Archive for April, 2009

First of all, my warmest wishes for a very Happy New Year, wishing you a year full of happiness, good health and prosperity.

I hope 2008 was a good year for you, in the mortgage industry we saw major changes in 2008…

1. The U.S. sub-prime fiasco made lenders and mortgage investors run for cover. Canada lost some good lenders
2. Rate Premiums. Bond yields and the Bank of Canada’s key interest rates fell substantially in 2008. Yet, heightened credit risk forced lenders to pay more for the money they lent out. That led to record-high mortgage spreads, high fixed rates, and for the first time in a very long time we saw prime plus for variable rate mortgages and secured lines of credit.
3. Amortizations. 2008 saw the government eliminate the popular 40-year amortizations.
4. Minimum down payment The government brought back the 5% minimum down payment
5. Government Support of the Market. Canada Mortgage Bonds program is the main source and for non-bank lenders, sometimes the only source of capital. In October, the Finance Department again came to the rescue with its mortgage buyback initiative.

2009

The Big 5 banks have forecast that they expect further rate cuts by the Bank of Canada in 2009. They are expecting between 1/2 % to 1%.

Here is what the big banks are forecasting for interest rates:

• TD Economics - TD expects a rate cut of 50 basis points in January 2009
• BMO expects 1/2 percent rate cut in January 2009 –
• RBC forecasts 1/2 percent drop in January 2009 –
• CIBC Wood Gundy expects a 3/4% rate reduction by February/March 2009
• Scotia is forecasting a 1% drop for 2009

The big question is, will the banks pass on the rate cuts made by the Bank of Canada!

Do you think the banks will pass on the full reductions! What rate are you currently paying!

Next Bank of Canada announcement is January 20th

During Canada’s “Housing Boom”, that occurred roughly from 2002 to 2008, unsound price increases drove up levels of building. Affordability of these prices have diminished significantly leaving a large disconnect between house prices and income. This situation was in great need of a correction. Our view is that house prices exceeded the value of housing that was justified by fundamentals by approximately 9% nationwide. This overpricing forced a level of residential construction that exceeded its fundamental-justified level by approximately 12%, an excess that was exaggerated in the past three years. The current unwinding of house prices reflects both a cyclical downturn and a return of house prices to fundamentally justified levels.

We consider “overbuilding” of two forms: “demand driven” where home buyers buy up too many houses and that this demand cannot be sustained; and “supply-driven” where builders accumulate excessive inventories. Although there is evidence of both types, we contend that Canada’s “overbuilding” was mainly of the first type, where home buyers pushed homebuilding to an unsustainable pitch that is now being rapidly reined in. While most markets won’t face U.S.-style overhangs, the construction of too many new homes over the boom means a deepened slump.

While Ontario homebuilding will reel from a cyclical downturn, the degree of structural weakness appears limited – with the important exception of the Toronto condo market. Both in Toronto and Vancouver, historically high levels of apartment-style units presently under construction mean that record numbers of condos will reach completion during 2009. If absorption rates fall, as cyclical factors would indicate, condo inventories could spike severely.

However, Canada will not experience a U.S.-style housing crash, owing to less overbuilding and more conservative lending institutions.

Source:www.td.com/economics

Economic forecasting seems to be getting more and more difficult. Who would have thought a year ago that interest rates would fall to the current level? We had an increase in fixed rates that started in 2007 and pretty much continued to December 2008. During this time many buyers thinking this was the trend decided to lock into fixed rates. Home buyers locked in their mortgage at the 5 year fixed rate which was around 5.75%. Today we can get a 5 year rate as low as 4.29%. If you have a fixed rate mortgage it makes sense to re-evaluate whether it would be worthwhile to switch to a lower interest rate mortgage.

Breaking your mortgage will result in a prepayment penalty payable to your current lender. The question is whether the savings from the lower interest rate is enough to cover the penalties and any closing costs on the new mortgage. Each situation would have to be addressed on an individual basis. I have run into several cases where there has been significant benefits to switching to a lower rate.

Here is one such scenario:

• Mortgage amount - $188,393
• Term - 5 yr term with 2 yrs remaining on mortgage, - 22 year amortization
• Interest rate at 5.75% - interest payable over next two years - $20,923
• Interest rate of 4.29% - interest payable over next two years - $15,587
• Difference equals $5336
• Prepayment penalty of $1,865 – 3 months interest penalty

Difference in monthly payment: $153.95
The other huge benefit is that you are now in a 5 year mortgage at a rate of 4.29%, imagine the additional savings you will receive from the remaining 3 years.
What if you are only 1 year into a 5 year term, most lenders would charge you interest rate differential!

• Mortgage Amount - $230,615
• 1 year into a 5 year term
• Interest rate at 5.75%
• New interest rate 4.29%
• Remaining interest on current mortgage $50,250
• Interest on new mortgage $37,274
• Penalty would be Interest rate differential =

Difference in monthly payment: $189.85

The borrower had 2 options in this case - switch to a 4 yr term mortgage at 4.39% or get a variable rate at 3.8%. Here is the total interest he would pay over the remaining 4 years of his mortgage based on these terms:

• 4 yr term - $59,263
• Variable rate mortgage - $50,037
• Stay at the current mortgage for the next 4 years - $75,500

The client saves $25,463 (or $75,500 less $50,037) by switching to a variable rate mortgage. The net savings is $15,463 (or $25,463 less $10,000 penalty).