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February 17, 2010
The Federal Government takes steps to protect consumers from predatory lending practices.
“Canada's housing market is healthy, stable and supported by our country's solid economic fundamentals," said Minister Flaherty. “Our Government is acting to help prevent Canadian households from getting overextended, and acting to help prevent lenders from facilitating it."
The Government will therefore adjust the rules for government-backed insured mortgages as follows, and are effective April 19, 2010:
- All borrowers must qualify at the 5 year rate even if they choose a mortage with a lower interest rate and shorter term.
- Lower the maximum lending on equity limit to 90% of the appraised value of your home on refinancing, from 95%
- 20% down is now needed for government-backed CMHC insured mortgages on investment properties that are not owner-occupied.
- Amortization period and down payment remain unchanged at 35 years max and 5% down
The result of these changes will be negligible as most lenders already have these policies in place, as a minimum.
Genworth Financial Canada is now offering some mortgage protectioin which goes well beyond the initial purchase of the home. Whether in a strong market or during uncertain economic times, should you face unexpected life events that affect their ability to make mortgage payments, Genworth might be able to help.
Through their Homeowner Assistance Program homeowners who are experiencing temporary financial difficulties, which may put their mortgage at risk can evaluate their situation. This could be the result of a serious illness, marital separation, or loss of employment. If you have a Genworth-insured mortgage, you can take advantage of this program - at no extra cost.
Bank of Canada cuts interest rates again in January
As widely expected, the Bank of Canada lowered its benchmark overnight lending rate by a half of a percentage point to one per cent at its setting on January 20th, 2009. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, declined to 1.25 per cent.
The Bank acknowledged the global economy has deteriorated further since it last lowered rates in December 2008, when it announced Canada had entered a recession. “Major advanced economies, including Canada’s, are now in recession and emerging-market economies are increasingly affected,” said the Bank when it again lowered interest rates on January 20th.
The Bank has repeatedly lowered its policy interest rate to support economic growth. Since December 2007, the Bank has cut its overnight lending rate by a total of 3.5 per cent.
“The Canadian economy is widely expected to begin growing in the second half of 2009, as government spending and easier credit begins to lift economic growth,” said CREA Chief Economist Gregory Klump. “Business and consumer confidence are unlikely to improve much until such evidence appears.”
The Bank downwardly revised its forecast for economic growth in 2009, but revised it upward for 2010. It also pushed the goalposts out to the middle of 2011 as to when it expects inflation to climb back to the two per cent midpoint of its target range between one and three per cent. The Bank targets the core rate of inflation at two per cent. The rate has stayed below the target level since October 2007.
“The Bank’s revised forecast for economic growth and inflation means it won’t raise interest rates anytime this year, but credit conditions have tightened, which will mute the benefit of the Bank of Canada’s recent interest rate cuts for consumers, business, and the economy,” said Klump.
Echoing previous messages about for the potential for additional interest rate cuts when it next meets in March to set its policy interest rates, the Bank also said it “will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the two per cent inflation target over the medium term.”
When the Bank cut interest rates on January 20th, the advertised five-year conventional mortgage rate stood at 6.75 per cent. This is down 0.74 per cent from one year earlier, and 0.2 per cent below where it stood when the Bank made its previous interest rate announcement on December 9th, 2008.
The ongoing credit crunch has led mortgage lenders to reduce discounts on advertised mortgage interest rates, and in some cases these have been completely eliminated.
“Sales activity and prices will decline this year, as many buyers hunker down and put off buying decisions during the economic recession,” said Klump. “Housing market prospects will improve in 2010 in tandem with a rebound in economic growth.” (CREA 20/01/2009)
The Bank of Canada cut interest rates to a record low today to stimulate the economy, but it's likely to stoke something else too - growing anger from ordinary Canadians who complain that banks are pocketing much of the savings.
Wendell Dunning, a 50-year-old Edmonton machinist for a steel company, says his longtime bank not only hasn't passed along the break from a December interest rate cut, it suddenly raised the rate on his personal line of credit to prime plus three per cent from prime plus two.
"I went nuts," Dunning said. "The rates are going down to en-courage people to spend money and borrow to get the economy going and they're turning around and stealing it from us."
Dunning is part of a backlash of Canadians increasingly frustrated with a perceived lack of action in lowering key lending rates.
Both the Consumers' Association of Canada and the Canadian Federation of Independent Business are fielding record numbers of complaints from people all over the country who want to know why mortgage, business and personal lending rates haven't decreased substantially in response to the slumping economy or the falling Bank of Canada rate.
"We are getting more calls on the principals of these issues than we ever have before," said Bruce Cran, a spokesman for the consumers'association. "The government is giving them (banks) a break on the interest rate at prime level and they are not passing any of that on."
Canadian chartered banks base their prime lending rate, sitting Monday at a historically low 3.5 per cent, on the Bank of Canada's lending rate. Both of those rates play a key role in determining interest rates for mortgages and consumer loans.
As of last week, posted rates for a popular five-year fixed mortgage from Canada's four biggest banks were 6.75 per cent. In January 2004, when both the Bank of Canada and bank's prime rate were much higher, that same mortgage was being offered at 6.35 per cent.
The Bank of Canada's overnight lending rate is sitting at 1.5 per cent, the lowest overnight loans to the banking system have been in the past 50 years. That rate is expected to fall further today.
While chartered banks have traditionally lowered or raised their interest rates based on the Bank of Canada's rate announcements, they are not bound by law.
In December, when the central bank slashed its rate by three-quarters of a point down to 1.5 per cent, the commercial banks responded with only a half-point cut in their prime rates for the blue-chip borrowing rate, to which floating-rate consumer and business loans are directly tied.
Terry Campbell, vice-president of policy for the Canadian Bankers Association, said Canadian banks have been working to lower interest rates and have been successful in doing so through the fall. However, he said it's harder than ever for banks to raise funding to lend to businesses and consumers.
"In order to be able to lend, banks have to borrow,"Campbell said. "It's the cost of raising these funds in the marketplace, that's what drives the interest rates that banks charge.
"Where banks will raise their money in the marketplace is through things like the bond market and deposits. We are still cutting our costs, but we have to bear in mind the costs that we face in the marketplace."
That explanation holds little weight for Dunning.
"They're penalizing someone like me who has an excellent credit rating and has never missed a payment and they're turning around and taking another per cent off me," he said.
Randall Morck, a professor of finance with the University of Alberta School of Business, said banks are gun shy about loan defaults during the economic downturn.
"The banks are just as scared as everybody else because they lost a whole bunch of money, too," Morck said.
But interest-rate charges are high, and compound quickly, warns adviser
Reverse mortgages allow anybody 60 or older to borrow money against the value already built up in their home.
If you're at least 60 years old, own your home mortgage-free and want to boost your income in tough times, you might consider a reverse mortgage.
But it's not for everybody.
Reverse mortgages, which have been available in Canada since 1986, allow mature homeowners to tap into the equity in their homes without having to sell them.
Borrowers can receive up to 40 per cent of the value of their home in a tax-free lump sum or in staggered payments over a set period of time. No repayment is required until the home owner dies or moves out of the home.
Borrowers must maintain their properties and stay up to date with taxes, insurance and condominium or maintenance fees.
So you can get immediate cash for any purpose you want and you don't have to repay it until you sell your home.
Sounds great, but there's a downside.
Interest rate charges are typically higher than those for conventional loans and they compound quickly, with borrowers often owing more than twice the amount they received, within 10 years.
Reverse mortgage underwriter Canadian Home Income Plan said an average of 50 per cent of a home's value is left after the property is sold and the reverse mortgage is paid off.
"I would only use it as a last resort," Vancouver financial adviser Adrian Mastracci said in an interview. "It's an expensive way to borrow. Everything accrues and one day, somebody has to pay out a significant amount of money.
"Before I went for a reverse mortgage, I would consider downsizing to a smaller home and using the proceeds from that."
The annual percentage rate for an $80,000 Canadian Home Income Plan reverse mortgage currently ranges from 11.75 per cent to 13.05 per cent, depending on the term of the plan.
There are also about $3,500 in "set-up costs" -- including appraisal fees, independent legal advice fees and other costs.
Mastracci said older homeowners would be better off getting a line of credit or a normal mortgage, but acknowledged many seniors might not qualify for those products.
"Reverse mortgages are for people who really need the money and have few other options," he said. "Maybe they just don't have the time to sell their home and downsize into something smaller, which can take a lot of time in today's market."
Reverse mortgages might be used as an alternative source of income by investors who don't want to sell shares in a down market. Higher-income seniors could use a reverse mortgage to avoid withdrawing additional investment income that would push them over the clawback threshold for Old Age Security.
CHIP has been the main underwriter of reverse mortgages in Canada since pioneering the concept 22 years ago. It currently has about 7,000 reverse mortgages worth a total of $798 million, secured by properties worth about $2.2 billion.
bconstantineau@vancouversun.com
End of Article
If you would like to inquire about a reverse mortgage, please contact Mike Leibel with Mortgage Alliance Company of Canada - 403-204-1111
In recent weeks, a great deal of attention has been given to the health of the Canadian mortgage market in relation to events south of the border. The recent action by Congress in Washington has heightened scrutiny on the Canadian mortgage and real estate markets.
Numerous studies have been released regarding Canada's economic situation and there is no doubt that both the real estate and mortgage markets are slowing in Canada.
CAAMP's chief economist Will Dunning has prepared a report that provides a timely review of the market and key indicators that separate Canada from the U.S. Here is a copy of the report.
By CAAMP Chief Economist, Will Dunning
Recent media reports have expressed some concerns about potential risks for the Canadian housing and mortgage markets. One of the concerns being expressed is that Canadian consumers have been “over-extending” themselves through mortgage borrowing. And, it has recently been suggested that the Canadian housing and mortgage markets might fall into a downward spiral like the one currently underway in the United States.
Most Canadian economists, including CAAMP’s Chief Economist, point to very substantial differences between the Canadian and US situations, which mean that the risks in Canada are considerably lower than they have been in the US.
The Canadian Economy is Much Stronger.
During this decade the Canadian economy has been much stronger than the US economy. Figure 1 shows the percentages of adults that are employed (the “employment-to-population ratio”). The US economy peaked at the start of the decade. While it recovered somewhat during 2005 and 2006, the ratio has remained well below the prior peak. By contrast, the Canadian economy has shown increasing strength in this decade, and the employment-to-population ratio has set new record highs every year from 2003 to 2008. Moreover, to the extent that the US economy did improve at middecade, most of the growth was from the housing market – increased construction plus home equity take-out. There was a self-reinforcing bubble in the housing market. In Canada, on the other hand, economic growth has been diversified and much more durable. The Canadian economy has done a very good job of generating highly-qualified home buyers; in the US, slower job creation has meant that there have been fewer good mortgage candidates. Credit quality has remained very strong in Canada but slipped badly in the US.
Housing Equity is Substantial in Canada
Some very interesting estimates from Scotiabank’s Economics Department (see Figure 2) show that Canadians have retained strong equity positions in their homes. Scotiabank estimates that in Canada, home equity is equal to almost 70% of the values of residential property – in other words, total mortgage debt is only about 30% of the total value of Canadian homes, and the equity position today (almost 70%) is stronger than it was a decade ago (about 66%). In the US, on the other hand, there has been sharp erosion of home equity, which began during 2001/02. By 2004 – well before the onset of the current US troubles - the equity position had already seriously eroded. Figure 2 Low Debt Service Ratios in Canada
Most Canadian home owners have housing costs that are very well within their comfort zones. Data from 2006 (shown in the table below) indicates that more than 90% of Canadian home owners have GDS ratios below the traditional 32% threshold.
Canadian Home Owners by GDS Ratios, 2006 GDS Ratio Number of Home Owners As % of Total
Total 8,048,000 100.0% Source: Adapted from Statistics Canada, Survey of Household Spending PUMF, 2006. Cat. No. 62M0004XCB
Scotiabank has estimated that consumers’ total debt service burden in Canada (as a percentage of after-tax income) has not worsened during the past decade, with the burden staying close to 8%. In the US, by contrast, the debt service burden is almost twice as high (about 14%) and the burden has increased significantly, from about 12% a decade ago.
Very Few Canadians are in Arrears
The most recent data from the Canadian Bankers Association – which covers 7 major banks – shows that just 0.27% of residential mortgages were in arrears (three months or more, as of June 2008). This amounts to about 10,300 out of 3.85 million mortgages. This data from the Canadian Bankers Association covers about 85% of all residential mortgages in Canada - it is possible that there is a different rate of arrears in mortgages from other lenders. The Bank of Canada estimates that about 2% of sub-prime mortgages in Canada may be in arrears or foreclosure. In total, 20,000 to 25,000 Canadian home owners might be in arrears, a very small fraction of the 8.05 million home owners in Canada.
Interest Rates Contribute to Sustained Affordability
One of the major risks faced by mortgage borrowers – a factor that has clearly contributed to the US crisis - is that their monthly mortgage payment might increase when their mortgage comes up for renewal. Interest rates for 5-year fixed rate mortgages (after lender discounts) are currently 5.25% to 5.5%, almost identical to the average for the past five years (5.2%). For variable rate mortgages, typical discounted rates are now 4.25% to 4.5%, similar to the average of the past 5 years (4.3%). For most Canadian home owners, future renewals will not result in increased mortgage payments. What’s more, most Canadian households have experienced income growth since they took out their mortgages, with the consequence that over time their ability to cover their mortgage payments has improved.
In many respects the Canadian and US housing markets have followed similar paths during the past decade – until late 2006 (see Figure 3). In both countries strong demand resulted in rapid growth in property values. In the US, however, a strong growth cycle turned into a bubble, and like all bubbles, it eventually burst.
The key reason that the Canadian housing market did not follow the US into the same quagmire is that our lending industry and practices are structured differently:
• In particular, most Canadian mortgages remain on the lenders’ books, and there is strong incentive to maintain high credit standards. As is shown in Figure 4, only about 6% of Canadian mortgages are held by special purpose corporations and non-depositary intermediaries.
• In the US, on the other hand, widespread securitization eventually caused a breakdown in the incentive to control risk. When it became apparent that mortgage originators would not have ultimate accountability for credit quality, credit quality was abandoned.
Will Dunning is the Chief Economist for CAAMP and President of Will Dunning Inc., a consulting firm that specializes in economic analysis.
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For more information on this program, visit their website by clicking the above headline.
I was born right here in Calgary and have been a full-time member of the Calgary Real Estate Board since April of 2000. I consistently outperform the industry averages and am a member of CIR Realty's "Executive Platinum Award Club", a notable achievement which is approximately equivalent to the Real Estate Boards MLS® Million Dollar Award Club.
