Changes to Mortgage Lending in Canada

This past summer, Canada’s department of finance announced they would be making changes to insured mortgage lending guidelines, making it harder for prospective homebuyers to get a mortgage. In Canada, when you buy a property and you have less than 20% down, the mortgage has to be insured by one of the nation’s mortgage insurers. Since mortgage insurance is backed by the government of Canada, it is within their jurisdiction to mandate changes they feel are necessary. The changes, which took effect on October 15th this year were as follows:

1) Minimum 5% down required on a home purchase (previously zero down was allowed)
2) Maximum 35 years amortization (previously up to 40 years was allowed)
3) Minimum credit/beacon score requirement up from 600 to 620

These changes effectively make it harder for buyers to get mortgages. The changes were mandated in order to reduce the insurance risk and to protect Canadians.

How can prospective homebuyers deal with these changes?

Homebuyers who have been unable to save for a down payment should aim to take advantage of the Canadian Home Buyer’s Plan (HBP). In Canada, first time buyers are allowed to take up to $20,000 out of their RRSP for a down payment on a home and they do not have to pay taxes on the withdrawal. You have fifteen years to replenish the RRSP after taking out funds under the HBP. If you haven’t been making regular contributions to your RRSP, you may also want to consider taking out an RRSP loan to make the most of your allowable RRSP contribution room. Funds must be in the RRSP for at least 90 days before they can be withdrawn under the HBP.

To ensure you meet the minimum credit/beacon score requirements, be sure to establish at least two trade lines. A trade line is a credit card, line of credit or a loan. Don’t cancel older credit cards or make unnecessary loan applications -- doing so will negatively impact your credit score. Avoid carrying high balances on your cards and always pay at least the minimum amount owing.

If you are self employed, be sure to get your taxes done on time. Don’t worry about the fact that you’re not reporting a lot of income (this is a common concern for self employed people). It is understood that for accounting purposes you will minimize the amount of income you are reporting and that your ‘net income’ may not be a good measure of your ability to pay. You can still get a mortgage without have to prove income, as long your credit is good, and as long as you can prove that you’ve been self employed and working in the same business for at least a couple of years.

David Grossman talks about improving your credit on CBC's Living in Toronto

Several changes to mortgage insurance will be taking place on October 15th 2008 which will impact Canadian homebuyers. Among the changes mandated by the department of finance, the minumum beacon/credit score requirement will be going up from 600 to 620.

Given these changes, it makes it that much more important that people know what is being reported on their credit report and how to build a good credit rating.

I recently spoke with Mio Adilman on CBC's Living in Toronto about building a good credit profile. For tips on how to build a good credit profile, click on the video below.



Call me if you have questions.

Some Good Economic News for Canadians

The economy is suffering worldwide in what now appears to be a global credit crisis however there is some good news in Canada which might make you feel a little better.

Yesterday it was reported that a survey by the World Economic Forum found Canada to have the soundest banking system in the world. On a list of 134 countries Canada was ranked number one. Click here if you would like to read the article now.

Also, last Friday's Globe & Mail reported that Canadian employers created a blockbuster 107,000 new jobs in September. Though most were part time, this blew away economist’s expectations of an increase in 8,000 new jobs.

Also in Canada, sales of new vehicles rose 1.7% last month compared with the same month a year ago.

In an effort to stave off a worldwide crisis, most of the worlds banks reduced their rates this week. The Bank of Canada reduced their overnight lending rate by a half a percentage point.

The new Prime lending rates charged by the banks are:

TD Canada Trust – 4.35%
CIBC – 4.35%
Scotiabank – 4.25%
RBC – 4.25%
BMO – 4.25%

It's good news if you’re have a variable rate mortgage. Contact me if you have questions.

Canadian Government Throws Wet Blanket on Mortgage Market

On Wednesday this week the Department of Finance announced that some of the mortgage products created in the last two years including 40 year amortizations and zero down mortgages would be eliminated effective October 15, 2008. They also announced they would change some of the documentation requirements (I anticipate more strict requirements for self employed/no income qualifer mortgages) and institute a minimum beacon score requirement of 620 (they say would consider lower scores on an exception basis.

For more details on the changes check out my video below..



Tips on dealing with the changes:
If you're in the market and you want to purchase using one of the existing programs, make sure you get your mortgage application in by October 15th. If you were planning to buy a home and you think these changes will impact your ability to follow through with your plans, talk to your financial planner about the Home Buyers Plan which allows you to take funds out of an RRSP tax free after just 90 days as long as its for down payment purposes. Use your savings or look into getting an RRSP loan to get money into the RRSP. If your self employed, get your taxes filed so you can show your current with your taxes and if your credit score is on the low side, eliminate unnecessary loan inquiries and try and reduce your credit card balances. You can check your credit score by going to www.equifax.ca. There's no impact on your credit score when you check it yourself.

Should You Go with a Variable or Fixed Rate Mortgage?

I recently got into a discussion with a client about whether he should go with a fixed or variable rate mortgage and I shared with him a copy of a paper that was written by Associate Professor Moshe Milevsky at Schulich School of Business in 2001. The paper is called 'Floating Your Way to Prosperity' and you can find a copy of it and other papers written by Professor Milevsky at http://www.ifid.ca/research.htm. The study incorporated movements in rates over a 50-year period and proves that 8 or 9 times out of ten you would have won out by going short term vs. long term on your mortgage. Following is a copy of the discussion...

"Thanks for the article. At first glance, although I have not read it all yet, it looks professional and seems to support our decision to go with the variable rate. Two questions pop up in mind so far (there may be probably more as I read through the article);
1) How relevant you think is this article and its conclusions considering the fact that it was published in 2001 and today we are facing a new situation in real estate (sub prime) which has an ongoing impact (and we still don't know where and when it's going to stop) of downturn in economical stability and residential house prices?
2) He bases some of his analysis on past history. I have learned in life that especially in economics past does not equal the future. What is your view as to the predictability of past events on forecasting future trends?"

My response - "His study was based on the 50 year period up to 2001. If he did the study again to include the period from 2001 up to 2008, I think that the results would not be any different. I have had a variable rate mortgage for the last six years and while I think there was a short period of time when some people locked in to a fixed rate mortgage at around 4% (a very good fixed rate), I think that for the rest of the time you would have been better off with the variable rate. As far as the subprime crisis goes, while it has had a severe impact on the U.S. economy and definitely some impact on the Canadian economy, I think that the end is in sight. It is also important to note the Canadian mortgage and real estate situation is very different than the U.S. We have steady immigration, a relatively healthy economy and low unemployment, and of course a favourable interest rate environment keeping our real estate market healthy. I should also mention that we have far more conservative lending practises in Canada."

Mortgage Tip: Ask about your Lender’s Variable Rate Mortgage “Lock-in Privileges”

Not all variable mortgages are created equal. In the current mortgage market, the spread between fixed and variable rates is very wide. Fixed rates are around 5% while variable rates are closer to 4%. As a result, most borrowers are opting for variable rate mortgages. When trying to decide which variable rate mortgage to go with, one of the most important things you need to find out about, are your lender’s “lock in privileges”. What rate you will get, if you decide to lock in to a fixed rate mortgage in the future and will the lender guarantee that in writing?

Banks advertise their posted fixed rates which are higher than the rates you be offered if you were negotiating a new fixed rate mortgage today. Knowing that you will get the best discounted rate at the time of locking in will give you peace of mind now and could save you thousands of dollars in the long run. Call me for a run down on the differences in the “lock in privileges” among Canada’s largest lenders.