Monday, September 10, 2007

Eliminate virtually all market risk with a 15-year fixed rate mortgage

In the past couple of weeks, given the fallout in the U.S. mortgage and real estate markets, a couple of prospective home buyers who were considering purchasing a property this fall, have asked me whether they should hold off on their plan to buy a property. Should they "wait and see", they asked. My short answer is no -- in my opinion, it's still a good time to buy real estate in Canada.

First of all, the mortgage and real estate picture in Canada is very different than in the U.S. Subprime lending is the major cause of the fallout in the U.S, and as a percentage of all mortgages, subprime lending is considerably smaller in Canada than it is in the U.S. -- less than 5% of all mortgages in Canada are subprime vs. 20% in the U.S. Further, many of the mortgages under repayment in the U.S. are so called "teaser rate" mortgages which offer an extremely low payment for the first couple of years. After the teaser period is over, with interest rates in the U.S. up, many borrowers have found that they are unable to pay their mortgages. While they originally thought they would be able to refinance on an expectation of higher property values, they now find themselves unable to do so because instead of house prices appreciating, they have depreciated.

In Canada, most borrowers take 5-year fixed rate mortgages so we do not have the the same exposure to changes in lending rates as our neighbours to the south. Further, the real estate market in Canada continues to perform very well, and when you consider that the average 5-year fixed rate mortgage in Canada over the last 30-years was 10%, mortgage rates are still relatively low. You can get a 5-year fixed rate mortgage at rates as low as 5.74%. With mortgage rates as low as they are and with all the new mortgage products including extended amortizations, zero down mortgages and no income qualifier mortgages for self employed, many people who previously could not afford to buy a home can now do so.

For most people, the greatest single variable impacting real estate affordability is the mortgage rate. While it is unlikely that what has happened in the U.S. will happen here in Canada for a number of reasons -- our economy is strong, employment is strong and immigration continues to drive demand for real estate -- if you are worried that the problems in the U.S. could spill into our economy and impact our mortgage and real estate market, you could virtually emliminate all risk simply by taking a longer term mortgage. Take a 10 or 15 year fixed rate term at around 6%, and you could practically coast through one complete economic cycle. On the other hand, if you decide to put off buying and if interest rates do go up in the medium term (in the near term there is no expectation of higher rates), you could turn around in a few years to find that you have effectively been priced out of the market.

Saturday, September 1, 2007

Attractive mortgage solutions still available for borrowers who don't qualify at their bank

Now that Canadian sub-prime lenders have increased rates, if you don't qualify for a mortgage at your bank, does that mean that you are in serious trouble? In a word, no. There are many institutional lenders that offer mortgages at about the same rates as banks, and many have more flexible lending guidelines than banks.

When it comes to insured mortgages (a mortgage needs to be insured if your down payment is less than 20%), did you know that the banks do not support all of the programs offered by CMHC and Genworth (the mainstream insurers)? Banks can be extremely picky about the types of applications they choose to loan on. Whether your mortgage application is for an insured or uninsured mortgage, mortgage brokers are often able to place mortgages at bank rates, where borrowers were previously declined at their banks. Here are a few examples of mortgage we recently placed...
  • Self employed applicant unable to prove income with 5% down. Applicant's bank told him he needed a minimum of 25% down. We got an approval through an alternate lender at 5.79% rate.
  • Bruised credit -- an applicant fell behind on his bills while he was out of work. After becoming re-employed he went to his bank and asked for an increase to his mortgage to consolidate his debt -- he was declined by his bank. We got him a new 1st mortgage with an alternate lender at 5.84% rate.
  • Self employed, refinance with plenty of equity in house, was declined at his bank due to high debt load. We got an approval at an alternate lender at 5.84% rate.
To put the above into perspective, the rates offered by TD and Scotiabank at the time these mortgage approvals were obtained were 5.89% and 5.84% respectively.

When a bank declines your mortgage application, it can be very discouraging. Be sure you talk to a mortgage broker to have a clear picture of the options available to you.