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Residential Market Commentary - CMHC's new rules

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Canada Mortgage and Housing Corporation is making a couple moves that will send ripples through the mortgage market.  One could give lenders access to more confidential financial information about borrowers.  The other could ease frustrations for a group of borrowers that has consistently had problems securing loans.

According to documents obtained by Reuters, through a freedom of information request, the federal housing agency wants the Canada Revenue Agency to take a “more direct and formal role” in verifying income statements made on mortgage applications.  Right now the CRA does not verify income claims for lenders, even with the permission of the borrower/taxpayer.

A two-year plan drafted by CMHC shows the agency is concerned about a systemic risk posed by mortgage fraud.  The agency has said there is no evidence of widespread fraud in Canada, but it also says its information is limited.

The CMHC plan says paperless transactions, pressures to close deals quickly, rising prices and new regulations can “create strong incentives for individuals or mortgage professionals to engage in … fraud.”  A spokesperson also says CMHC is developing data-driven systems to screen for commission fraud, where a lender or a broker may have encouraged a borrower to exaggerate income claims.  The documents reveal the agency intends to start publishing statistics on mortgage fraud.

At the same time CMHC says it wants to make it easier for the self-employed to qualify for a mortgage.  The agency says it is giving lenders more guidance and flexibility to help self-employed borrowers.  The effort focuses on those who have been running their business – or have been in the same line of work – for less than 24 months.  The new policy is set to take effect October 1st.

 

A CHIP Customer Story

Customer Story – Silver Divorce (It happens)

The client was referred to a Mortgage Broker by an existing client to help out his mother with the financial aspect of her separation/divorce.

Client Details:

Early 70’s, retired with limited income, Mrs. Smith wanted to keep the only home she has known her entire adult life.  In order for her to keep her house, she required funds to pay out her husband for the balance of the division of assets.  She had sufficient income to qualify for a “traditional” mortgage, but she did not want the burden of payments given she was going to be on her own and wanted to have a little breathing room.

Solution:

Although Mrs. Smith had some investments she could have used to buy out her spouse, she felt more secure leaving her investments alone and to tap in to the equity to satisfy her requirement under the separation agreement.  We set up a CHIP for the maximum she approved for and advanced only what she needed to pay out her ex.  This left her with some available credit to use down the road if she needed it after things settled.

Outcome:

Having an unexpected major life change come upon her, she was able to meet her financial obligations in the divorce while not incurring any extra monthly obligations that would have put an added strain on an already difficult time in her life.

Mrs. Smith was thrilled that her broker was able to come up with such a suitable solution for her.  She was able to keep the home she loved and to maintain some normalcy in her retirement.
   

Mortgage & Housing Update

 

Housing markets continue to adjust to regulatory and government tightening as well as to higher mortgage rates. The speculative frenzy has cooled, and multiple bidding situations are no longer commonplace in Toronto and surrounding areas. Home prices in the detached single-family space will remain soft for some time, and residential markets are now balanced or favour buyers across the country. The hottest sector remains condos where buyers face limited supply.

Owing to the housing slowdown, a general slowing in the Canadian economy and significant trade uncertainty, the Bank of Canada will continue to be cautious. But as inflation trends higher, we expect the Bank to hike interest rates once again this summer and possibly in the fall as well.

Last week, the Bank of Canada increased the qualifying (posted five-year fixed) mortgage rate from 5.14% to 5.34% in response to benchmark mortgage rate increases at most of the chartered banks. TD bank led the rate hikes when it increased its posted rate for a five-year fixed mortgage by a whopping 47 basis points to 5.59% on April 25.

The central bank qualifying rate is separate from the actual mortgage rates offered by banks to borrowers but is used to assess homebuyers who are seeking loans. The higher rates come as an estimated 47% of all existing mortgages will need to be refinanced in 2018, up from the 25 to 35% range in a typical year, according to a recent CIBC Capital Markets report.

A rise in government bond yields preceded the slew of bank hikes. The yield on the Government of Canada benchmark five-year bond was 2.25% this morning, compared to 1.02% a year earlier. Fixed-rate mortgages tend to move with government bond yields of a similar term, reflecting the change in borrowing costs.

Competitive pressure among the banks appears to be heating up as BMO last week offered what is possibly the largest-ever discount on variable rate loans. The bank is promoting a variable five-year mortgage at 2.45%, a full percentage point below its own benchmark rate. This morning, TD Bank joined is rival in offering a highly discounted variable mortgage rate effective until the end of the month. Canada's lenders often provide special spring mortgage rates as homebuying activity picks up. These moves come amid slowing mortgage growth.

Borrowers still have to qualify based on the much higher Bank of Canada posted rate of 5.34%.

We offer a mortgage review, free of charge, no obligation... contact us today for yours!

   

The Mortgage Insurance Market & Wholesale Lenders

The Mortgage Insurance Market & Wholesale Lenders

The Canadian mortgage market used to be very simple. We had the big banks, credit unions, and trust companies.

However, almost 20 years ago, the Canadian government made three major changes to the Canadian mortgage industry. First, the government and CMHC put their weight behind Canadian mortgages by guaranteeing an insurance payout to lenders in the event that a borrower does not pay. Yes, the Canadian taxpayers are on the hook if CMHC goes under.

Second, Canada also began to allow lenders to pay for mortgage insurance for their borrowers, even though the insurance was not required. Borrowers would not know that their mortgage is insured, rather the lender would pay for, and insure the mortgage on the “back end” in order to make the mortgage less risky. I.E: if the borrower did not pay, the insurer would pay the lender (just as they would pay if the borrower had less than 20% down payment and was charged for insurance themselves).

And third, Canada allowed its lenders to bundle up their mortgages and sell them to investors. The securitization of mortgages (the process of taking the mortgages and transforming them into a sellable asset) allowed investors to purchase many mortgages at once, knowing there would be a specific return. The return here would be just less than the interest rate on the various mortgages (less because the lender has to make a little bit of money for creating the mortgage bundle or security).

Now, mortgage investors are looking at two things: investment return and mortgage risk. The lower the risk of an investment, the lower the return an investor may be willing to see. Because Canadian lenders can insure their mortgages against default (non-payment), investors are very keen on purchasing these mortgages. Thus, investors provide lenders with a lot of inexpensive money to lend out, which in turn, provided for better interest rates for borrowers.

As an aside, an example of investors may be one of Canada’s large banks, an American bank, pension funds, and/or other financial institutions.

The result was the emergence and major growth of mortgage finance companies, called wholesale lenders or monoline lenders.

Monoline lenders, encouraged by access to cheap capital, set up efficient mortgage underwriting (approval) operations and were able to provide flexible mortgage products and better-than-the-banks interest rates for their clients.

The overwhelming majority of wholesale lender mortgages are back-end insured by the lender, packaged up, and sold to investors.

What is interesting here is that wholesale lenders will insure mortgages transferred from one institution to another – something that banks do not do. This allows for better interest rates when renewing with a wholesale lender than if renewing with your current bank lender.

If you have any questions related to your mortgage give us a call!

   

Top 5 Things To Consider When Building Your New Home

Building a new home – It’s something that many couples dream of. It can be an exciting, stressful, joyful, crazy time period that many walk away from saying “never again” or “bring on the next one!” We scoured the internet and sorted through our own experiences to bring you the Top 5 things to consider when you are building a new home.

1) It’s All In The Numbers

Just like house-shopping, building a home from the ground up requires you to know what you can afford. Most house plans offer a cost to build tool (usually for a nominal fee) to give you an accurate estimate of construction costs based on where you’re building. The numbers include the costs of construction, tax benefits, funds for the down payment and slush account, and other related calculations.

Once you have determined what you can and are willing to spend, meet with a mortgage broker to discuss how much you wish to borrow for your home.

Renovations and the actual building portion aside, we often are asked on what a mortgage looks like for a not yet built home. This is where a “construction” mortgage comes into play. The budget you give your broker should include your hard and soft costs as well as the reserve of money you plan to have set aside in case you run into unexpected events.

It’s this initial budget that a lender will determine how much you qualify for.

For example, based on the lender loaning up to 75% of the total cost (with 25% down):

Land purchase price (as is) Total soft and hard costs Total Cost (as complete)

$200,000

$400,000

$600,000 x 75% = $450,000 available to loan

Keep in mind, the lender will also consider the appraised value of the finished product. In this example, the completed appraised value of the home would have to be at least $600,000 to qualify for the amount available to loan. The appraised value is determined before the project begins.

As well, the client will have to come up with the initial $150,000 to be able to finance the total cost of $600,000. A down payment of $150,000 plus the loan amount of $450,000 = the total cost of $600,000.

2) Choose a Reputable Builder

Builders are a dime a dozen, but not all of them are qualified or will be the right one for your project. Careful research is needed when determining who will be the head contractor of your home-building project. Alternatively, one of the best ways to find your perfect contractor is by asking friends and family who have gone through the process. Another great source is your mortgage broker! They often have many industry connections to some of the most qualified contractors and builders. Ask them if they know of anyone—we can almost guarantee they can will have at least one or more referrals for you.

3) Build a Home for Tomorrow

It can be tempting to personalize your home to the tenth degree—after all you are building it to meet your unique, customized wants and needs. However, keep resale value and practicality at the back of your mind at all times. Life can often throw a few curve balls that lead to you-for one reason or another-having to place the home for sale. If that time should ever come, you want to be able to appeal to all buyers easily and not have to hold the house longer than necessary. Ask yourself if the features you are putting into your home will appeal to others and if the features suit the neighborhood you are building in as well.

4) Go Green!

Now more than ever before energy efficient upgrades are easy to add to your home. When you are in the design stages, selecting energy efficient appliances, windows, HVAC systems, and more can save you money in the long run and may also make you eligible for certain grants and discounts. For example, the CMHC green building program rewards those who select energy efficient and environment friendly options.

5) Understand the Loan

As a final note, once construction is done it’s crucial to understand how a Construction Mortgage Loan repayment works. To make it easier, we have a list of points that you should know:

  • Construction loans are usually fully opened and can be repaid at any time.
  • Interest is charged only on amounts drawn. There are no “unused funds.”
  • Once construction is complete and project completion has been verified by the lender, the construction mortgage is “moved over” to a normal mortgage.

A lender will always take into consideration the marketability of a property. They will look at
not only the location based on demographic but also the location based on geography. For instance, a lot that is in a secluded area where no sales of lots have occurred in the last five years and mostly consisting of rock face may not be a property that they are willing to lend on.

  • Depending on the lender, you may have a time frame within which you need to complete construction (typically between 6 and 12 months).

There are a lot of things to consider when you build a home but a few things that can keep you on track and on budget are to have a solid plan in place, work with a builder you trust, build a strong team around you that can be there from start to finish, and to do your research. Once you have decided to build, call your mortgage broker — they can help you get the ball rolling and can guide you to the first step of breaking ground on your new home

   

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