Canadian Mortgage News & Canada's Mortgage Trends

Mortgage Term Reviews

CMT’s Mortgage Term Review has been freshly updated.

Some of the notable points:

• At the moment, 2- and 4-year fixed terms seem to be in the value zone.
• Hybrid mortgages have gained some prominence since the last go-round in May.
• Readvanceables continue to be an excellent choice for those with 20% equity.

The full comparison is posted on CMT’s Mortgage Term Review page.

Yields Down. Rates, Not So Much

Canada’s 5-year bond yield closed near a 3-week low today, settling at 2.43%.  That’s down from its June 10 high of 2.81%.

 
While there’s been a noticeable dip in yields, there hasn’t been much reduction in 5-year fixed mortgage rates (which track yields).  At the most, we’ve seen a few non-bank lenders drop 5-year rates by 0.10% lately.  The Big 5 banks have not lowered advertised rates at all.

One lender sent an email today suggesting that banks have changed their focus from aggregating clients to profitability. Given the banks just went through a vicious market share war, they may be less inclined to discount rates now with only four months to hit their year-end income targets.

The lender went on to say: “There may be some movement soon, but banks are ensuring bond prices stay consistent before they make a move.”

Variables and First-Time Homebuyers

Here’s an article about first-time homebuyers that shows the risks some people take with their mortgage:  See Story Here

The story portrays a young couple getting their first mortgage. It talks about how cash-strapped they are, and the difficulties they’ve experienced in affording a new home.

The story then goes on to say:  “What really helped? The 2.75% interest rate they were offered. It ultimately allowed them to move from a $1,800-a-month apartment into their own home.”

The couple then warns: “But we don’t have a lot of [wiggle] room.  We can go up to 4%, but then we’re done.”

So, illogically enough, they chose a variable-rate mortgage.

The person who recommended a variable to these folks should be examined.  A variable–rate mortgage is the last option a risk-susceptible homeowner should be considering.  Prime rate can move 1.25% before you know it.

In Canada’s current cycle, the Bank of Canada has slashed rates 4.25% in 17 months. The BoC says they will go no lower. After moving sideways, rates will start rising.  Most analysts expect prime rate to jump at least 1/2 of the amount it fell (i.e.,  at least 2+%).  The main question is when...and no one knows.

Going back to 1991, Canada has seen the following increases to prime:

• 0.75% (In 1 month - Feb 92 to Mar 92)
• 3.50% (In 2 months - Sep 92 to Nov 92)
• 2.50% (In 4 months - Feb 94 to Jun 94)
• 2.75% (In 4 months - Nov 94 to Mar 95)
• 2.50% (In 12 months - Sep 97 to Sep 98)
• 1.25% (In 7 months - Oct 99 to May 00)
• 1.25% (In 13 months - Mar 02 to Apr 03)
• 2.50% (In 39 months - Apr 04 to Jul 07)

The above list includes rate increases over both the short and long term.  A few of the short-term hikes took place inside of longer-term rate-increase cycles, so their effect would have been cumulative (i.e.  they would have added to previous rate increases).

It is worth noting that prime rate has usually fallen within 2-3 years after rising. On the other hand, Canada’s key lending rate has never before been cut to 0.25% in emergency fashion, as we’ve recently witnessed.  Perhaps rates will therefore remain elevated for longer, once they start going back up.

Whatever the case, if you eyeball the data it’s clear that a 2% prime-rate increase is very realistic in a 1-2-year timeframe.  This graph of prime rate since 1991 illustrates that.

This isn’t intended to suggest where rates are going, of course. Past data is too limited and random to draw conclusions.  The point is simply that prime rate can move a lot in 1-2 years. Variable-rate mortgages are therefore unsuitable for folks with little financial breathing room.

A 2% increase in prime would raise payments 31% on a 35-year 2.75% variable mortgage.  On a $400,000 loan amount, that’s $463 more a month. 

If you’re a homeowner on a tight budget, and a 31% payment increase concerns you, don’t be seduced by today’s 2.75% adjustable rates. Look at a fixed-rate mortgage instead, or keep renting and build a financial buffer.

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Sidebar: With mortgages, there are exceptions to every rule because suitability is dependent on individual circumstances. Always consult a licensed mortgage professional to see what terms make the most sense for your personal situation.

(Prime rate data courtesy of the Bank of Canada)

Happy Canada Day

Banks and lenders are closed for the day.

What a perfect opportunity to celebrate what makes our strong and free country the world’s best place to call home.

Genworth Canada to IPO July 7

Genworth Financial Canada announced the details of its initial public offering today.

Canada’s 2nd largest mortgage default insurer will sell 44.7 million shares at $19 each.  The target issue date is July 7, 2009. Thereafter, Genworth Canada will trade on the TSX under the symbol MIC.

The IPO will line Genworth’s coffers with about $635-$730 million.

More…

Best of the Money Blogs

We’d like to offer a big and humble thank you to the Globe & Mail for including Canadian Mortgage Trends in their “Best of the Money Blogs” article.

The story is a handy compendium of the most useful Canadian finance blogs on the net. You’ll find all the essentials (Million Dollar Journey, Canadian Capitalist, Thicken My Wallet, Four Pillars) and a host of interesting new blogs.

Check it out and vote for your favourite.

Boring But Effective

That’s how a recent IMF paper characterized Canada’s mortgage market.

Among other things, it compared Canadian and American mortgages and listed several key differences.  Here are the big ones:

• US mortgages typically don’t have pre-payment penalties.  Canadian mortgages usually do (except for “opens,” which are more expensive).
• Canadian mortgages are portable. Portability is rare in the US.
• US mortgages often have higher origination costs (thanks to “points” and fees) than Canadian mortgages.  According to the study, Americans pay $3000-$5000 on a typical purchase, while Canadians pay about $1800.
• Rate holds are usually free in Canada. American lenders commonly charge for them.
• Mortgage insurance in Canada covers the entire loan amount. In the US, it usually only covers losses above a LTV ceiling (above 80% for example).
• In Canada borrowers must pay the entire insurance premium up front. In the US, borrowers pay it monthly and can cancel it when LTV falls below the required threshold (e.g.,  80%).
• In foreclosure, Canadian lenders have recourse in a borrower’s non-home assets. In the US, that’s usually out of the question due to legalities or costs.
• Most US mortgages require payments to be made at the beginning of every month. In Canada, we have weekly, bi-weekly, semi-monthly, and monthly payment options.

Some other notable statistics and conclusions:

• Deposit-taking institutions held 62% of Canadian mortgage debt at the start of 2009.
• Just 29% of Canadian mortgages are securitized, versus 60% in the US.
• 45% of Canadian chartered bank mortgages are insured.
• Home ownership in the US and Canada are both about 68%, despite US homeowners receiving a mortgage interest tax deduction.
• Canada has fewer options than the US when it comes to mortgage terms over 5 years. The author says that’s due to a five-year maturity cap on government-guaranteed deposit insurance, and the Interest Act’s prepayment penalty limit.

Civility Lost

When someone criticizes real estate pundit, Garth Turner, their blog often gets inundated with not-so-friendly comments from Garth’s followers. Case in point are these comments left on Greg Williamson’s blog recently.

It seems Greg put out a web video about future mortgage payment shocks that questioned Garth Turner’s grim real estate views. Turner’s followers barraged Williamson with some of the rudest blog comments we’ve ever seen.

This is not meant to be a commentary on Turner or Williamson’s viewpoints.  Each have their own valid beliefs.  The point is this.  There’s no place for hate-filled commentary in a rational debate.  If adults can’t get across their points with civility, they don’t deserve the airtime.

Props to Greg for standing up and publicly defending himself.  He did not delete one post (that we could see), despite commentators hurling expletives and making numerous tasteless references. Greg is far more tolerant than we would have been.

HELOC Deal

National Bank already has one of the top readvanceable mortgages in Canada.  Now it’s better.

NBC has cut its line of credit (LOC) rate down to prime + 0.85% (3.10% as of today).  This is the lowest fully-open LOC rate that we’re aware of.

If you add a 4, 5, 6, 7, or 10-year fixed portion, or a variable-rate portion, you can get the AIO LOC rate even lower--to prime + 0.75%.  (The AIO can be split into multiple portions.)

National is the 2nd bank that’s reduced its HELOC rate below prime + 1%.  That’s good to see.  Hopefully it inspires other lenders to price their LOCs more competitively.

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Sidebar: Here are additional details on the All-in-One.  For more information, contact a mortgage planner near you.

News Tweets

When breaking mortgage news hits, it will now be posted in near-real-time on CMT’s left sidebar.

This nifty little feature is powered by Twitter.  It lets us post news anywhere, anytime, using our cell phones or any Internet connection.  Fun stuff.