Toronto Condo and Real Estate Blog

Government of Canada Moves to Protect and Strengthen Canadian Housing Market

The Government of Canada recently announced adjustments to the rules for government guaranteed mortgages aimed at protecting and strengthening the Canadian real estate market.

The new measures include:

1) Fixing the maximum amortization period for new government-backed mortgages to 35 years;

2) Requiring a minimum down payment of 5% for new government-backed mortgages;

3) Establishing a consistent minimum credit score requirement

4) Introducing new loan documentation standards.

This announcement marks a responsible and measured approach by the government to ensure Canada’s real estate market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada.

The new limits are planned to take effect October 15, 2008. This would allow existing mortgage pre-approvals with the common 90-day duration to be used or expire. Certain exceptions would also be permitted after October 15. The government will work closely with all stakeholders to ensure timely and effective implementation of these measures.

The new regulations apply only to new mortgages, while existing originations will be unaffected. The lag period prior to the regulatory change will allow existing mortgage pre-approvals to be used or expire. All mortgage insurance companies will be affected by this regulatory change.

As Canada Mortgage and Housing Corporation (CMHC) is a Crown corporation, the government is ultimately responsible for CMHC’s obligations, including mortgage insurance claims. Hence, CMHC will no longer offer 40-year amortization and 100% loan-to-value ratio mortgage insurance products, given the new regulations.

In addition, the government also backs private insurers’ obligations to lenders in the event of default, provided the business is eligible to the guarantee, but claims are subject to a 10% deductible of the original principal amount of the loan agreement.

Private insurers are still free to insure 40-year amortization and 100% loan-to-value mortgage products, but the lack of government backing will lead to sizeable increase in risk. This may mean the elimination of these products after October 15, or a higher insurance cost for the borrower.

The measures announced today will build on the strength of Canada’s real estate market. According to the International Monetary Fund, the increase in house prices in Canada is based on sound economic factors such as low interest rates, rising incomes and a growing population. A recent Statistics Canada report concluded that home ownership is at record levels, with over two-thirds of Canadians owning their own home.

For the news release from the federal Department of Finance, visit www.fin.gc.ca/news08/08-051e.html.

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Contact the Jeffrey Team for more information - 416-388-1960

7 Tips to Help You Pay Your Mortgage Faster and Save You Thousands of Dollars

There’s a major sense of accomplishment and peace of mind of owning your home outright. Paying off your mortgage sooner can make sound financial sense by saving you thousands of dollars in interest costs. Learning how to save on your mortgage can slice years off your loan. Finding out if you can save on your mortgage payments won’t cost you anything, and you will discover whether you have the best loan available for your individual circumstances.

1) Shop around for the best mortgage possible with your credit score. When a mortgage company has a small overhead cost to stay in business it typically means that they will not charge you unreasonable ongoing service fees. Make sure you know the fees charged by your mortgage company before you sign on a loan.

2) Select weekly or bi-weekly mortgage payments. A bi-weekly mortgage payment means you’re making 26 half-payments instead of 12 monthly payments. But keep in mind that unless your initial mortgage is set up as bi-weekly, some lenders charge an upfront fee of $300-$400 to make bi-weekly payments, and even though you’re making a payment every two weeks, the lender only applies it once a month.

If you make bi-weekly payments of $415 instead of monthly payments of $830, you could save almost $27,000 in interest over the entire amortization period of your mortgage, and you could own your home about 4-1/2 years sooner.

3) Prepay a little extra every month, or any time during the term of your mortgage. Increasing your payment by even a few dollars each month will pay down your principal amount faster. It is a good idea to pay 10-15% more each month. This amount shouldn’t put too much extra burden on you, and it will help to pay off your mortgage much faster. For example, if you increased your mortgage payments by just $170 from $830 to $1,000, you could save almost $48,000 in interest over the entire amortization period of your mortgage, and you could own your home about 8 years sooner.

4) Make an annual lump sum payment. Use your tax refund, work bonus or any extra money you can save and apply it directly to your principal amount. Check your mortgage documents to find out how often you can prepay and in what amount. Many loans don’t prohibit you from doing this, however the lender may have parameters on how many extra payments you can make. Ask this question when shopping for a mortgage loan.

5) Pay as much as you can at renewal time. Most mortgages become open at renewal. This means you can pay as much as you want on your mortgage. If you chose a 5-year, fixed-rate term, and made a $10,000 lump-sum payment every time your mortgage came up for renewal, you would save about $37,481 in interest over the entire amortization period of your mortgage.

6) Red flag your extra payments. Always check your mortgage statement to make sure that any extra payments you made are being counted against the principal and that your bank has accurately documented your payments. Make the extra principal payments on a separate cheque and make a note on the memo line stating that the payment should be applied to principal reduction only. At tax time, tally up those payments and make sure they’ve been applied correctly.

7) Stay informed. Once you have a mortgage, aside from making the payments, it’s easy to forget about it altogether. By keeping up-to-date on interest rates and new products could save you money. You may want to shop for another product that better suits your needs. For example, to qualify for a mortgage, you may have started out with a lower-rate adjustable rate mortgage, but you want to switch to a more long-term affordable fixed-rate mortgage later.

When You Should Hold Off on Paying Your Mortgage Faster?

While paying down a mortgage quickly may be a wise decision for many homeowners, it’s not for everyone. For example, you may want to switch to investing in mutual funds when yields return 10-12% annually. For most people though, this is not a mathematical issue but one of security, as they just want that mortgage paid off. For people who are very debt-averse, the peace of mind of paying off the house more quickly is worth the price.

Secondly, if you are planning on moving soon, you may want to hold off investing money into your existing home as you may need the money for a down-payment, closing costs or buying new furniture for your new home.

As you can see, with a little research, you could save on your mortgage. The truth is: the banks won’t tell you how to save money on your mortgage as they want to make the interest on the money that they have loaned to you. If they were to help you save money, they would lose money and their profits would stagnate. Make sure that if you implement changes to save on your mortgage it is the right decision for you.

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Contact the Jeffrey Team for more information - 416-388-1960

But Bank of Canada warns of complacency on newer products like 40-year mortgages

Lori Mcleod - Globe and Mail

The real estate market appears poised for a soft landing rather than a crash, in a cooling trend the Bank of Canada says is both “expected and welcome.”

Sheryl Kennedy, the central bank’s deputy governor, said Canada’s financial prudence has helped it sidestep the sharp home price declines being experienced in countries including the U.S., Britain and Spain.

“The Canadian real estate market does not appear to be characterized by excess supply at this time,” she said in the text of a speech delivered yesterday in Banff, Alta. “The proportion of unoccupied, newly built dwellings in most cities remains below historical averages, suggesting that a major widespread reversal in house prices is unlikely in the near term.”

In the past decade, prices of existing homes in Canada have risen by about 55%, while new-home prices have risen by about 27%. As one of the country’s largest real estate booms loses steam, most economists are forecasting a small increase in prices this year that will keep pace with the central bank’s 2% target for inflation.

It’s a much different story in the U.S. market, where home prices dropped by 14.1% year over year in the first quarter of 2008, according Standard & Poor’s/Case Shiller national home price index.

That record price decline occurred at a pace five times faster than that of the last U.S. housing recession, according to the index’s quarterly report, released last month.

Much of Canada’s real estate boom was the result of supply catching up with pent-up demand that followed the downturn of the late 1980s and early 1990s, according to Ms. Kennedy.

Canada’s conservative mortgage culture has helped protect it from the excesses seen during the U.S. boom, which had a much larger amount of subprime mortgages, she added.

As the real estate market cools, the Bank of Canada can worry less about the sector as a driver of inflation, said Michael Gregory, senior economist at BMO Nesbitt Burns Inc.

“This speech would have been a lot different if we still had double-digit price gains on new and existing homes,” he said in an interview.

The central bank now has a more pressing concern on its hands in soaring commodity prices, he said. In the real estate market, the issue has shifted to how much cooling prices could put a damper on consumer confidence, he added.

Despite her fairly positive outlook, Ms. Kennedy cautioned that Canada can’t afford to become complacent about the real estate market, noting it took a decade for prices and sales to rebound after the bust of the late 1980s.

To that end, the central bank is keeping an eye on “challenges,” including ensuring that mortgage innovations, including 40-year amortization products and “near-prime” mortgages, don’t detract from prudent lending practices.

Ms. Kennedy’s comments suggest the “the jury is still out” at the Bank of Canada regarding the value of these innovations compared with their potential risks, Mr. Gregory said.

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Contact the Jeffrey Team for more information - 416-388-1960