historically high level in relation to income. The percentage of household debt to income has risen from 110% in 1999 to 153% currently. “These facts (rising debt and house prices) are interrelated, since rising house prices can facilitate the accumulation of debt,” said guest editor Graydon Paulin, introducing the four papers. “Households could therefore experience a significant shock if house prices were to reverse.” The bank also suggested at 10% drop in home prices in the near future could result in a 1% drop in consumption, negatively impacting the overall economy. A “significant” share of borrowed funds from home-equity extraction in the past decade was used to finance consumption and home renovation, notes the report. “Such indebtedness constitutes an important source of risk to household spending, since it makes households more vulnerable to a potential decline in housing prices,” one paper states. While rising population and income gains over the past 30 years have mostly related to the rising house prices, other factors were taking more prominence in the past decade, such as lowered interest rates, higher expectations for house prices and the liquidity of the housing market.

Thursday, February 16, 2012

Good article from the Globe and Mail: Canada’s housing market has two good years ahead of it yet, Canada Mortgage and Housing Corp. said Monday, with low interest rates and a “moderately” expanding economy keeping price corrections at bay. The Crown corporation – which insures Canadian mortgages – has had a consistently rosier view of the market than many private sector forecasters. Canadian banks have recently issued reports probing the consequences of cheap money, and trying to predict whether there is a bubble in prices that will eventually pop and cause prices to crash. They are particularly concerned about Vancouver and Toronto, where some have predicted price corrections of up to 10 per cent because of overbuilding in the condo market. But CMHC said Monday Canadian markets would “remain steady in 2012 and 2013. “With the Canadian economy set to expand at a moderate pace and mortgage rates expected to remain low, activity levels in 2012 in both new home construction and sales of existing homes will stay close to levels seen in 2011,” said Mathieu Laberge, deputy chief economist. Also in the forecast: “Housing starts will be in the range of 164,000 to 212,700 units in 2012, with a point forecast of 190,000 units. In 2013, housing starts will be in the range of 168,900 to 219,300 units, with a point forecast of 193,800 units. Existing home sales will be in the range of 406,000 to 504,500 units in 2012, with a point forecast of 457,300 units. In 2013, MLS sales are expected to move up in the range of 417,600 to 517,400 units, with a point forecast of 468,200 units. The average MLS price is forecast to be between $330,000 and $410,000 in 2012 and between $335,000 and $430,000 in 2013. CMHC’s point forecast for the average MLS price is $368,900 for 2012 and $379,000 for 2013. The moderate increases in the average MLS price are consistent with the balanced market conditions that occurred in 2011, and that are expected to continue in 2012 and 2013.”

Friday, February 10, 2012


BASED ON OUR RESEARCH AND KNOWLEDGE OF THE SECTOR, WE SEE NO REASON TO TIGHTEN OR RESTRICT ACCESS TO RESIDENTIAL MORTGAGES AT THIS TIME 1. CURRENT ENVIRONMENT Canada has a well-earned reputation for exercising economic prudence. As a result, we have managed to avoid a mortgage or housing market meltdown. Our banks are stable and our economy, while impacted by the general global economic slowdown, remains healthier than most. CAAMP’s extensive industry research indicates that the Canadian mortgage industry is healthy. We must continue to “stress test” our own financial sector to determine how it would withstand potential weakening of the economy. The more educated we are about the debt we incur (mortgages, credit cards, lines of credit), the better off we will be 2. FEDERAL GOVERNMENT ACTIONS TAKEN The federal government responded promptly when it was determined changes were needed in the mortgage market. There have been three significant sets of changes in the past 36 months: - Amortization periods shortened to 30 years from 35 and 40 years - Minimum down payment increased to 5 per cent of purchase price. No 100% LTV mortgages - Homeowners refinancing their mortgage may borrow up to 85 per cent of the equity in their home; down from 90% and 95% - These changes have impacted the mortgage market; re-financings have decreased dramatically and mortgage credit growth has slowed Based on our extensive research and knowledge of the sector, we see no reason to further tighten or restrict access to mortgages at this time 3. REASONS FOR CURRENT CONCERN 1) Housing Market Prolonged low interest rates are making it more attractive to purchase a home Research shows that the vast majority of homeowners can accommodate rate increases (84 per cent surveyed in CAAMP’s fall 2011 research said they could handle a $200/month increase) CAAMP’s fall 2011 survey indicates mortgage borrowers are prudent, increasing their lump sum payments and paying down their mortgage faster than required Supply and demand drive housing prices – provinces and municipalities should be more aware of their land-use policies and how they impact housing supply 2) Media Focus on Insurance Ceiling - Changes in Some Banks’ Lending Practices It is a fact that CMHC is approaching its $600 billion government-imposed limit on mortgage default insurance. Private insurers have a $300 billion limit. This has nothing to do with mortgage insurers being responsible for an increasing number of higher risk mortgages Lenders are buying portfolio insurance against defaults on low risk mortgages - cases where homeowners have more than 20 per cent equity in their homes. These are not high risk mortgages. CMHC is approaching its limit because the number of mortgage holders has grown, the population and housing units have increased and lenders have been insuring low risk mortgages, leveraging the government’s triple A credit rating for other bank business Residential mortgage credit in Canada continues to expand. During the past five years, outstanding residential mortgage credit has expanded by 53%, or an average rate of 8.9% per year. The growth rate is slowing The volume of outstanding residential mortgage credit passed the $1 trillion threshold in July 2010, and as of August 2011, it reached $1.079 trillion Increased homeownership results in an increase in mortgage default insurance However, mortgage defaults are rare. CMHC reported it paid out $454 million in the first nine months of 2011 which represents a 0.42 per cent default rate Overall mortgage arrears rates in Canada are declining and never approached the level of the early 1990s. The housing market in Canada is growing organically and safely There is no parallel in Canada to the subprime default problems that plagued the US market 3. FURTHER RESTRICTIONS ON ACCESS TO MORTGAGES Who will be affected? Self-employed borrowers who represent a growing portion of our labour force (currently 2.67 million people, or 15% of employment in Canada) New Canadians who can afford a down payment but have yet to build credit and employment history First time homebuyers who want to enter the homeownership market and build equity These are not the people who fall in to a sub-prime loan category like we saw in the US; yet these changes will impact them The housing industry is an engine of growth in Canada. If we impede its growth, we will add to unemployment and depress the economy If fewer mortgage lenders are able to insure their loans simply because the insurance program has not kept pace with the growth in the mortgage market, then consumers will have less choice when it comes to negotiating a mortgage. Less choice, or less competition, will inevitably lead to higher borrowing costs for the Canadian consumer Likewise, if mortgage brokers are restricted in the mortgage products they can offer, consumer choice will be diminished and costs will increase This reduced access to capital will make it more difficult for people who can legitimately afford to buy a home 4)What are the Risks of Further Restricting Access to Mortgages? CAAMP has one of the most comprehensive collections of research on the mortgage industry. It includes original data on borrowers and the characteristics of mortgage loans. This research has revealed repeatedly that borrowers and lenders in Canada have been prudent, and only a very small share of borrowers would have trouble affording future rises in mortgage rates. There are risks, but most are related to the broader economy through two channels: Unemployment The broader economic data suggests that the Canadian economy is slowing. If that results in job losses, the housing market would be negatively affected, and there would be impacts on mortgages held by people who lose jobs and then struggle to make payments. Declining Housing Prices Housing prices could decline in a weaker market. In a recession, there is the threat of a downward spiral: a weak economy harming the housing market which negatively affects the broader economy. We believe and trust that the federal government will act to mitigate such a negative scenario. These risks have nothing to do with mortgage products themselves. Risks to the Canadian mortgage market are dependent on the performance of the broader economy. In that light, the best means to control mortgage market risk is through strong economic management. In particular, care must be taken not to take any measures in the mortgage market that unnecessarily reduce housing activity that would be damaging to the economy.

Wednesday, February 8, 2012

More Down Payment May Cost You More Money

The search for conventional mortgage financing just got tougher -- and may get tougher still -- with several Canadian lenders moving to cut their rental programs because of tighter access to bulk insurance.
FirstLine, the CIBC-owned broker channel lender, kicked off the latest round of downsizing, last week announcing it would impose a $750,000 cap on rental property loans up to an 80 per cent loan-to-value. That’s $250K less than what owner-occupieds can qualify for.

Street Capital announced a similar decision last week, axing its rental program altogether. And while it will consider exceptions on a case-by-case basis, that’s only where clients are willing to pay default insurance they technically do not need.

Under Canadian mortgage rules, borrowers opting to go conventional by putting down a minimum 20 per cent are exempt from that requirement.

But increasingly lenders have opted to insure those loans themselves through bulk insurance offered by the CMHC. The practice allows them to then securitize those mortgages for sale on equities markets. It also clears up space on their balance sheets to write more loans.

Last week, CMHC warned that lender access to its $600 billion insurance fund would likely be rationed as the Crown corp. approaches the limit of that funding. Government hasn’t yet agreed to raise that ceiling.

Lenders are now taking a look at their books and deciding where to cut their conventional lending business rather than keep some loans uninsured and, therefore, on their books.

Rental programs – along with business-for-self lending – is most vulnerable to that downsizing, say analysts, suggesting property investors will find it increasingly difficult to win financing for acquisitions.

That has already begun to happen, with another high-profile lender -- Merix Financial -- deciding to pass on mortgage insurance costs to conventional mortgage borrowers asking for LTVs between 65% and 80%.

“It was important to Merix to continue to offer those products – BFS and Rental -- so originators can continue to offer them to their clients,” said Jason Kay, VP of sales. “While some clients are having to pay more, from a cash flow perspective, it is relatively neutral compared to costs before the changes.”:

(from Canadian Real Estate Wealth)