To Bond or Not to Bond

For decades, most home mortgage loans made in Canada were made by the big banks and other “A” lenders and guaranteed through mortgage default insurance backed by the government’s housing agency, CMHC. In late 2016, government regulators tightened the requirements for borrowers qualifying for that insurance, resulting in more people doing without it.

Approximately three-quarters of the mortgages made by federally regulated banks last year didn’t have government backed mortgage default Insurance. Nearly half the nation’s $1.5 trillion CDN home loans are now uninsured against default according to Bloomberg News. For lenders, consumers’ growing demand for loans with no government backed insurance creates a problem .... mortgage funding.

“The market has to come up with a solution. Otherwise there will be no financing available for mortgages.” says Moti Jungreis, head of global markets at Toronto-Dominion Bank’s TD Securities

Under the new Canadian mortgage rules, it could make sense for more lenders to package uninsured mortgages into bonds, which over time could become a cheaper and more reliable form of funding while giving a boost to the Mortgage bond market.

Without that backing, banks and other lenders will have to rely on deposits, asset-backed commercial paper, and other forms of funding that can be more expensive and less accessible, particularly for smaller, non-bank lenders. That’s why it could make more sense for lenders to package uninsured mortgages into bonds, which over time could become a cheaper and more reliable form of funding.

Is this an immediate Fix? “NO”. This solution will take time for both lenders and investors to learn and adapt. But there is a light at the end of the tunnel.

Adapted by Steven Porter, Mortgage Agent with Mortgage Architects.
Steven can be reached through his website at www.1800Mortgages.ca

What Determines Mortgage Rates in Canada?

Source: www.StevenPorter.ca
A generation ago, it wasn’t uncommon to see mortgage rates top double digits. But for a good portion of the last decade, the rates have remained historically low. While it’s always hard to predict where mortgage rates will go in the future, it is worth looking at their history and an explanation for what influences their fluctuation.
Variable mortgage rates Variable mortgage rates are determined by commercial banks’ prime rates, which are mainly swayed by the Bank of Canada’s key interest rate. That means an increase in the key interest rate almost automatically leads to a similar increase in variable mortgage rates. The Bank of Canada will typically raises its key interest rate in an effort to combat inflation. Fixed Mortgage Rates Fixed rate mortgage loans are primarily influenced by the yield on Canadian government bonds (bond yields) of corresponding maturity. The correlation between the fixed rates and the yield on five-year Canadian government bonds is almost a near match. This is the case because bond rates represent the benchmark for financial institutions’ cost of funds.
Factors Influencing Bond Yields There are a number of factors that influence government bond yields. Since they are guaranteed by the Canadian government, these bonds are generally among the least perilous assets. Since a large amount of bonds are traded daily in the market, the supply and demand game in the bond market determines their price, and therefore their yield.

In the marketplace today, you can choose from two mortgage rates – fixed or variable. Are you comfortable with some risk in order to possibly save some money in the long run or prefer the peace of mind that comes with stability? These among other factors are important to consider before deciding between fixed or variable.              STILL NOT SURE WHAT MORTGAGE IS RIGHT FOR YOU? CONTACT ME TODAY!

Posted by Steven Porter. Steven is a licensed Mortgage Agent with Mortgage Architects, Certified Reverse Mortgage Specialist (CRMS); Seniors Real Estate Specialist (SRES) and Accredited Buyer Representative (ABR) and retired, real estate broker with 30 years experience in residential real estate. Steven can be reached at 1-905-875-2582; steven.porter@mtgarc.ca or online at 1800Mortgages.ca

Prepare for multi-point interest rate rise says Desjardins

Prepare for multi-point interest rate rise says Desjardins Mortgage borrowers should be prepared for a rise in interest rates which could mean a 2.5 per cent rise by 2021.

That’s one of the scenarios considered in a new report by economists at Desjardins which highlights that economic expansion and falling yields in the bond markets may require higher interest rates.

The report notes that the likelihood of a sharp rise in mortgage rates is low but advises borrowers to “make sure they can face an average increase of approximately 2 per cent in mortgage rates over the medium term, something that could happen if the economic expansion continue for longer.”

Desjardins also acknowledges an increase in discounted rates by mortgage lenders, which means that even with a projected increase in the posted rates, borrowers are unlikely to be paying the full percentage.

Rises in interest rates are also unlikely to happen rapidly as the Bank of Canada is mindfull of the high levels of household debt and the issues that would arise from suddenly adding upward pressure on rates.

The report forecasts that the first 0.25 per cent interest rate rise will be in April 2018 followed by another in October 2018 and a third in January 2019.

However, there remains a caveat that the forecasts are based on the current trajectory for the US and Canadian economies which may of course change. - by Steve Randall, May 2017

- Posted by Steven Porter, Mortgage Agent - Mortgage Architects
Steven can be reached through his website at www.1800Mortgages.ca

More Rates Now Hinge on Credit Scores

Never before has your credit score had such an impact on your mortgage rate. Ever since the banking regulator (OSFI) jacked up capital requirements on default insurers, and linked its capital formula to credit scores, more and more securitizing lenders have:

a) set different rates for different credit score ranges; and/or

b) raised their minimum credit scores for given mortgage products.

At some lenders, borrowers with, say, a 640 credit score are offered rates that are 1/4 point worse than someone with a 750 score. Many retail channel lenders set their internal discounts based on credit scores as well.

On conventional mortgages, the magic number seems to be 720. On scores below that, lenders’ extra insurance costs start climbing more meaningfully, and some of them pass that through to borrowers.

It all means that we as an industry are going to have to better educate our clients about this trend—because, according to a recent TransUnion poll, many folks don’t get it.

Over half (56%) of credit card holders say they don’t even understand how their credit score is compiled.

And 4 in 10 borrowers don’t grasp the importance of making more than their minimum monthly payments.

Cardholders who pay more than the required minimum each month are less risky borrowers in general. And that shows up in their credit scores. And, while the credit bureaus don’t disclose their exact scoring algorithms, those formulas seem more sensitive than ever to debt utilization and payment timeliness. - Robert McLister


- Posted by Steven Porter, Mortgage Agent - Mortgage Architects
Steven can be reached through his website at www.1800Mortgages.ca

Could the new mortgage rules be costing you $15,000?

In November of 2016 the government introduced changes to the rules for what mortgages would qualify for the government backed mortgage insurance programs. The new criteria for mortgages to be insured will includes the following requirements:

• A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan;
• A maximum amortization length of 25 years;
• A property value below $1,000,000;
• For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once every five years to conform to the established amortization schedule; A minimum credit score of 600;
• A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate; and,
• If the property is a single unit, it will be owner-occupied.

If your mortgage does not meet these guidelines the lender can no longer insure the mortgage. This will have the biggest impact on anyone who is looking to refinance their mortgage to access the equity in their home.

Why is this important?

Lenders in Canada don’t lend their own money! They go into the marketplace to raise capital which they can then lend out to borrowers. If the cost of getting their capital goes up, these costs are passed on to the borrower as higher interest rates.

The cheapest source of mortgage funds come from government sponsored programs that allowed lenders to insure the mortgages that they set up. The lenders package up these mortgages and sell them to investors. This process is known as securitization. Because these mortgages were insured by the government the investors were willing to take a lower rate of return in exchange for knowing that their investment was guaranteed. This source of funds is used by both the banks, credit unions and non-bank lenders. And because the cost of getting the funds is the same for all lenders it created a lot of competition to offer the best rates in order to attract new mortgages to their companies.

With the changes the non-bank lenders had to look to alternative sources of getting the funds for mortgages that cannot be insured. Because these mortgages can’t be insured the non-bank lenders have higher costs of getting their funds. As a result the non-bank lenders had to increase interest rates on these mortgages to cover the additional costs. And even though the banks and credit unions could fund these mortgages from their deposits they have also increased rates on these types of mortgages.

With the rule changes lenders now look at mortgages as following into three different categories and set the interest rate they will charge the borrower based on which category that mortgage falls into. These categories are:

Insured – These are for purchases or switches of existing mortgages where the client will be paying the mortgage insurance fees. The maximum amortization for these mortgages is twenty-five years, borrower must qualify using the benchmark interest rate of 4.64% and the maximum purchase price is $1 million. These mortgages will offer the best interest rates.

Insurable – These mortgages meet the guidelines to be insured but the borrower has more than 20% to put down. In the past lenders were willing to cover the cost of bulk insuring these mortgages. With the new rules the lenders are looking to pass the cost of the mortgage insurance on to the borrower. In most cases the lenders are doing this by offering higher interest rates depending on the loan amount in relation to the purchase of the property. This is known as the loan to value. If the loan to value is less than 65% it is possible to get the same rates as an insured mortgage. As the loan to value increases the cost of the mortgage insurance increases so lenders will charge a higher interest rate to compensate for the additional cost of the insurance. When the loan to value exceeds 75% it is likely that you will be paying a similar interest rate to the mortgages that fall into the uninsurable category.

Uninsurable – This applies to any purchase where the property value is over $1 million and any refinance where the borrower is looking to access the equity in their home. These mortgages will attract the highest interest rate as it costs lenders more to obtain the money they need to make these loans.

Currently an insured five year fixed term is available at 2.59% while an uninsurable five year fixed term will be closer to 2.79%. So if your new mortgage falls into the uninsured category and you have a $350,000 mortgage it will cost you an additional $14,702 in interest over the life of your mortgage. Not $15,000 but pretty darn close. Source: Lawrie Thom

Posted by Steven Porter. Steven is a licensed Mortgage Agent with Mortgage Architects and retired, licensed, real estate broker with 30 years experience in residential real estate. Certified Reverse Mortgage Specialist (CRMS); Seniors Real Estate Specialist (SRES) and Accredited Buyer Representative (ABR). Steven can be reached at 1-905-875-2582; steven.porter@mtgarc.ca or online at 1800Mortgages.ca