Canadian Mortgage Changes

“Mortgage changes followed concerns about housing crunch in Canada

by Julian Beltrame, The Canadian Press”

“OTTAWA – Concerns that cracks were beginning to appear in the foundations of Canada’s housing market were behind the government’s surprise decision to crack down on loose mortgage conditions ushered in less than two years earlier, officials and experts say.

Starting Oct. 15, Canadians will no longer be able to purchase a home with a government-backed mortgage with a 40-year amortization and no down payment.  

Instead, mortgages will be limited to 35 years and the government will only insure 95 per cent of the value of the home, meaning buyers will need to come up with at least a five per cent down payment. As well, borrowers must demonstrate that debt servicing costs are no more than 45 per cent of gross income and have a good credit rating.

But while most in the housing sector welcomed the announcement, they also questioned the timing. The Canadian housing sector is cooling after six torrid years of growth.

Bank of Montreal deputy chief economist Douglas Porter said the decision should have been made a year ago, when Canada’s housing market was likely exhibiting signs of a bubble as both prices and starts increased by double-digits over the previous year.

“It’s better a little late than never and better than ridiculously late,” Porter said.

“I think in hindsight, we can attributed a lot of the very strong conditions we saw right across the country in 2007 to the loosening up of rules in the prior year,” he explained. “At the time, I was a little concerned that the Canadian housing market just continued to thunder along last year when the fundamentals were starting to move against it.”

Liberal MP Garth Turner, who recently authored a book warning about a Canadian housing bust, suggested Canadians could expect to see the value of their homes fall about 15 per cent nationally, and 30 per cent in some hot markets such as Vancouver.

While praising Finance Minister Jim Flaherty for acting, Turner said the minister has also set up the conditions under which some Canadians will try to beat the Oct. 15 deadline.

“This pulls the plug right out of the bubble, but it does it in a way that inflates the bubble another few months,” he said.

“If you’ve been shopping around for a home and you don’t have any money for a down payment, you will want to buy now with zero down and a 40-year mortgage. If you’re a lender, you’ve got three months to load up people with debt regardless of what the debt-service ratio is.”

Ottawa said the changes were a precautionary measure designed to head off a U.S.-style subprime mortgage crisis, not an indication of underlying problems in the Canadian system.

But officials said concerns had been mounting for months as the government tracked the explosion in the issuing of mortgages longer than 25 years, for years the standard in Canada.

The government had been consulting with lenders, insurers and brokers for the past few months over generous mortgage products, said Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals (CAAMP).

“I think they were worried about what was coming out of the U.S. in increases in defaults and foreclosures, and I think they were concerned over their 100 per cent guarantee, wondering, ‘What is our risk here in a calamity?’ ” Murphy said.”

Julian Beltrame, The Canadian Press

http://www.canadianbusiness.com/markets/headline_news/article.jsp?content=b0710133A&page=2

I think that many folk’s are reading the headlines and forgetting to do a little more research, one of the biggest differences that can be plainly seen from the American counterparts is that the US was using 100 year Amortizations, yes you read that correctly 100 years. In the Vancouver market it is almost impossible for anyone to break into unless they have a substantial source of income, I don’t know of that many young people who have the kind of income to even consider home ownership in the Greater Vancouver Area.

I don’t foresee many being able to buy out there baby boomer parents either, and the parents need to pull the equity out of there homes in order to retire. “Nearly 3 out of 5 middle-class retirees will probably run out of money if they maintain their pre-retirement lifestyles, a new study from Ernst & Young www.ey.com has concluded.

The study, set to be released Monday, finds that Americans will have to drastically reduce their standard of living before retirement to live comfortably, or even avoid destitution, later in life. Middle-income Americans entering retirement now will have to reduce their standard of living by an average of 24 percent to minimize their chances of outliving their financial assets, the study found. Workers seven years from retirement will have to cut their spending by even more – 37 percent.” http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/07/13/MN9511OD8S.DTL

More Canadians will continue to be increasingly dependent upon their nest egg that has been built by the equity of homeownership, how will the new generation afford to take over the burden of what have become million dollar mortgages?

Just as an example the amount of income required for a 850,000 home with 5% down over a 35 year term would be 185,535 per year, I don’t know of many people under 40 that are legitimately earning that kind of income—even combined income—a great deal of the Vancouver bubble has been created from offshore money and as of right now the amount of offshore influx is still over 50k people from oversees moving here every year!

What do you think, is the younger generation going to be able to sustain these prices??

Canada Day in Langley 2008

Canada Day has always been a great celebration, not the loud
brashness that you come to expect from the fourth of July, but a collection of
things that make this country so great. I started the day at the Langley Canada
Day Festival at McLeod Athletic Park. Langley Canada Day Celebrations has

grown to be the biggest two day event in the Langley’s and one of largest

Canada Day celebrations in the province.
http://www.langleycanadaday.ca/

It was hard to believe how much there was to offer, petting zoo’s,
continuous stage show, children’s rides/games, aircraft static displays,
Crafter’s Alley, Vendors, marketplace, special community exhibits by gymnasts,
firefighters, merchants and special community groups as well as live
musical entertainment from local talents.

RE/MAX
was out in full force as well, they sponsored the first aid
tent of course, they had a RE/MAX
balloon out
as well!!

One of
the more interesting things was a V8 Powered Custom
motorcycle from Azzkikr Customs http://azzkikr.ca/azzkikr/
can you imagine, how about towing your boat behind this one!!

But my personal favorite was the Dam’s Lincon Mercury

http://dams.dealerconnection.com/?lang=en

Monster Truck!!

This was a very popular ride! I wish I had waited in the enormous
line to get my chance, but alas it was too hot to stay put that long!

After the Canada day address I went to one of my favorite Pubs The Dubblin

Crossing in Langley/Surrey http://www.dublincrossing.com/home.html if you have never been GO!

It is quite the treat, they have my favorite Harp on tap, very hard to find anywhere

What good would living on the wet coast bring if we did not get to the beach??

I went chill’in http://www.tasteofwhiterock.com/articles/chill042007.html on White Rock Beach to soak up some of

the festivities on the beachfront and pier.

Just like the Langley festivities live music was a huge draw for the
White Rock crowd.

I was able to catch a set of the Sumner Brothers, one of my favorite local acts with special guest Jim Black on the Guitar,

at Chill’in I ran into some friends who work at Mercedes Benz of Vancouver, if you are in the market for a new Mercedes,

I whole-heartily recommend you see Adrian http://www.mbvancouver.com/index.cfm?id=3314

Looking forward to another great year in this beautiful Country, thanks to
everyone for making it a wonderful celebration.

How a lender looks at a Mortgage Application

Everyone always seems to be quite curious when it comes to the mortgage application, how do the Blue power suits come up with what a ‘good’ application is? and were does my application stack up to this standard?
Just think about how you would feel if someone was to ask you for a loan. You would consider how long you have known them, are they punctual, do they move around a lot -good with there obligations, do they live within there means….. What you are doing is creating a picture of how likely you will see your hard earned money again! Lenders call this the Five C’s of credit. Today I would like to talk about what each of these components mean and how it is my job to position your application in the best of light to the lenders.

 

Character is the general impression you make on the potential lender. Imagine if you were lending money to a friend, how well you think that they will be willing to repay the loan thinks like your educational background and experience in business will be reviewed. The length of time at your current employment and your current residence will be considered. The longer you have been at both, the higher you will score on the character scale. One important thing to note is that with the large percentage of Lower Mainland residents that are now self employed, if you worked in the same business for several years as an employee and now you are business for self, Genworth and CMHC have programs that will look at your previous employment background, as most traditional institutions require 2-3 years as business for self.

 

Collateral is what the loan is secured upon; Mortgages are a part of the banks Real Estate Secured Lending department. In real estate transactions this generally means the property that you are looking to purchase or a property you are using as collateral (such as a Home Equity Line Of Credit). If for some reason, you cannot repay the mortgage, the bank wants to know that the real estate the mortgage was taken out for is good and marketable real estate. A real estate appraisal will determine the value for the property in today’s market. The appraisal will also indicate to the lender the type of property being financed and any deficiencies that may affect the ability to re-sell, in case of default. A property that is located in a North Vancouver is considered a better risk than a farm in rural parts of the Province. Simply, there are more buyers for the home in the city than for a rural farm and therefore is easier to re-sell.
Capital is the money you personally have invested in the purchase, otherwise known as your down payment. The more of your own money you invest as a down payment, the more likely that you will do all you can to maintain your payment obligations. Banks want to see a vested interest in the property that you are acquiring; this is why rates and insurance premiums are generally higher for a rental property as it is not occupied by the purchaser who is comfortably living in another location. Capital is also reflected by your ability and willingness to save money and accumulate assets. The higher your net worth, the more you have as a cushion for repayment in the event you run into a financial set-back.
Credit is the evaluation of your habits in performing credit obligations. The information about your credit history is stored at the “credit bureau” and indicates how well you paid your bills over the last 6 years. All major credit cards, auto loans, leases etc. are reported to the credit bureau. A lender will evaluate your ability to maintain your obligations and try and determine how well you live within your means. Some individuals make the mistake of not paying the minimum monthly obligations on loans and credit cards with the expectation of making a larger payment the following month. These missed payments appear on their credit report branding them as chronic “late-payers” for the next 6 years. In Canada we use an empirical system of your score which is called the Beacon score, in the US it is referred to as a FICO score, they are on a scale from 400-900 the higher your score the more favorable your application will be.  

Capacity to repay the loan is probably the most critical of the five factors. The lender will want to know exactly how you intend to repay the loan. The lender will consider your income as it relates to the loan that you are applying for. Does the monthly carrying costs of the loan represent less than or equal to 32% of your total monthly income? If it is, the probability of you successfully repaying the loan is fairly high. Prospective lenders will also want to know about any other sources of income you may have to repay the loan, if your steady income stream is interrupted. Some of the institutions such as TD Canada Trust allow you to use rental income to offset this obligation, either directly or as supplemental income, please send me a email if you have any questions regarding this policy, it is a important tool that can make or break a transaction.