MORTGAGE INSURANCE NEWS

CMHC could be pulled out of mortgage insurance business, Flaherty says
By Garry Marr
Financial Post Apr 27, 2012

Finance Minister Jim Flaherty would consider taking Canada Mortgage Housing Corp. out of the mortgage default insurance business he told the National Post’s editorial board.

“Over time, I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada. I think what’s key is that mortgage insurance is available at a reasonable cost in Canada. I think there is a role to regulate but whether we, the Canadian people, have to be the owners and shareholders of a financial institution to do this is a question. I don’t think it’s essential in the long run.”

He offered no timetable on when the government could get out of mortgage default insurance business, just offering it up as a possibility. “We have a list of Crowns, Crown agencies that are being reviewed,” said Mr. Flaherty.

In a wide-ranging discussion on the housing market, he said he has no plans to increase CMHC’s current $600-billion loan limit, ruled out any possibility of regulating foreign real estate investment and made it clear his focus is on the governance of Crown corp. which controls about 75% of the mortgage default insurance business in the country.

“For some time now I’ve had concerns about the large commercial role that CMHC now plays. CMHC has become a significant Canadian financial institution. As you know, historically it was created with a mandate post-war to advance housing in Canada. It’s become much more that.”

The finance minister moved this week to tighten control of CMHC, placing it under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions. Previously, it fell under the watch of the Department of Human Resources and Skills Development.

The shift comes with CMHC closing in on the $600-billion limit the government has for how much of its portfolio will be backstopped by the taxpayer. Three years ago it was $450-billion.

By law, consumers must buy mortgage default insurance if they have less than a 20% down payment on a home and are borrowing from a federally regulated financial institution.

But CMHC has not been insuring just those loans, it has agreed to step in and insure loans — with the premiums paid by financial institutions — for lower-ratio mortgages, or what is called “portfolio” or “bulk insurance.”

He said the head of OFSI will now have the power to look at the books of CMHC the way she looks at the books of other private financial institutions in Canada. Already, the government has placed the deputy minister of finance on the board of CMHC.

“We have quite a bit of information about what the banks do and don’t do. [Superintendent] Julie Dickson had to go to some of them in the last year and say ‘you must ensure that your board policies on residential lending mortgages are carried through,” he said. “She’s quite a strict supervisor which is good for our country.”

OSFI has already been looking into CMHC and established one of the key issues for the organization is governance. “OFSI are certainly of the view there are necessary governance improvements we can do,” said Mr. Flaherty.

He made it clear there are no plans to extend CMHC’s $600-billion limit. “For a while,” said Mr. Flaherty, about how long the Crown corporation would have to exist under that limit. It was at $541-billion at the end of the third quarter of last year but business has slowed as the agency culled its portfolio business.

Mr. Flaherty’s own opinion on the housing market is that has been fuelled by low interest rates which he says he does not control. “Cheap money,” he said, noting he did talk to the banks about being unhappy about their mortgage rate wars earlier this year which had reduced the rate on a five-year closed mortgage to below 3% — an all-time low.

As to whether the market has been in part fueled by foreign buyers, as many in the real estate industry have suggested, Mr. Flaherty said his government will not get involved in that aspect of the market. “No,” he said, pausing to emphasize the point. “I don’t think there is [a role]. They key in housing from my point of view is to get the best information on housing.”

ON GUARD FOR THEE?

Canada stands ready to tighten mortgage rules: Flaherty
By Randall Palmer
Reuters Mar 22, 2012

STITTSVILLE, Ontario – The Canadian government, dealing with signs of an overheated property market, is ready to tighten mortgage insurance rules again if necessary, Finance Minister Jim Flaherty said on Thursday.

Mr. Flaherty also chided bank executives for asking the government to impose more restrictions, noting that the banks are the entities that offer mortgages.

Canada’s banking regulator, trying to curb risks posed by record-high levels of household debt, said this week it wanted lenders to be more transparent about their mortgage businesses.

Mr. Flaherty has imposed tougher requirements for government-backed mortgages three times since 2008.

“With respect to tightening up the mortgage insurance market we’ve done it three times … and we watch, we monitor the market, and if we have to tighten it some more we will,” he told reporters in Stittsville, Ontario.

“The new housing market produces a lot of jobs in Canada so there’s a balance that needs to be addressed. I’d like the market to correct itself, quite frankly, if it can.”

Mr. Flaherty said he had noted indications of softening in the Toronto condominium market, which he said was a good sign.

Canada’s household debt-to-income ratio hit a record high of 151.9% last year, largely the result of mortgage borrowing. The ratio dipped slightly in the fourth quarter but at 150.6% was not far off the record.

Mr. Flaherty said “it was a bit odd” that some banks were pressing him for tighter rules.

“We have bank executives in Canada saying ’You know, really the rules on insured mortgages should be tightened up’. They must forget that they are actually the ones that issue the mortgages — it’s their market, it’s not my market,” he said.

Since 2008, Mr. Flaherty has lowered the maximum amortization period for new mortgages to 30 years from 40 years, raised minimum down payments required to qualify for government insurance, and required all borrowers to qualify for a five-year fixed-rate mortgage to get insurance.

If he decided to act again, Mr. Flaherty could announce new measures in his March 29 budget.

Mr. Flaherty, who has promised to cut spending to eliminate the federal government’s budget deficit by the 2015-16 fiscal year, said he would be proposing moderate cutbacks in the budget.

“This is not an austerity program,” he said, adding the focus would be on long-term growth, prosperity, innovation and sustainable social programs.

RESULTS IN VICTORY?

Low-rate mortgage wars are on
John Greenwood
Financial Post Mar 9, 2012

After a string of warnings from policymakers about the perilous state of household debt in this country, it hardly seemed like a good idea.

But this week the big banks launched the latest round in the mortgage war, with Bank of Montreal rolling out its rock-bottom 2.99% five-year home loan, one of the lowest rates on such a product. BMO’s peers quickly followed suit, breathlessly unveiling their cut-price mortgages, available for a limited time.

In public comments the banks wrapped themselves in the maple leaf, claiming the special rates are aimed at bolstering the finances of consumers, since the new products come with fixed rates and shorter amortizations designed to allow borrowers to pay down debt faster. “We think this is totally consistent with the debate about stability of [household finances],” said Frank Techar, head of BMO’s domestic retail bank.

“Canadians have identified effective debt management as their primary focus this year, and these special offers will help new homebuyers and existing mortgage holders reduce interest costs and pay down their mortgage sooner,” said Colette Delaney, executive vice-president at Canadian Imperial Bank of Commerce’s retail bank.

But here’s the thing. Canadian household debt has been steadily rising for more than a decade and it’s now sitting about same the level it was in the United States just before the housing collapse, precursor to one of the biggest waves of consumer defaults since the Depression.

Thanks to low interest rates and a stable economy, Canadians are managing their burden. But Bank of Canada Governor Mark Carney has warned repeatedly that elevated borrowing is the biggest domestic threat to health of the financial system.

But don’t “special offer” mortgage deals encourage people to borrow more, and doesn’t that exacerbate the problem?

Or maybe problem is the wrong word, because from the banks’ perspective it’s not so much a problem as a potential earnings headwind, according Peter Routledge, an analyst at National Bank Financial.

.Residential mortgages are hugely important for the banks, a key business in domestic retail lending which is traditionally one of the most important earnings drivers. At a time of heightened competition, profit margins are razor thin but players are making up for that by hiking the volume of loans they write.

Canadians have about $1.1-trillion of mortgages outstanding, by far the lion’s share of total consumer debt, according to the Bank of Canada.

But the bank’s are mostly protected from risk of default through insurance provided by the Canada Mortgage and Housing Corp.

On average, at least 50% of mortgages held by the banks are covered by insurance, all but the safest, low ratio loans to highly credit-worthy customers.

So in a worst-case scenario — a collapse in the housing market — the banks would have minimal direct exposure to loan losses.

But they would experience a drop in profits since a housing correction would almost certainly result in a consumer pull-back in loan demand, not just for mortgages but across the board, and the banks are very cognizant of that.

“I think banks recognize that scenario would be very bad for earnings, and why would they want to hurt their franchise?” said Mr. Routledge.

When the U.S. market started to turn, lenders responded by bringing out ever more risky products that enabled people to lever up even more because their role in the economy had become distorted.

“But that’s very unlikely to happen here because of the [more healthy] structure of the mortgage market,” he said.

Another reason for Canadian banks to be cautious is that CMHC has been fundamental not just to their business models but also to their funding. Last year the big six issued more than $25-billion of covered bonds, mostly backed by CMHC insured mortgages. Thanks to the CMHC, the interest rate on the bonds is only marginally above Canadian government bonds, and significantly lower than the funding costs of even the strongest foreign banks.

The last thing the banks want to do is anything that might cause the federal government to change the rules around CMHC insurance.

With this in mind, we can ask the question again: Are the banks increasing risk in the system with their special low-rate mortgage offers?

Bank officials suggest the main target is customers of other banks along with new customers with solid jobs and a genuine need to own homes.

Rob Mclister, editor of industry newsletter Canadian Mortgage Trends, says such offers typically result in only a small amount of business from new borrowers. Instead what they do is raise the level of market interest in mortgages and home buying generally, he said.

Not surprisingly, the banks continue to grow home loan volumes at mid single digits, a healthy clip given the weak economy.

HOME FOR CANADIANS

CMHC backing fewer loans
By Garry Marr
National Post Jan 30, 2012

Canada Mortgage and Housing Corp. is cutting back on mortgages it insures as the Crown corporation edges closer to a $600-billion cap imposed on it by the federal government, the Financial Post has learned.

A CMHC spokesman confirmed that it had approached a number of lenders at the end of 2011 about reducing its “bulk or portfolio insurance” after third-quarter results showed the agency had committed to back $541-billion in mortgages. CMHC, which guarantees mortgages held by financial institutions, is ultimately backed by the federal government and needs approval to go over the $600-billion limit — something that would create greater risk for taxpayers should the housing market collapse.

“CMHC has recently received an unexpected level of requests for large amounts of CMHC portfolio insurance.” said Charles Sauriol, a spokesman for the Crown corporation, in an email.

“To ensure equitable access to portfolio insurance within CMHC’s annual limits, an allocation process is being established which has caused some delays. Portfolio insurance provides lenders with the ability to purchase insurance on pools of previously uninsured low ratio mortgages and does not impact CMHC’s transactional business.”

Financial institutions are required to have mortgage-default insurance when a consumer has less than 20% equity. However, the banks have been seeking insurance on loans with even high downpayments — something not required by law — so they can securitize those bulk lending loans, thereby getting them off their balance sheets and reducing their capital requirements. In those cases in which the loans to value is less than 80%, the bank pays the insurance charge instead of the consumer.

“One of the things that has got them [to the limit] faster than expected is they are doing a lot of conventional insurance for lenders,” said one source. Just three years ago, CMHC had $450-billion in loans it was backstopping and had to go to the government to get that increased to $600-billion.

“I think as a taxpayer you should care. The policy question is why should the Canadian taxpayer take that type of meltdown risk within CMHC,” the source said.

The risk to the taxpayer would be a collapse in the market leading to a defaults like the U.S. saw. If CMHC couldn’t cover those defaults, Ottawa is on the hook for 100% of any shortfall.

On the surface, insuring conventional loans may not appear as risky as traditional mortgage default insurance because it comes with more equity. The banks have been demanding ultra low fees on the conventional mortgages, arguing the equity position makes them a lower risk. However, lenders are skimming their portfolio to load up mortgages that are 70% to 80% debt to equity and may also have other problems, said a source.

With mortgage defaults well below 1%, some might argue the risk to CMHC is negligible. “If you look at what is backing [CMHC’s] guarantee, it should be more than enough to cover any downturn in the market,” said one banking source, who asked not to be identified, about CMHC’s cash reserves. “Besides, what will the government do, not increase their limit? This could kill the entire housing market.”

CMHC gave no indication it would seek an increase in its limit.

“CMHC’s mortgage loan insurance limit in force is $600-billion. CMHC manages its mortgage loan insurance business in accordance with this limit,” said Mr. Sauriol.

The Crown corporation would be going to the government looking for an increase in its limit at a time when both Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty have been casting a wary eye at the housing market.

“We watch the housing market carefully and we are prepared to intervene if necessary. Having said that, we’re not about to intervene in the housing market now,” said Mr. Flaherty this month. For his part, Mr. Carney said “we see that in a number of real estate markets in Canada, valuations are at a minimum, firm; in others, they’re probably overvalued. So there are risks there.”

Sources have indicated the government is already considering tough new measures for calculating how the self-employed qualify for loans and tightening regulations for condominium buyers, so there is probably little appetite for backstopping even more debt from CMHC. In addition to CMHC, the government has a $300-billion limit for private mortgage default insurers.

PAID, STAMPED, FILED!

Canadians paying off mortgages early: CMHC
Financial Post Staff  
Nov 29, 2011

OTTAWA — Canadian homeowners are doing a good job of paying off their mortgages early, according to the Canada Mortgage and Housing Corp., which released its third-quarter results Tuesday.

While mortgage repayments can be spread out over 30 years, the CMHC reports that the average amortization period for mortgages insured by the national housing agency is under 25 years, and the loan-to-value ratio of those homes was 80% or less. As of Sept. 30, the outstanding loan amount per household for all homeowner loans was $159,740, slightly above the figure for the previous year.

“CMHC analysis shows that a substantial percentage of CMHC-insured high ratio borrowers are ahead of their scheduled amortization,” the agency said in its report. “Accelerated payments shorten the overall amortization period, reduce interest costs, increase equity in the home at a faster rate and lower risk over time.”

The agency says its mortgage arrears rate is 0.42%, in line with industry trends.

Rules brought in by the federal government in March, in response to historic levels of household debt, which reduced amortization periods on certain mortgages, and limited the amount that can be borrowed when a house is refinanced, cut refinancing activity by 31% from last year, the CMHC said. The agency’s homeowner purchase mortgage insurance showed a year-over-year decrease of 12%.

“The level of household debt remains a concern but there are encouraging signals,” it says. “There has been a significant deceleration in the growth of mortgage credit since March, particularly in recent months, impacting the growth rate of total household credit. Growth in personal loans, lines of credit and credit cards has levelled off in recent months.”

The agency notes general economic conditions have been favourable in 2011, with stable mortgage rates, a healthy housing market and a declining unemployment rate.

“Overall arrears levels and arrears rates have been improving and (mortgage insurance) claims volumes have been lower than expected,” it said. “Given current economic forecasts, it is expected that trends will improve moderately going forward, although both downside and upside risks remain.”

While housing sales have slowed since January, the CMHC expects sales for the year to fall within a range of 423,600 to 470,100 units, and next year’s sales to be somewhere between 406,100 and 509,000 units. Prices should “modestly grow as market conditions are expected to remain in the balanced market range,” it said.

The agency notes it keeps an eye out for bubbles, but so far it sees “little evidence of over-valuation” in the Canadian housing market.

Photo By: *_Abhi_*

WHAT TO KNOW ABOUT THE BOOM

What you need to know about Canada’s booming housing market
By Christine Dobby
November 15, 2011

With sales of existing homes in Canada rising in October to the highest level since January, the Canadian Real Estate Association boosted its forecast for resale activity for 2011.

The industry group released data on October sales activity as well as a revised forecast for the year on Tuesday.

National sales of existing homes increased 1.2% from the previous month, building on a gain of 2.5% in September. Price gains however cooled to 5.5%, the smallest gains since January.

A total of 397,561 resale units have traded hands so far this year, CREA said, up 1.8% from levels in the first 10 months of 2010.

Here’s what you need to know about the booming Canadian housing market:

Ontario leads the way

Third-quarter sales activity in the province was stronger than forecast, while the rest of the country came in broadly in line with expectations, the CREA said.

It was the strength of activity in Ontario that prompted the CREA to boost its annual forecast for 2011 to 1.4%, up from 0.9%.

The industry group now predicts national sales of 453,300 for the year, compared with 446,915 in 2010.

198,000 of 2011′s residential sales are expected to come from Ontario, with Quebec and British Columbia expected to have sales of 77,000 and 76,600, respectively.

Home prices are still up but showing signs of cooling down

CREA kept its national average home price forecast for the year little changed at $362,700. That’s an annual increase of 7.0% compared with $339,049 in 2010.

Prices are expected to remain flat next year, with the CREA forecasting $362,700 again for 2012.

The industry group pointed to moderating prices in Vancouver in the third quarter compared with the first half of the year, with sales of multi-million dollar properties in that city returning to “more normal levels.”

CREA said the national average price in October rose 5.5% from a year earlier to just under $362,899, the smallest increase since January.

The balance of supply and demand is tight but the market remains on solid footing

October’s monthly rise in sales resulted in a slightly tighter balance of supply and demand, but the national housing market remains “firmly rooted in balanced territory,” the CREA said.

The national sales-to-new listings ratio, a measure of market balance, stood at 53.4% in October, up from 52.8% in September.

Low interest rates continue to bolster the market

CREA also revised its forecast for 2012 upward slightly, predicting a smaller easing than previously expected of 0.5% to 451,200 units.

The uptick is largely due to expectations that Canada’s interest rates will stay low until well into 2012, CREA said.

But domestic and global economic headwinds could put pressure on the sector

“A number of factors will keep Canada’s housing market in check as interest rates remain low,” said Gregory Klump, CREA’s chief economist.

He pointed to tightened mortgage regulations, high household debt and slower economic and job growth as possible headwinds.

However, Mr. Klump noted that persistent news of global economic uncertainty has put only minor dents in consumer confidence to date.

“How confidence evolves depends on how global turmoil plays out over the coming months,” he said.

A BRIGHT SPOT!

Resale home sales seen as bright spot
Garry Marr, Financial Post 
October 18, 2011

Existing home prices in Canada continued to increase last month, although the gains recorded were the smallest since January.

The Canadian Real Estate Association said the average price of a home sold in September was $352,581, a 6.5% jump from a year earlier.

The continued strength of the market in the face of a battered world economy was on display last month as sales rebounded from August, increasing by 2.7% on a seasonally adjusted basis. For the first three quarters of the year, existing home sales are now 1.2% ahead of last year's pace.

The Ottawa-based group, which represents about 100 boards across the country, said new listings have been flat for two months and markets have tightened but all signs indicate most jurisdictions are still in balanced territory.

The group says nationally the sales-to-new-listings ratio was 52.8% in September, up from 51.6% in August. CREA says almost two-thirds of Canadian markets have a sales-to-new-listings ratio of 40% to 60%, which is considered balanced.

"The Canadian housing market remains a bright spot against a backdrop of mixed headline news about the global economy," said Gary Morse, CREA president. "Low mortgage rates continue to draw buyers to the housing market, while recently tightened mortgage regulations are working as intended."

Adrienne Warren, an economist with Bank of Nova Scotia, noted that even as Canadians spend less on retail purchases, those low interest rates are enticing home buyers.

"Continuing uncertainty over the global economic outlook and highly volatile financial markets have yet to contribute to any notable slowing in Canada's housing market," says Ms. Warren.

Last month's numbers were boosted by a strong contribution from the country's largest market. Toronto average sales prices rose 8.9% last month from a year ago to $465,369 while sales activity was up 21.3% during the same period.

"It's pretty clear Toronto is the star of the national real estate scene at least in this act," said Phil Soper, chief executive of Royal LePage Real Estate Services. "The reality is while the world may be on shaky economic footing and there are scenarios where it would cause hardship to business in Toronto, the current reality is we got jobs back from the recession quickly and there has been some slight upward pressure on income and salaries."

The market also appears to finally have adjusted to new mortgage rules. The latest round of changes saw amortization periods lowered to 30 years from 35 years, reduced refinancing limits to 85% of a home's value from 90% and removed government insurance on homeequity lines of credit.

Mr. Soper said those moves, combined with rule changes in 2010 that forced condominium investors to have a minimum 20% down payment, had slowed down the market. "What we didn't want to see was speculative house flippers and that's been tightened up," he said.

Gregory K lump, chief economist for CREA, noted housing has remained stable in face of market volatility, which has contributed to Canadian confidence in the economy.

"Interest rates are expected to remain low for longer, and evidence suggests that recent changes to mortgage regulations are preventing the kind of excesses they were designed to avert. Both of these developments are good news for the housing market," he said.

Photo By: Fiona Katherine

REACH FOR A GREAT GRADE!

Homebuying 101
Take into consideration all of the costs
By Marnie Bennett
Postmedia News September 6, 2011

Perhaps you are one of those fortunate first-time homebuyers for whom making the big decision to buy came easily. And then again, maybe you aren't. For many, the decision is difficult.

It's a decision that requires careful consideration. You may have concerns about financial obligations, the responsibility of upkeep or even the idea of being "tied down." Maybe you've just landed your first significant job and the idea of home ownership has only recently taken root in your imagination.

Or, like many people, you've been renting for what feels like forever and dread the thought of writing yet another cheque to help pay down your landlord's mortgage.

Numerous factors will influence your decision, but I'd encourage the fence-sitters among you to consider two overarching questions.

First, how strongly do you feel about owning your own home? While it's possible to live perfectly well while renting a good space, many of us find home ownership important to our sense of comfort, security and identity.

Certainly, there's also a sense of satisfaction in watching your home equity increase with every mortgage payment. As a solid investment, a home is hard to beat: How many investments provide shelter and comfort to the investor?

There is a big payoff - ultimately, you will own your home outright and monthly payments will be a distant memory. That is a luxury renters simply do not have.

This brings us to the second, more crucial, question: Can you afford it?

Remember, your first home need not be a palace. Assuming that you're steadily employed and do not plan to move again in the near future, the purchase of a modest home or condominium is nearly always a smart move. You may even find mortgage payments surprisingly affordable and not a far cry from your monthly rent.

It is paramount to consider the additional costs of ownership. Things like property taxes, utilities, condo fees, insurance and mainte-nance can add up and force you way over your budget. I strongly suggest you speak with a mortgage broker or bank representative for help designing a realistic home budget.

If home ownership is close to your heart, you'll find a way.

Marnie Bennett is a leading broker with Keller Williams VIP Realty in Ottawa, with more than 30 years' experience in real estate.

LOCK IT OR FLOAT IT? THAT IS THE QUESTION.

Is it time to lock in mortgage?
Garry Marr
Financial Post · Aug. 31, 2011

The gap between short-term and long-term rates has shrunk enough that it might be time for anyone renewing a mortgage to consider locking in.

Moves last week by the major banks to reduce the discount on variable-rate mortgages comes as the discounts for long-term mortgages have gotten as steep as they have ever been.

"What seems to be happening is they are focusing their attention on fixed rates. We are starting to see some aggressive competition on four-and five-year products," says Gary Siegle, a mortgage broker and Invis Inc. regional manager in Calgary.

How aggressive? Try as much as 190 basis points. A five-year, fixed-rate mortgage with a posted rate of 5.39% is now being offered for 3.49%.

For whatever reason, the four-year, fixed-rate mortgages are being priced even more aggressively.

Mr. Siegle says he can lock consumers into a four-year, fixed mortgage for as low as 3.09%.

The discounting comes as variable-rate products, linked to prime, have become more expensive. Short-term money has become more expensive in the bond market, forcing banks to reduce discounts.

The banks traditionally move their prime rate with the Bank of Canada rate. With no flexibility there and existing customers getting huge discounts based on old deals, banks are forced to raise rates for new loans as short-term money gets more expensive.

The trend began in April when FirstLine Mortgages, a subsidiary of Canadian Imperial Bank of Commerce known for its low rates, cut its discount on variable rates.

Others banks were slow to follow, hoping to make money on volume. But refinancings have dried up under tougher mortgage rules and sales have slowed, creating the need to tighten profit margins on variable-rate products.

Today, the discount on a variable-rate mortgage is about 55 basis points off the prime rate of 3% - in other words, 2.45%. Compare that to 3.09% on a four-year mortgage and the premium to lock in is not that much.

"This gap is about as narrow as it goes," says CIBC deputy chief economist Benjamin Tal. "It reflects a flat yield curve, which makes it difficult to make money in this business."

Mr. Tal says variable-rate mortgages tend to be more attractive when there are inflation expectations not yet expressed in short-term rates. This time, he says, the bond market is depressed, anticipating recession, and that has shrunk spreads dramatically.

The one thing keeping people in short-term money is the sense that there is no urgency to move because the U.S. Federal Reserve Board has pledged not to raise rates for two years, which also effectively ties the hands of the Bank of Canada.

"We know the five-year rate is attractive, but we also know short-term rates are not raising," Mr. Tal says.

What does that mean on a practical, dollars-and-cents basis?

Let's use the Canadian Real Estate Association's 2011 average sale price forecast of about $360,000 and assume a 20% down payment and a $288,000 mortgage.

At 2.45%, your monthly mortgage payment based on a 25-year amortization would be $1,282.98. At 3.09%, your monthly payment rises to $1,376.28.

But even at the gap, you would pay about an extra $7,000 in interest to lock in over four years.

Ultimately, the $7,000 amounts to an insurance policy. You get payment certainty for four years, but at a price.

If rates climb 200 basis points on your variable-rate mortgage, it could cost you $22,000 more in interest over four years. The reality is that rates wouldn't jump at once and, therefore, increases would likely be gradual.

Moshe Milevsky, the York University finance professor who wrote the oft-quoted study that variable-rate mortgages do better than fixedrate mortgages 88% of the time, said if you start thinking about it like insurance, it comes down to your risk tolerance.

"There are people who pay a lot for protection on their portfolio; there are people who pay a lot for life insurance," Prof. Mr. Milevsky says. "If the premiums are low enough, you might say, 'Sure, I'll pay.' But if you have a tight budget, every basis point counts, and it might not be worth it."

To me, he still has the ultimate answer for the tough decision whether or not to lock in.

"I still don't get why more Canadians don't split their mortgage," Prof. Milevsky says. In other words, locking in half of the mortgage and floating with prime on the other half.

"When is a bank going to come to the realization Canadians hate making this choice?"

He's right. Even with rates this low and the gap between short-term and long-term rates this narrow, it is still a tough call.

Photo By: Accretion

ADVICE TO SURF THE WAVES OF MORTGAGES

Brokering the best mortgage deal
Experts able to navigate through choppy waters
By Denise Deveau
For Postmedia News March 30, 2011

Cheryl Hutton and Aaron Coates always thought getting a mortgage would be a challenge.

But within 18 days of visiting a mortgage broker, they were able to close a deal on a new townhouse in Calgary without a hitch.

Now in their early 30s, both have careers in the theatre, something Hutton says has been a bit of a sticking point with banks.

"In our industry, we never fit the paperwork guidelines (for the banks). For some reason people don't think we pay our bills."

Although it was their first home purchase, Hutton says it was surprising how easy the whole process was once they had someone who could walk them through it.

"He sat us down, told us what our options were, showed us that it was possible, and explained all the steps we needed to take. If it wasn't for him, we may not have made the leap," she says.

Sorting through a mortgage process and negotiating rates can be overwhelming for first-time and seasoned homebuyers alike.

That's why people such as Hutton and Coates turn to brokers to do the legwork for them.

Yet mortgage brokers will tell you that a good number of homebuyers out there don't really understand what they do.

"Part of the challenge we have in our world is that people aren't really sure what a mortgage broker is," says Gary Siegle, regional manager for Invis Inc., a mortgage brokerage firm in Calgary.

Brokers should not be confused with "rovers" -mortgage specialists attached to a specific financial institution who visit customers outside of banking hours, he explains.

"They only deal with that bank's product. A broker, however, is an intermediary whose job is to make a match between a lender and a borrower. We represent the individual, not the bank."

About 30 per cent of mortgages in Canada are done through a broker, says Perry Quinton, vice-president of marketing for Investor Education Fund, a Toronto-based, non-profit financial information service.

"The reason more people don't know about them is because the banks are so visible," he says.

"It's easy to gravitate to them when you have your savings accounts, credit cards and investments there already."

Going for the comfort factor could cost you though, she adds.

"A broker has access to different lenders including banks, and can shop rates and features. A half per cent may not sound like much, but that could make a difference of about $20,000 for a $250,000 mortgage amortized over 25 years. Any little bit helps."

For anyone considering a broker, Quinton advises people to do a bit of groundwork first if they have the time.

"It helps to educate yourself about options and what you can afford. Look at all your living expenses, including student loans and credit card debt. Chances are you are understating those."

Another thing to look into is the different types of available mortgages and features, including interest rates, payment frequency, amortization, cash back programs, and the ability to make lump sum payments.

"Knowing these things before you go in can save you a lot of money," she adds.

Photo By: alfcfishing

TANKING CMHC RULES?

Think Tank: Time to leash the CMHC
John Greenwood 
FPPOSTED, January 31, 2011

The federal government should limit tax payer exposure to potential problems in the housing market by winding back the role of the Canada Mortgage and Housing Corp. in the provision of mortgage insurance, according to a new report by the CD Howe Institute.

The CMHC has a pervasive presence in the domestic mortgage market, potentially resulting in “unmanageably large risks in financial markets” that are ultimately borne by the Canadian public, says the report.

Under current rules, people who borrow more than 80% of the value of the home they want to buy must also take out insurance, and the CMHC is by far the most dominant player in that market.

According to the report by Finn Poschmann, vice president of research at the CD Howe Institute, the CMHC now backstops mortgages equivalent to more than 30% of Canada’s gross domestic product.

As a result, Canadians are exposed to “large, ill-defined risks,” says the report, which argues that Ottawa should crank back the CMHCs presence in mortgage insurance and allow more room for private sector insurers.

Originally conceived as a mechanism for executing public policy, the CHMC has expanded dramatically, especially in the wake of the financial crisis as the government encouraged banks to boost lending by allowing them to securitize more home loans.

But critics worry that the unintended consequence was that mortgages became too easy to get, pushing up real estate prices across much of the country to unsustainable levels.

The CD Howe report comes on the heels repeated warnings from the Bank of Canada that Canadians have become over leveraged and need to start paying down debt.

One of the main concerns about the CMHC is the lack of disclosure about the quality of its mortgages and details of the types of loans it insures. For instance, when the government announced earlier this month that home equity lines of credit, or HELOCs, would no longer qualify for CMHC insurance, many analysts expressed surprised that such loans were ever allowed to be part of the CMHC program in the first place.

NEWS FROM THE HILL

Ottawa toughens mortgage rules
By Andrew Mayeda
Postmedia News January 17, 2011

OTTAWA -- Finance Minister Jim Flaherty is cracking down on Canadians' ability to qualify for a mortgage, in the government's latest attempt to rein in consumer debt.

Flaherty announced Monday the government is reducing the maximum amortization period for government-backed mortgages to 30 years from 35 years. The change will affect mortgages with loan-to-value ratios over 80 per cent.

Canadians will only be able to borrow up to 85 per cent of the value of their homes, down from 90 per cent.

In addition, the government is withdrawing backing for lines of credit secured by people's homes.

Flaherty said the changes are designed to prevent the kind of housing bubbles that developed in other countries, most notably in the United States, where the collapse of the subprime mortgage market triggered the global financial crisis.

"The main reason we're taking the action is for the longer term, that we avoid even the beginning of the development of the kinds of issues in some other countries that have been very damaging to families," the minister told reporters after unveiling the mortgage changes.

Flaherty said the decision was based on the long-term goal of protecting household finances and the broader economy, rather than on any particular data on the housing market.

A number of economic observers, including Bank of Canada Governor Mark Canada, have recently expressed concern about the record-high debt levels of Canadians. Based on the ratio of debt to income, Canadians are actually deeper in the red than American households, which are still struggling to dig themselves out from the debt taken on before the financial crisis.

Flaherty said Canadian families must keep in mind that interest rates will eventually rise from their relatively low levels. Economists have expressed concern that a sharp rise in interest rates could leave Canadians stranded with too much debt.

"I think people need to demonstrate that good Canadian trait of prudence and reasonableness and common sense in terms of their debt assumption," said Flaherty.

Speculation has been building about whether the opposition parties will support the government's upcoming federal budget. The NDP, for example, has outlined a series of proposals, including help for Canadians' home-heating bills and the revival of the home-renovation tax credit. But Flaherty said the government doesn't plan to bring back the popular renovation credit, which was part of the government's economic-stimulus program.

Last Friday, Prime Minister Stephen Harper acknowledged his government was considering changes to the rules governing mortgages. He said the government "remains concerned about growth in the level of household debt.

In February 2010, Flaherty moved to toughen up the mortgage rules amid worries that Canada was in the midst of a housing-market bubble. The reforms, since introduced, compelled borrowers to meet standards for a five-year fixed-rate mortgage, even if the buyer wanted a shorter-term, variable rate loan.

They further required purchasers of rental properties to issue a 20 per cent down payment as opposed to five per cent. The moves played a role, observers say, in slowing down real-estate activity. While the federal government looks to curb borrowing, economists say the Bank of Canada may have to follow by raising its key interest rate sooner rather than later.

The central bank issues its latest rate statement Tuesday and it is expected to hold its benchmark rate at its present one per cent level as signs indicate the economy may be benefiting from renewed business and consumer confidence in the United States.

The tightened mortgage rules take effect March 18, 2011. Under federal law, lenders must obtain mortgage insurance when homebuyers pay a down payment of less than 20 per cent of the purchase price of the new home. The government then backs the insured mortgages. The new changes apply to such government-backed mortgages.

The withdrawal of government insurance on home-equity lines of credit takes effect April 18.

"Taxpayers should not bear any risk related to consumer debt products unrelated to house purchases. Those risks should be managed by the financial institutions that originate and offer these products," Flaherty said.

Changes to take affect this spring

The New Measures:

- Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.

- Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes.

- Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs.

Photo By: Digital Agent

6 SUGGESTIONS - DO THE MATH!

Six suggestions for avoiding mortgage fraud

DIANNE NICE
Globe and Mail Update
Published Monday, Oct. 18, 2010

Whenever the housing market starts to heat up, so does mortgage and real estate fraud. Buyers rush through deals to avoid losing out, but can end up being scammed if they’re not careful.

While there are no statistics on these types of fraud in Canada, in the United States, it is estimated to cost victims between $4-billion and $6-billion (U.S.) a year.

“Mortgage scams are carried out in all different forms and involve a multitude of people, some who don't even know they're being taken advantage of,” says Diane Scott, president of the Calgary Real Estate Board.

Ms. Scott says at least two types of mortgage fraud have occurred in Calgary this year. One is property flipping, in which a dishonest seller artificially inflates the value of a property using a phony appraisal and then sells it for a large profit. The phony appraisal often remains with the property through multiple transactions, making it difficult to determine the property's true worth, and the end buyer is left paying for a mortgage that is much higher than the home's value.

The other involves “straw buyers,” who are offered money to lend their identity and good credit record for use on fraudulent mortgage applications. The fraudster uses the information to apply for a loan, then disappears with the money, leaving the straw buyer on the hook for the mortgage payments.

Other types of real estate scams include title fraud, where your identity is stolen and used to assume the title of your property, which can then be used to sell your home or get a new mortgage. The criminal takes the mortgage money and runs. You may not even find out about the fraud until the lender contacts you or someone pulls up in a moving van, claiming to be the new owner of the house.

And there’s also foreclosure fraud, in which a homeowner having trouble paying a mortgage is offered a loan in exchange for up-front fees and an agreement to transfer the property title to the scammer, who is then able to take the victim’s loan payments, sell the house or remortgage it and leave with the money.

While a lawyer, realtor or licensed mortgage broker can help ensure all legal precautions are taken, it’s still important to do your homework before you buy, Ms. Scott says. Here’s her advice on how to avoid becoming a victim of fraud:

1. Beware of unusual offers. Never lend your identity to anyone or sign documents you do not fully understand. “If it sounds too good to be true, then it probably is,” Ms. Scott says.

2. Do the math. Look at the listing history on the property and do a comparative market analysis. Check the number of sales and price ranges for the community. If the home’s listing price is much higher than the average value of neighbouring homes, it could mean someone is flipping the property or has had it fraudulently appraised.

3. Don’t assume the seller is honest. Get your own realtor or independent representation for your purchase. If the seller objects, something is wrong.

4. Do a land title search. This will show the name of the property owner, any mortgages or liens registered on the title, as well as previous sales and transfers. You can also buy title insurance to protect against title fraud.

5. Get your own appraisal. You may want to include, as part of your offer to purchase, the option to have the property appraised by a member of the Appraisal Institute of Canada.

6. Secure your deposit. Make sure your money is being held in a real estate trust account by a realtor or lawyer. This will ensure your money is safe until the deal closes.

Photo by: Barnesnet

BARGAIN BASEMENT MORTGAGE BINS?

Money is on sale!

Ted Rechtshaffen
Special to Globe and Mail Update
Published Friday, Oct. 15, 2010

This month, a client locked in a five-year mortgage at 3.49 per cent.


They could have done the same in 2001, but it would have been about 7 per cent.

In 1982 it would have been 18 per cent.

Even in the low-rate days of 1952, it would have been about 5.5 per cent.

Borrowing costs are lower than any time in modern history. This represents an incredible opportunity for those with the foresight (or fortitude) to take advantage.

Here are five strategies to consider:

1) When borrowing, lock in today’s rates. I know that at most times a variable rate is a better solution than fixed. Today is not "most times." If you are getting a new mortgage, lock it in. Even if it is only for three years, you can get a three-year mortgage today for under 3 per cent. The best three and five-year variable rates today are 2.25 per cent, but the Bank of Canada is almost certain to begin hiking rates again within six months. With such a narrow gap between a variable rate and a fixed rate, it simply isn’t worth the risk.

2) If you own a house, consolidate all your debts against your home. While credit card debt remains as high as 19 per cent in many cases, and other unsecured debts might be in the 5-per-cent to 7-per-cent range, you may have an opportunity to move those debts to your mortgage and gain significant savings. Even having a line of credit at prime + 1 per cent (4 per cent) can be consolidated into a mortgage for real savings. As an example, if your home is worth $500,000, and you have a mortgage balance of less than $400,000 (80 per cent), you will likely be able to consolidate other debts in your mortgage, up to 80 per cent of your home’s appraised value.

3) Start a business. As a business owner, I know that getting capital is not easy. The most common response I heard when I was looking many years ago was “use a line of credit secured by your house.” This might not be right for everyone, but I can assure you that you will not find a lower-cost source of capital (except those interest-free loans from family). In fact, I would look at using a fixed-rate mortgage as opposed to a line of credit if you require a larger amount of funds up front or want to secure the rate.

4) Borrow to invest. While some believe this is gambling, I can assure you that, unlike at the Las Vegas tables, the odds are tilted toward you. If you borrow to invest, the interest cost becomes tax deductible. In today’s market, you could do a five-year mortgage at 3.5 per cent, and if you are in the top tax bracket, this will effectively cost you less than 2 per cent a year. Over the past 60 years, the Toronto Stock Index has averaged annual returns of over 10 per cent. I am not saying you can count on these returns every year, but if your borrowing cost is under 2 per cent, and a dividend portfolio can pay 4 per cent a year just on the dividends, it can be a very powerful wealth-building strategy.

5) Borrow to buy more real estate. Imagine having an $800,000 house in Vancouver or Toronto and having no debt. You decide to buy a beautiful ocean-front property in Florida or California. The new property costs $300,000 – and they want cash. You can take out a mortgage on your Canadian property to possibly make the real estate purchase of a lifetime. If you are considering this, be sure to use a foreign-exchange dealer to save on exchange costs, and look into the tax issues of owning real estate in the United States.

Just for fun, you might want to file away this article and open it up in about five years. You may just wish you took the plunge when money was on sale.

Photo by: Dreamer7112

RESALE PACE TO CLIMB

Resale home pace expected to climb
By Marty Hope, Calgary Herald
October 16, 2010

With a struggling economy and housing sector, anything the least bit positive is a good thing.

So it has been for the past couple of weeks -- a scrap of good news here and there.

Statistics Canada was first out of the chute with news that the Calgary area's unemployment rate for September declined to 6.6 per cent -- down from 6.7 per cent in August and declining even further from the 6.9 per cent in September 2009.

That being said, there were 1,400 fewer jobs created last month compared with August 2010.

But since the first of the year, job creation is still ahead of 2009, says Statistics Canada.

Job creation is good news for the new and resale housing sectors for obvious reasons.

The Calgary Real Estate Board has also chipped in with its good news.

In its latest activity report, the board reported sales of both detached single-family homes and multi-family condos climbed in September compared to August.

In terms of detached homes, 958 changed hands, up from 867 in August.

As for condos, the September sales total was 366, two more than were sold in August.

But compared to the same month last year, sales numbers for September were off.

CREB president Diane Scott took the positive road in her September summary, saying fall sales "should improve slightly" to reflect the latest Statistics Canada report.

"There are signs that September may mark a gradual, if not slight, uptick for Calgary's housing market," she says. "We are seeing a modest improvement since the market's decline that started in April of this year."

In the earlier part of the year, home-buyers -- first-timers for the most part -- decided to move up their purchase dates to beat expected hikes in interest rates and changes to mortgage rules.

When both these factors came into play, people who hadn't bought stepped back from the market, taking a wait-and-see attitude.

There were also those who continued to be concerned about the strength -- or lack of strength -- in the economy.

Here again was a bit of good news. Mortgage rates have not moved dramatically and the average price of used homes is holding fairly steady.

"The Bank of Canada is in no hurry to raise interest rates to any significant level and affordability continues to improve in key segments of the Calgary housing market," says Scott. "These factors, along with great selection, have clearly tipped this market in favour of the buyer."

The average price of detached single-family homes in September within Calgary was $460,278, up three per cent from August but almost unchanged from $459,085 in the same month last year.

The average selling price for condos inside Calgary was $284,028 last month -- down one per cent from August and two per cent from September 2009.

While the market, itself, appears to be undergoing a slight change, the makeup of the buyer is also getting a facelift.

"Clearly, there is a shift in the types of buyers entering the market," says Scott.

"It was first-time buyers who drove the late market recovery last fall and this spring.

"While lower-priced home sales have declined, sales over $1 million have actually increased by two per cent this year compared with the same period last year."
- - -
MILLION SALES UP

For the first nine months of this year, million-dollar-plus sales of used homes totalled 286, up from 229 during the same period last year, says the Calgary Real Estate Board.

But the highest volume of sales of detached single-family resale homes are occurring in Calgary in homes priced between $300,000 and $399,999.

They amount to nearly 38 per cent, a slight improvement over 2009. Meanwhile, the vast majority of condo sales -- more than 47 per cent -- were priced from $200,000 to $299,999.

A year ago, this category accounted for nearly 51 per cent of all condominium sales. "While consumer confidence has strengthened and the unemployment picture has improved, economic jitters will continue to impact Calgary's housing market," says president Diane Scott of CREB. "More and more home buyers will eventually return to the marketplace, but for the moment, they remain moderately cautious."

Photo By: Dave van Hulsteyn

SALES ON THE RISE

Home sales, prices up in September
Garry Marr, Financial Post · Friday, Oct. 15, 2010

TORONTO — Housing sales rose in September for a second straight month while average prices reversed the falling trend with a 1.9% increase from August, the Canadian Real Estate Association said Friday.

The Ottawa-based group said sales in September climbed 3% from August on a seasonally adjusted basis. It was the highest number of sales since last May.

At the same time prices also showed some growth. The average sale price across the Multiple Listing Service last month was $331,089, on par with where it stood a year ago, and an increase from $324,928 in August.

"Supply and demand are rebalancing, and that's keeping prices steady in many markets," said Georges Pahud, president of CREA.

With demand improving slightly and the supply of homes falling, the number of months of inventory in the market dropped for a second straight month, the group said. New listings remain 15% below the peak reached in April.

CREA said two-thirds of local markets posted sales increases with Winnipeg, Calgary and Montreal standing out. However, compared with last year sales still lag across the country, down 19.8% in September from a year ago.

"Record level sales activity late last year and earlier this year is expected to further stretch year-over-year comparisons in the months ahead," the group said.

CREA said on a seasonally adjusted basis there was 6.6 months of inventory in the market nationally. That's down from 6.9 months in August and 7.2 months in July. The number of months of inventory represents the number of months it would take to sell inventories at the current rate of sales activity.

The interest-rate environment continues to help the housing market. While the prime lending rate has jumped with recent interest rate hikes from the Bank of Canada, effecting variable-rate mortgages, long-term rates continue to fall. Some lenders are now loaning money as low as 3.5% for a five-year, fixed-rate term.

"Mortgage lending rates eased in the third quarter, which helped support sales activity over the past couple of months," said Gregory Klump, chief economist with CREA. "Interest rates are going nowhere fast, so home ownership will remain within reach for many homebuyers."

TIME & RATES WAIT FOR NO MAN!

Time to lock in that mortgage rate?

Andrew Allentuck, Financial Post

Published: Thursday, May 06, 2010

Taking on a mortgage is a big commitment. Every buyer who uses a mortgage has the choice of floating or going with a fixed rate that often costs a couple of percentage points higher per year. Today, for example, one can get variable rates at an average rate of 2.34% while five year closed rates average 5.27%, according to Fiscal Agents Financial Services Group in Oakville, Ontario. Negotiated rates can be lower.

If rates never changed very much, there would be no contest – the floating rate deal would win. But rates do rise and fall and therein lies the borrower's dilemma.

Borrowers with kids and an aging car fear that their ability to pay interest rates twice or thrice the current floating rates are limited. "The test is liquidity and risk tolerance," says Derek Moran, a registered financial planner who heads Smarter Financial Planning Ltd. in Kelowna, B.C. "People with ample liquidity can afford to take a chance on rising mortgage rates. It follows that those who lack liquidity feel some pressure to avoid drastic interest rate increases."

The point is not merely academic, for Canada, in spite of recent mortgage rate increases, is still at a relatively low point of rates over the last four decades. "There is more room for rates to go up than down," Moran points out.

The cost of making a decision to float or go fixed varies with the rate differences.

In 2008, Moshe Milevsky, Associate Professor of Finance at the Schulich School of Business at York University, and Brandon Walker, a research associate at the Individual Finance and Insurance Decisions Centre in Toronto, published a study that measured the direct and opportunity costs of going with either choice. "Over the long run, homeowners really do pay extra for fixed rate mortgages," they concluded.

The reason is intuitive. Lenders do not want to take the chance that when they have to refinance a loan that they will be stuck paying more than they are getting.

Mismatching what they lend with the cost of what they borrow can cut their profits and even lead to insolvency. So lenders attach what amounts to an interest rate insurance fee and bundle that into the price of money they lend on fixed terms.

Milevsky and Walker confirmed this explanation. "The study showed that a positive Maturity Value of Savings [the value of investing the difference between floating and fixed mortgages in 91-day T-bills] was positive the majority of the time, so the homeowner saved by using a variable-rate mortgage."

The amount of money that the homeowner can save by taking a chance on floating rates varied in the Milevsky and Walker study, depending on the time periods in question. But the average amount was impressive: $20,630 as of 2008. Put another way, floating allowed borrowers to cut the time it would take to pay off the mortgages by a year or more, in some cases as much as five years on 15-year amortizations.

Rational calculation and personal feeling are, of course, different things. A person with a fixed income and a great deal of debt may be reluctant to put a rate casino between himself and the lender and will therefore go with certainty, even at a high price.

It is also a matter of experience. "First time buyers tend to pay close attention to the cost of the mortgage," says Laura Parsons, Areas Manager of Specialized Sales – which includes mortgages, for the BMO Financial Group in Calgary. For them, the appeal of locking in is relatively high. Their mortgages are new, the amounts they owe are higher than they would be 10 or 15 years in future when the mortgage is substantially reduced, and their incomes, often early in their adult lives, are lower than they will be in future.

"First time home buyers are net debtors and they don't want to endanger their finances," suggests Adrian Mastracci, a portfolio manager and financial planner who heads KCM Wealth Management Inc. in Vancouver.

There are other strategies that the buyer can use to provide some rate insurance without taking on what Milevsky and Walker have demonstrated as the high cost of peace of mind.

"The buyer can take a variable rate mortgage but set payments higher than the minimum required" says Parsons. "That could be at the 5 year closed rate, which would mean a faster paydown and growing asset security while still keeping the low cost of the variable rate mortgage. Faster paydown is itself cost insurance if interest rates do rise."

Banks are nothing if not inventive in helping clients cope with the fixed versus floating dilemma. For example, TD Bank offers to give 5% of the amount borrowed on a five or six year fixed rate residential mortgage to the borrower. The program, aptly dubbed the "5% CashBack Mortgage," implicitly acknowledges that fixed rate loans can be more costly than variable rate ones.

For its part, RBC has a RateCapper Mortgage that builds on the initial low cost of a variable rate mortgage but limits the cost if rates shoot up. On a five year mortgage, the borrower will never pay more than the capped rate and if the variable rate, based on the prime rate, drops below the RateCapper mortgage maximum, the interest rate charged to the borrower also drops. The plan is a compromise and spreads interest rate risk. Many other lenders allow borrowers to mix fixed and variable rates, thus accomplishing a similar goal.

Plan selection, it turns out, is gender-related. According to a BMO survey, men, 44% of the time, are more likely than women to choose a fixed rate mortgage than women, who make that choice only 28% of the time. Women, it turns out, tend to make the better choice, for as BMO's analysis shows, "fixed rates were advantageous during only two periods – through the late 1970s and in the late 1980s, in both cases ahead of a period rising interest rates, as is the case now."

So where are interest rates headed? The yield curve, a line that links interest rates for periods of time from 1 day to 30 years, implies that rates will rise, but not very much.

There is no sense that we are returning to a period of double digit rates. Moreover, there are deflationary forces at work, notes Patricia Croft, chief economist of RBC Global Asset Management in Toronto. "The present crisis in European finance and the potential fizzling out of the present recovery in North American capital markets could presage falling inflation and even disinflation – the subsidence of rising prices and interest rates," she explains..

BMO forecasts that the rising Canadian dollar will put downward pressure on consumer prices, reflecting the fact that much of what Canadians eat and use is imported. Inflation could flare up, BMO's economists say, but there is a balanced risk of declining prices. For now, the Bank of Canada is being very cautious in its interest rate management commitments. For those who are strapped for cash, personal circumstance may dictate the choice of a fixed rate. But for everyone else, the folly of trying to make interest rate predictions over a business cycle and to predict both the short term rates and the long term rates along the yield curve should be apparent. No promises, of course, but the odds of saving money are with borrowers who choose variable rate plans or those that emulate them.

Photo By: Philipp Klinger

JUST STAY STRONG

Housing market momentum to carry strong sales volume into 2010: Scotiabank
By Mario Toneguzzi
Calgary Herald
March 23, 2010 9:02 AM

CALGARY - The momentum in the Canadian housing market has carried through to early 2010, with the volume of sales transactions in January and February only slightly below the near-record levels of late 2009, says a report released today by Scotiabank.

And the average MLS sale price in Canada will reach a record level this year.

"Strengthening labour markets are underpinning confidence, while generationally low mortgage rates

— and expectations that borrowing costs will soon be headed higher — are adding a sense of urgency," said the Global Real Estate Trends Report authored by economist Adrienne Warren.

"Milder-than-usual temperatures across much of the country may also have put a bit of spring into the
typically slow winter sales season. Average prices too are testing new highs, both for new and resale homes. A steady increase in the number of listings in recent months alongside a sharp increase in new construction is restoring a much better balance to the overall market compared with the latter half of 2009."

But the report said sellers’ conditions persist in most major centres.

The report said continued strong demand and pricing is expected through the spring, especially given an expected rush of buyers hoping to pre-empt tighter qualifying criteria for insured mortgages effective mid-April as well as the July 1 introduction of the HST (Harmonized Sales Tax) in Ontario and British Columbia.

"However, this should give way to more subdued activity in the second half of the year, as higher interest rates and higher home prices erode affordability. The incentive among builders to add substantial new housing stock should likewise fade as supply increases and prices cool."

The report expects the volume of MLS sales to hit about 510,000 this year, up 10 per cent from

2009 but still a touch shy of the 2007 record at the national level. Average prices are forecast

to increase about eight per cent to a record $345,000 in Canada.

Housing starts are estimated at 190,000, up from 149,000 last year.

Photo by: _Caitlyn

MORTGAGE CONFUSION

New mortgage rules leave homebuyers confused
Insured buyers must show 'ability to pay'
James Pasternak, Financial Post
Published: Wednesday, March 17, 2010

Frank and Susan Williams bought a house near Hamilton, Ont., this month, they followed a time-honoured tradition of using leveraged financing.

With mortgage insurance they only had to put down 5% of the $270,000 purchase price. They went with a closed variable rate at 2.25% and amortized the loan over 35 years. The deal was initiated with a mortgage broker, with Bank of Nova Scotia providing the financing.

"It's a three-bedroom bungalow. That was attractive to us. We have a dog and we like to do things in the backyard. We did not have the type of money we thought we'd have to put into a house. We said let's just bite the bullet and get this over with," Ms. Williams says.

And getting it over with was probably a good idea. First, they were in a rent-to-own arrangement and had to exercise their option to buy before August 2010. And second, based on pending federal rules for government-backed insured mortgages that come into effect on April 19, the Williams (not their real name) would probably not have qualified for the variable-rate mortgage. In fact, as recent arrivals from the United States and its housing crisis, their credit history might not have passed any stress test.

"We really came from the United States with nothing. Everything we had disappeared with the housing crisis. In areas that had bad loans all the houses just hit bottom. We were expecting US$250,000 out of our house but we got nothing," Ms. Williams says. They walked away from the whole mess.

But while the Williams might have had good reasons for leveraging to get their dream home -- they are firsttime buyers in Canada -- the new federal rules governing mortgages have been widely misunderstood. In fact, the biggest fear among the young and house-less is fear itself.

"There are a lot of rules that changed. But they weren't communicated very well," says Robert McLister, the editor of Vancouver-based Canadian Mortgage Trends (www.CanadianMortgageTrends.com).

Margo Wynhofen, of Grimsby, Ont.-based Verico One Mortgage Corp. ( www.mymortgageadvisor.ca) and vice-president of the Independent Mortgage Brokers Association of Ontario, says she has had to spend considerable time explaining federal Finance Minister Jim Flaherty's statement of Feb. 16.

"I had a lot of people misunderstand the announcement. So I had a lot of clients call me for clarification. There was an overwhelming sigh of relief," Ms. Wynhofen says.

Under current mortgage-lending rules, buyers with a down payment of less than 20% of the purchase price must purchase mortgage insurance, with the most common source being Canadian Housing and Mortgage Corp. The new rules affect only customers that are required to purchase the insurance.

Under the new rules, all buyers requiring mortgage insurance will have to meet the "ability to pay" for a higher, more expensive five-year fixed-rate mortgage even if they choose a mortgage with a lower interest rate and a shorter term.

"It's not just first-time homebuyers who are affected. It's anyone who wants a variable mortgage rate now who doesn't have one already, they now have to qualify at a higher interest rate. Some of them won't qualify. And that's fine so they'll just take a fixed rate. It's not the end of the world," Ms. Wynhofen says.

Bernice Dunsby, director of home equity financing at the Royal Bank, says the new rules might even help save first-time buyers from themselves.

"We believe the new measures will have a small impact on mortgage growth, if any. First-time buyers should not be any more concerned about these changes. In fact, I believe the changes will actually help first-time homebuyers to ensure that not only can they afford their home today but in the future, especially if interest rates rise," says Ms. Dunsby.

In some cases, the rules might be outdated before they are fully implemented. A growing number of homebuyers are forgoing the conventional mortgage and using alternative financial products. Take the case of London, Ont., accountant and recent homebuyer Phil Parkinson. Three years ago, he bought his first home with a fully secured line of credit offered through Manulife Financial Corp.

The Manulife One product provides up to 80% of the appraised value of your home. It can be used to pay off the balance of your existing mortgage, personal lines of credit and any other outstanding debts you might have.

"These operate on a variable rate. It's just like one big bank account. You can have your money deposited into the account, you can pay your bills. [As you deposit] you can knock your account down and lower your interest calculation. Theoretically, you don't have to pay anything expect the interest," Mr. Parkinson says.

Other highlights of the rules don't directly affect firsttime buyers. For example, the maximum amount Canadians can withdraw in refinancing their mortgages has dropped to 90% from 95% of the value of their homes. rule has created a mini-stampede.

"There is a bit of urgency now to get [a refinancing] done before April 19. People are chronically refinancing. I have clients that refinance every two to three years to take the equity out of their home to pay off credit-card debt. The home has become an ATM machine," Ms. Wynhofen says.

A January 2007 Statistics Canada study of personal debt concluded that "increasing mortgage debt for refinancing purposes or taking out home-equity loans implies that homeowners in both [Canada and the United States] are using their homes as a source of cash to finance their spending rather than as an investment."

And in an effort to contain the risks of real-estate speculation, as of April 19 the minimum down payment for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation rises from 5% to 20%.

As for ex-patriot Americans Frank and Susan Williams, they're pretty relieved about their fresh start with a new house.

"It's very different to get a mortgage here. It's a lot less hassle than in the United States," Ms. Williams says.

And because the Williams are not particularly worried about the new mortgage rules, they are already thinking about their next purchase.

"We might be able to buy a little place that's larger when we can leverage this up a bit -- maybe get something cheaper than this with more room,' Ms. Williams says.

Photo by: Dom Dada

2 MONTHS OF A CHILL

Home resales cool for second straight month
Reuters
Published: Monday, March 15, 2010

TORONTO -- Sales of existing homes in Canada dipped for a second straight month in February, but remained high on a year-over-year basis, as the market may be moving into more balanced conditions, data showed on Monday.

The Canadian Real Estate Association (CREA) said a total of 42,799 homes changed hands last month, down 1.5% from January, as a large gain in sales in Toronto were offset by declines in Vancouver and other British Columbia housing markets.

The real estate group said the Winter Olympics, which were held in the host city of Vancouver and nearby areas, may have played a factor in lower sales in the province last month.

Unit sales in British Columbia were down 13.3% in February from January, compared with a 3.3% advance in Ontario.

Across Canada, sales rose 44% from the same month last year, a smaller gain in national activity from the previous three months. This was in line with economists' views that year-over-year comparisons are likely to shrink in coming months because the recovery of the housing market started in February 2009.

"Housing markets are becoming more balanced," said Gregory Klump," CREA's chief economist.

After a relatively short spell of low consumer confidence during the global financial crisis, Canadian homebuyers were quickly back in the market and have made the housing sector one of the cornerstones of the domestic economic recovery. The pace of the rebound has encouraged debate about a housing bubble.

But with rising supply -- new listings rose for a fifth straight month, up 2.4% -- it could take the steam out of the housing markets as the year goes on, said Mr. Klump.

Ultralow interest rates could further prompt home resales this spring before the arrival of new mortgage rules in April and changes to provincial sales tax regimes in British Columbia and Ontario, before cooling in the second half of the year.

"We should see the Canadian housing market move slowly back into a balanced-market position as higher mortgage rates and prices begin to temper demand," said Millan Mulraine, economics strategist at TD Securities.

CREA said the national average home price in February rose 18.2% from a year earlier to $335,655 (US$329,074)

Photo By: cjhart10