You can’t say this wasn’t expected! For months Finance Minister Flaherty and Co. have plainly warned us that changes to Canadian mortgage lending rules were on the block. The demise of the 40 year term and 100% financing was the first hint of things to come.

Now unless you have been hiding in a dark corner of your basement hoping to escape Flaherty’s latest wand waving you won’t have to look far to find news that tells you that mortgages with a 35 year amortization are now that which once was. You’ll also find that loan to value ratio’s have also dropped from 90 percent to 85.

So what!

• it means that some first timers won’t be moving into their Yaletown condo.
• it also means that fewer homes will be sold – some claim 20,000 units
• it does not mean that the Vancouver real estate market is off the rails
• it does mean that the Bank of Canada can hold off increasing interest rates – at least for now
• if you are into political whispers, this mortgage reform might be a political ploy to soften the blow in the next budget which some see as a catalyst for a general election

• it does mean it will be harder to get lines of credit against the value of your home – this will mess up yacht sales and that planned Italian Villa holiday

But Really

It wasn’t so long ago that a 10% interest rate with a 25 year amortization was de rigueur. Somehow, life carried on and the buying and selling of homes continued. Being a cup half full kind of guy, I’m of the opinion this will continue.

Simply, as it pertains to the buying and selling of homes, I’m not convinced the Fat Lady is singing yet but, if you are talking about personal debt, that is an entirely different song.

Rob Regan-Pollock of Invis thinks…

This is a clear message to Canadians that they can no longer use their home as ATM’s to consolidate their debts. The Government wants to see more home equity and encourage better financial management by eliminating the refinance lifeline. This policy will hopefully encourage more awareness and personal responsibility as there is no longer an easy exit.

What Others are Saying:

Wall Street Journal – Canada Fin Min Tightens
Globe and Mail – Investor – returned to roots
Windsor Star – rules could slow local home sales
Vancouver Sun
Globe and Mail – Slow Loan Business

Without overstating the obvious, as a Vancouver Realtor® my job is to help you with the process of buying or selling your Vancouver home. Part of that process, includes checking to make sure that you have all your financing in oder. What my services do not include is the calculation of the money it will cost you to acquire or change your mortgage – that function remains the domain of mortgage professionals.

What has triggered this post was a ‘heads up’ from Rob Carrick over at the Globe and Mail about a piece written by the Canada Mortgage News people who left me gob-smacked about the incredible rip off consumers face when contending with Mortgage Penalties.

Paying a Realtor® full commission for his services pales by comparison to this revelation.

Shocking Discovery

Courtesy Rhonda Porter

Ticklers:

• “On November 26, 2010, we reported that a good source told us the govt would not follow through on their promise to standardize mortgage penalties until this spring, at the earliest.”
• “On December 15, 2010, we also reported that discounted Fixed mortgage rates were going up but Posted mortgage rates were staying the same… we stated that your mortgage penalty would not decrease as it normally does when rates go up.”
• “A $200,000 mortgage taken in December 2008 will cost you $16,800 to get out of today… but 12 years ago it would have cost you approximately $8,340 and even today, it should only cost $11,640.”
• “We made a startling discovery… we caution you, the results could get your blood boiling if you had to pay a penalty in the past 2 years….We found that Banks have shrunk or reduced the spreads between their Posted and Discounted rates over the past few years….and this has had a huge impact on Interest Rate Differential (IRD) penalty calculations.”

If you think Mr. Potter was an SOB read the full post to see how deep the bank’s hands are in your pockets.

Seeking Answers

Rhonda Porter who hails from Seattle gives us a US version of mortgage penalties saying that “It’s your money, your assets, your home and your responsibility to make sure you understand.”

Back on this side of the 49th is another heads up. Today, I was told to expect a weekend post from my good friend Rob McLister over at Canadian Mortgage Trends, as he intends to dive deeper into the ‘Big Five’s money grab’.

With help in mind, consider this my New Year’s interest free gift to you gentle reader – know that it will cost you nothing and you won’t be penalized as you wait for McLister’s post.

So says Mark Carney, Governor, Bank of Canada in his speech to the Economic Club of Toronto. Messages similar have been uttered by Carney for most of 2010. In tandem, Finance Minister Jim Flaherty too, has this year, established a track record of warnings, the latest being, that “there is reason for concern” but, not “extreme concern” to which he adds – the government has no plans to do anything at this time.

As a Vancouver Realtor®, these repeated messages make me wonder – what is their impact on buyers of Vancouver’s real estate. Are the appeals achieving their intended goal or is the foretelling of doom similar to the lessons of Aesop?

The Boy Who Cried Wolf

Aesop’s story was about a shepherd boy who got his chuckles by tricking the nearby villagers into believing that a wolf was attacking his flock of sheep. As Aesop tells us, each time the villagers came to the shepherd boy’s rescue no wolf was to be found. With repeated false alarms, the villagers soon found the shepherd boy’s routine had lulled them into complacency choosing instead, to ignore the boy’s cry.

As Aesop tells it, in time the shepherd boy and his flock were confronted by a real wolf who not only ate the flock of sheep but, as some versions of the story claim, also ate the boy.

Ear Plugs

For many months the two leaders have followed a path carved by the shepherd boy. They repeatedly raise the financial red flag of increasing interest rates cautioning all to manage their debt. It is not a new idea to think that many have listened to Carney and Flaherty’s repeated warnings. It is also not a new idea to anticipate that many more look at the repeated warnings as something akin to the shepherd boy’s actions.

Though their words implore prudent use of one’s credit, the repeated endless appeals of Carney and Flaherty may have fallen on deaf ears as did those of the shepherd boy. Retrospectively, the appeals appear counterproductive as many villagers – the buyers of Vancouver real estate, wore ear plugs while signing mortgage documents. Evidence confirming that few have listened can be found in the abundant media commentary pointing to Canadian debt reaching new uncharted levels and is in part, a sign of the villagers counter response to the appeals of Carney and Flaherty.

Numbing Phase

What will happen when the rates actually do start to climb? As the rates increase, now predicted to be mid year of 2011, there will be new cries from villager families being destroyed by the burden of their debt.

In response these leaders will become the modern day Aesops who tell stories while taking comfort in the knowledge that it is not they who are the problem but, instead as Jack Layton proclaims in his sound bite it will be the banks who will decimate the villagers. True to their nature, it seems possible the villagers might then expect to hear a new message from Carney and Flaherty which Carney may call Phase Two. That message will be direct in its simplicity – ‘we told you so’.

Good Eats

Carney’s “new phase” may be the first real sign of the inevitable arrival of the wolf yet, one question remains outstanding. Will Carney and Flaherty eventually suffer the fate of the shephard boy?

The Bank of Canada announced today that it will hold its trend setting target overnight rate at 1.00 per cent.

Changes

The Central Bank reported that the economic outlook for Canada has changed and it expects the economic recovery to be more gradual than projected earlier in the year. More modest growth reflects a more gradual global recovery and a more subdued profile for household spending.

Slowing

Inflation has been below expectations and points to continuing excess supply and slowing in the growth of unit labour costs. The Central Bank now believes the gap between potential economic output and actual output won’t close until the end of 2012 rather than at the beginning of that year.

BCREA expects the Bank of Canada target overnight rate will remain unchanged until the end of the first quater of 2011. As a result, the prime rate will remain at 3.00 per cent until that time.

Courtesy the BCREA Economic report reprinted with permission

You may have noticed that YatterMatters has a few sponsors. I asked Mortgage Architects to pay us a visit to give you some insight into what it is that they do and how they can help ‘When Life Moves You’.

We were really excited about the chance to be a sponsor. In real estate, the mainstream media is no substitute for professional insight from the field, so it’s essential to support the cause of sites like YatterMatters.

We also appreciate the chance to write a little blurb explaining what we do.

Who We Are

We are mortgage advisors and (in a nutshell) we try to do three things well:

1. Provide up-to-the-minute advice on which term entails the lowest cost. (“Term” is the length of the mortgage contract, like 1-year, 3-years, 5-years, etc.)
2. Identify which mortgage offers the best flexibility and value, given the client’s preferred term.
3. Walk homeowners through the entire mortgage process, from mortgage selection to document preparation, approval, and closing.

The Key

There is a key point about mortgages that often slips through the cracks. It relates to term selection. What many don’t realize is that picking the right term often saves more than searching for a rock-bottom interest rate. We do both, but the former takes precedence because anyone can do the latter.

We routinely do rate simulations for our clients and when they see the estimated cost differences of various terms they’re often astounded. This is one of those times when professional advice comes in handy.

Information When Needed

A good mortgage advisor is essentially a professional information provider. Mortgage professionals don’t sell anything. They educate. That way, people can make their own informed decisions and be confident in them.

In any event, it’s always a pleasure to chat with new people. For mortgage shoppers who need a 2nd opinion on their financing (at no cost), we’re just an email away at: info@myvirtualmortgagebroker.com

And, for those who want a deeper understanding of the mortgage world, you’ll find us blogging 4-5 days a week at: CanadianMortgageTrends.com

MyVMB.ca
800-280-2460
Tudor Mortgage Architects

The Royal Bank of Canada released its “Housing Trends and Affordability’ report.

Accordingly, it claims that owning a home in Vancouver is approaching uncharted territory in affordability.

Highlights of Robert Hogue’s, RBC’s Senior Economist thoughts.

Cost to Own Rises

Reasons:

• higher home prices and mortgage rates
• Hogue’s rationale: ‘tight market’- a result of last years impressive rebound, followed by decline in homes for sale (ed.note: not in Vancouver)
• eroded half of gains earned in 2008

Red Flags

• worrisome is share of household income dedicated to homeownership costs.
• Vancouver Affordabilty measure close to all time high

Looking Ahead

• further affordability erosion ahead
• current low interest rates and price stabilization is temporary
• in 12 – 18 months increased rates will erode affordability further
• rising household income will help – a little

In BC

• prices suffering downward pressure
• high prices make a change in interest rate more significant – “elevated property values relative to income amplify
• the effect of movements in mortgage rates on affordability”
• ownership in BC testing the limits of affordability
• **”Very poor affordability is likely to restrain demand in the period ahead.”

Thoughts

Hogue may find confirmation of his last statement as we witness verification in the incredible drops in Vancouver residential sales. (See Community SnapShot Series)

Full Report Here

**Liberal Quotes from this report Logo Courtesy RBC.

Now that you are settling back into your routine after the Summer break, there is more meaningful economic information to help us provide an overview of where the mortgage and real estate markets are heading this fall. I suggest we take a quick look at some global factors and then circle back for our local review.

U.S. Still Struggling

U.S. Lenders are still clearing their backlog of foreclosures with only 1/3 of foreclosures currently listed on the market. Lenders do not want to flood the market with homes and are progressively releasing inventory to try to keep prices stable.

Still a long way to go…

U.S. Unemployment and debt levels are weighing down economic growth. Even with an US Federal Reserve rate of 0.00%-0.25%, and long term fixed rates at record lows, the US consumer is more into saving than spending which is keeping U.S. growth weak. Combine weak domestic demand with the recent devaluation of the Japanese Yen and undervaluation of the Chinese RMB, U.S. exports are now less competitive. This adds yet another challenge to the U.S. economy. There is a realistic fear of further devaluation of the U.S. dollar. This is why we are seeing a lot of capital moving to fixed returns in the money market. To date, investors have moved $190.7 Billion into bonds & withdrawn $7 Billion from equity funds!

Europe is improving

The Euro zone has been growing at a faster pace than the U.S. but has similar structural challenges with unemployment and debt levels which will moderate growth.

In reviewing analysts forecasts, the threat of a double dip recession seems remote, however the reality will be sluggish economic growth in the U.S. and Europe. This should keep inflation concerns on the back burner for the foreseeable future.

Full Circle

So back to Canada where Canadian Mortgage Bonds and Mortgage Backed Securities have been on a tear! With investors waiting for the next chapter to unfold in the US & Europe, Canada is being viewed as a safe haven with investors who are happy to take a 2% guaranteed yield on CMHC insured Mortgage Backed Securities and Canadian Mortgage Bonds. Here are a couple of articles which reflect the growing popularity of Canada and growth in Mortgage Backed Securities & Canada Mortgage Bond –

• Money Morning
• Financial Post – Banks Hold the Cards

Steady as She Goes

Circling back – What does this all mean when it comes to taking a mortgage or wanting to buy a property in Vancouver? Our view is the Real Estate market in Vancouver is in buyer’s market territory. With the recent influx of capital into Canadian Bonds, we have seen a return to record low fixed rates. This, combined with softer pricing in certain areas of the GVRD, creates a window of opportunity first time and move up buyers.

This is also a great time for clients with fixed mortgage rates to consider an “Extend & Blend” to average down their fixed rate mortgage, or extend savings if they are already at an attractive low rate (e.g., a fixed mortgage rates from 1 or 2 years ago).

With inflation on the back burner, this is also a good time for clients with good cash flow to consider a variable rate mortgage. With maximum discounts of up to Prime minus 0.70% O.A.C., we suggest clients in higher rate variable products such as Prime or Prime Plus, consider paying the nominal 3 month interest penalty to maximize their discount below prime. We also recommend those in variable rate mortgages consider increasing their payments so they automatically pre-pay more to principal while rates remain low. In paying more than the minimum payment this strategy creates a form of dollar cost averaging. By paying more principal while rates are low clients will pay less interest when rates increase due to less owing on principal. The other bonus is they will already be used to higher payments and avoid any payment shock.

* Guest Post by Rob Regan-Pollock,
Invis – Team Rob Regan-Pollock
Ph: 604.879.2772

Rob’s Rate Sheet

So says Mark Carney, the Bank of Canada’s main man.

Key Words

Key words are a blogger’s nightmare when trying to optimize your place in Google’s world. Apparently Carney also used key words to optimize the reasons to justify why the Bank of Canada raised its overnight rate by a quarter of percentage point to 1 percent.

Consider:

• ‘considerable’ uncertainty
• `recent indicators suggest a more a more muted recovery in the near term’
• ‘weak growth in some advanced economies’
• ‘slightly softer’
• ‘slightly more gradual’
• ‘financial conditions in Canada have tightened modestly but remain exceptionally stimulative’
• ‘neutral’

and borrowing from the U.S. Federal Reserve chairman Ben Bernanke -

• ‘unusually uncertain’

SEO

SEO is an abbreviation of another blogger’s nightmare – Search Engine Optimization, a mysterious technical arts formula for ranking high in Google.

It’s only a guess, but has the CEO of the BOC cloned another meaning for Chief Executive Officer? Perhaps all the keywords chosen by Carney to explain the rate hike were a political arts formula aimed at placing Canada on top using – Canada’s Economic Optimization.

Maybe Carney should abandon the technical word games and instead be clear and say “we don’t have a reason but it will cost you more!”

Note: if you want clear talk about a mortgage and want to keep your costs down, then consider either of the two sponsors of this blog – they’re great!

I don’t know much about the fine details of the real estate market troubles in the U.S. Like many I just see and hear about a very large financial mess.

However, David Streitfeld of the New York Times had something to say about the real estate meltdown making note of a paradox – “the more money you borrowed, the less likely you will have to pay up”.

Quick Notes

Liberally quoting Streitfeld:

• during the housing boom, trillions of dollars were borrowed using soaring house values as security
  
  Photo Credit

• deliquency of home equity loans is higher than any other type of loan
• banks can’t collect – reasons, the homeowners threaten bankruptcy and the home values has disappeared
• in 2009, $11.1 billion in home equity and $19.9 billion in home equity lines of credit are considered uncollectible
• currently, the trend is the same with $7.88 billion written off in the first quarter
• odds of collecting if successful is about 10 cents on the dollar

State of the Union

Streitfeld refers to a statement by Christopher A. Coombs, a real estate lawyer,who says

“People got 90 cents free.” The system “rewards immorality”.

Moral Question

Since most of us live within a few miles of the border is it remotely possible that we here in Canada could be as Coombs suggests – immoral.

Are we?

Assuming that strategic mortgages existed in Canada, would you walk away from your mortgage? Would we be any different in our view of the world then our neighbours to the south?

It’s good to know trustworthy people who help others reach their destination. I asked Rob over at Invis – Team Rob Regan-Pollock, to pass along a mortgage update. According to Rob:

“More lenders have reduced their fixed rates. Current Rates are approaching those seen earlier this year.”

Prop Wash

U.S. unemployment claims were up last month so the fears of an overheating economy and runaway inflation are receding fast. No one expects rate increases in the US until well into 2011 and possibly later if their economy continues to drag with weak employment numbers.

In the Neighbourhood

Locally, Surrey and Delta have harmonized with Vancouver to legalize secondary suite>.

The Basics

What lenders take into consideration when considering Secondary Suite rental income:

Conventional Mortgage (More than 20% down)
• – Aggressive lenders will use up to 80% of rental income from a secondary suite and add it into the principal & interest component of the mortgage which can significantly boost qualification.
• Note: not all lenders will offset rental income – offsets range between 50% to 80%.

Insured (Less than 20% down)
• Since April 19th CMHC have mandated a maximum of 50% of rental income from Secondary Suites be added to borrower income.
• Genworth and Canada Guarantee allow up to 100% of suite income to be added to borrower income in the GVRD, and Capital District
• This targeted towards the support of local eco-density initiatives.

Rule of thumb

• take 35% of suite rental income as Principal & Interest to estimate how much a secondary suite will add to a borrowers mortgage qualification when going high ratio insured.

Need a Check-Up

Give Rob Reagan-Pollack over at Invis – Team Rob Regan-Pollock a call – 604-879-2772. He or one of his top notch team will help you with the diagnosis.

Submitted with Permission Invis – Team Rob Regan-Pollock – Formatting YatterMatters

Photo Credit