Last week was uneventful in the 'A' mortgage market -- no significant changes to rates.
The story in the 'B' (subprime) mortgage market however, was quite different - we saw rate increases and a general tightening of lending guidelines, making it harder for subprime borrowers to get mortgages.
What are the differences between the A and B mortgage markets?
The A mortgage market is for people who can qualify for a discounted mortgage rate. Typcially, these borrowers:
- have good credit
- are salaried, or
- are tenured self employed
The B mortgage market is made up of borrowers who don't qualify for a discounted mortgage rates. They usually:
- have some credit problem,
- if salaried they don't meet the normal income requirements, or
- are not tenured self employed
Why is the A market stable while the B market is seeing changes?
The A market is stable because lending money to strong borrowers for the purpose of buying real estate in Canada is still considered a good risk. Real estate in Canada has proven a good investment and homebuyers are unlikely to give up on paying for their homes, especially if if they are personally occupying the home.
In contrast, Canadian investors are showing some hesitation to invest in B/subprime mortgages in Canada. The source of funds that feeds the subprime market is asset backed commercial paper (ABCP) and in the last couple of weeks investors have been pulling their money out of ACBP's. This has already translated into higher borrowing costs for Canadian subprime borrowers and more stringent lending guidelines.
