Tag Archives: minimum down payment
No bubble here, Home Capital chief says
Demand recovering; Mortgage lender’s profits up 39.4% over dismal 2008
John Greenwood, Financial Post
Of all the experts offering opinions on the state of the Canadian housing market, very few have as clear a view of the situation on the ground as Gerry Soloway, and as far as he’s concerned there’s no bubble.
The recent jump in prices is a reflection of a recovery in demand as buyers moved back into the real estate market after the financial crisis, according to the chief executive of Home Capital Group Inc., a leading non-prime mortgage lender based in Toronto.
“I think we have clearly come off the bottom and I think there was a lot of pent-up demand before the market turned,” Mr. Soloway said in an interview. “I see the market probably levelling off during 2010.”
Over the last few months some economists and industry players have warned that the Canadian real estate market is getting overheated and that its time for the government to tighten the rules around mortgages as a way to remove some of the froth.
Mr. Soloway said he agrees that even though there’s no bubble it would be prudent if Ottawa “took a few modest steps and tweaked the market place” by such measures as shortening the maximum amortization period to 30 years from 35 years and increasing the minimum down payment for some buyers.
Home Capital yesterday reported fourth-quarter net income of $40.5-million, up 39.4% from the same period last year when the economy was immersed in gloom. In the three months ended Dec. 31, the company originated $3.9-billion of mortgages, up nearly 40% from 2008.
Residential home loans were $1.3-billion, up 51.4%. About $1-billion of those loans were related to single family homes. Mr. Soloway said Home Capital looks to insure and securitize about half of its mortgages through the Canada Mortgage and Housing Corp,
In the fourth quarter it securitized $863.4-million, up from $620.6-million.
The benefit of the strategy is twofold. Not only does it provide source of inexpensive funding– without the CMHC, Home Capital would be forced to pay significantly higher commercial rates — but it reduces risk since the mortgages are effectively insured by the federal government.
Within the residential portfolio, 31% of the loans were insured either by the CMHC or others, more than double the amount last year.
It is a long-held policy of the federal government to encourage home ownership among Canadians, and most of that is carried out by the CMHC.
Under the crown corporation’s Canada mortgage security program, banks and other lenders such as Home Capital securitized more than $100-billion of home loans last year.
A further measure introduced in the depths of the crisis known as the Insured Mortgage Protection Program enabled banks to sell $125-billion of securitized mortgages directly to the CMHC as a way to boost liquidity in the financial system.
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Contact the Jeffrey Team for more information - 416-388-1960
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Flaherty announces mortgage crackdown
Dana Flavelle & Les Whittington – Yourhome.ca
Thousands of would-be homeowners – particularly young, first-time buyers – will find it harder to acquire their dream house under federal mortgage changes meant to cool the red-hot real estate market.
“It’s going to push the borderline first-time home buyers out of the real estate market,” predicted Derek Holt, vice-president, economics, of Scotia Capital.
The new rules, which go into effect April 19, mean borrowers must have higher incomes or larger down payments, or opt for cheaper properties, finance officials explained.
Federal Finance Minister Jim Flaherty unveiled the new measures Tuesday as part of a larger package that also took aim at “reckless real estate speculation” and excessive refinancing, which he likened to using your home “as an ATM machine.”
But the centrepiece of the announcement is one that requires lenders to use tougher criteria when assessing borrowers’ ability to carry a loan.
The rule applies only to insured loans, extended to borrowers with less than 20% as a down payment. Nearly all first-time buyers fall into this group, according to industry data.
Currently, lenders test a borrower’s ability to repay using the three-year mortgage rate as a yardstick, even if the homebuyer is planning to opt for a short term at a lower rate. The three-year rate is now around 4%.
On Tuesday, Flaherty announced that lenders must now use the five-year fixed rate as their stress test as of April 19. The five-year rate at most banks is currently about 5%.
That’s more than double the cheapest rate, which is 2.25% on an open variable mortgage that floats with the market.
Comment: Actually, the best 5-year variable rates are 1.95%. And will the banks make you qualify on their posted 5-year rate, or the discounted rate that people actually get? That one percent difference is huge.
In practical terms, the new rule raises the bar for home ownership, even though it doesn’t raise the borrowers’ out-of-pocket expense. Borrowers can still opt for lower rates and shorter terms but must meet the higher standard, at least on paper.
For example, a borrower earning $59,626 a year could afford a $377,000 mortgage under the old rules.
After April 19, that borrower would need to be earning $68,838 to qualify for the same loan, according to TD Canada Trust.
The move comes in response to rising household debt levels and fears Canada’s record low interest rates could fuel a “bubble” followed by a U.S.-style real estate crash. While denying housing prices are dangerously overinflated, Flaherty said the real estate boom is fostering risky investment habits, rampant speculation and other excesses.
“Our government is acting to help prevent Canadian households from getting overextended and acting to help prevent some lenders from facilitating it,” Flaherty said.
The government also announced real estate speculators would have to come up with a 20% down payment, up from the current 5% minimum.
Comment: And how do they plan to enforce this? How can you prove someone is buying as an investment? New condo builders already charge a 20-25% down payment, so it would affect only resales. But there is no way to police it.
Flaherty also reduced the amount people can borrow against their homes to 90% of its value from 95%.
Banks and mortgage brokers, who feared the government might opt for more stringent measures, applauded the announcement, saying it would have a minimal effect on consumers or the housing market.
The difference between a five-year rate and three-year rate is only one percentage point, noted Tim Hockey, president and chief executive officer of TD Canada Trust.
“The measures seem to be quite balanced,” Hockey said.
And while they’re likely to have a “cooling effect,” he said buyers will still be in the market but more realistic about what they can afford.
Some economists, however, said it might have an unintended short-term consequence if more buyers rush in to clinch their deals ahead of the April 19 deadline.
“You’ll get a very hot spring market and a sudden softening in the back half of the year,” Holt predicted.
Doug Porter, deputy chief economist at BMO Nesbitt Burns, said it is more a case of short-term pain for long-term gain. He compared it to the Bank of Canada raising its trend-setting rate by a quarter of a percentage point.
Will Dunning, chief economist with the Canadian Association of Accredited Mortgage Planners, said his research shows that consumers are already acting cautiously and borrowing less than they could afford.
Heather Paterson, a senior mortgage broker with Invis, the country’s largest independent mortgage brokerage, said she has had several emails and phone calls from concerned clients. But only one client, who buys to invest, will be directly affected by the higher minimum down payment rule, she said.
The higher minimum applies only to properties that will not be owner-occupied, she noted. People buying cottages and second homes for their own use, or duplexes they plan to live in, can still buy with 5% down, she said.
Peter Aceto, president and chief executive officer of ING Direct Canada, said the measures are bound to have some dampening effect on the real estate market. But the rules affect mainly people who were going to be hurt anyway once rates started to climb, he said.
Flaherty decided against raising the minimum 5% down payment or shortening the maximum 35-year amortization period on insured loans but said all options remain open.
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Contact the Jeffrey Team for more information - 416-388-1960
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Related posts:
- Easy credit, soaring prices raise new housing fears Canadians are in the midst of a mortgage binge,...
- Home ownership at record levels… so is mortgage debt By Colin Perkel – The Canadian Press Never before have so...
- Home ownership at record levels… so is mortgage debt Interest rates at or near historical lows combined with low...
- Lending curbs may open gates The Toronto condominium market has been particularly vulnerable to buyers...
- As mortgage rates rise, is it time to lock in? Experts warn rates are creeping up as bond markets react...
New Mortgage Rules
* All borrowers will be required to meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter terms.
* Reduced maximum amount that can be withdrawn in refinancing a government-backed insured mortgage to 90% from 95% of the value of the home.
* Require a minimum down payment of 20% for government-backed mortgage insurance on non-owner occupied properties purchased for speculation. Borrowers purchasing owner-occupied residential properties will still be able to access government-backed mortgage insurance with a 5% down payment.
Canada’s housing market remains healthy and stable. According to the International Monetary Fund, our housing market is fully supported by sound economic factors, such as low interest rates, rising incomes and a growing population. Moreover, mortgage arrears – overdue mortgage payments – have also remained low.
Today’s announcement is part of the Government’s policy of proactively adjusting to developments in the housing market that could take root and cause instability. These steps are timely, targeted and measured, and will reinforce the importance of Canadians borrowing responsibly and using home ownership as a savings mechanism.
Mortgage Insurance
Mortgage insurance (which is sometimes called mortgage default insurance) is a credit risk management tool that protects lenders from losses on mortgage loans. If a borrower defaults on a mortgage, and the proceeds from the foreclosure of the property are insufficient to cover the resulting loss, the lender submits a claim to the mortgage insurer to recover its losses.
The law requires federally regulated lenders to obtain mortgage insurance on loans in which the homebuyer has made a down payment of less than 20% of the purchase price (also called high loan-to-value ratio loans). The homebuyer pays the premium for this insurance, which protects the lender if the homebuyer defaults.
The Government ultimately backs most insured mortgages in Canada. It is responsible for the obligations of Canada Mortgage and Housing Corporation (CMHC) as it is an agent Crown corporation. In order for private mortgage insurers to compete with CMHC, the Government backs private mortgage insurers’ obligations to lenders, subject to a deductible equal to 10% of the original principal amount of the loan.
In October 2008, the Government adjusted its minimum standards for government-backed, high-ratio mortgages, including:
* Fixing the maximum amortization period for new government-backed mortgages to 35 years.
* Requiring a minimum down payment of five% for new government-backed mortgages.
* Establishing a consistent minimum credit score requirement.
* Requiring the lender to make a reasonable effort to verify that the borrower can afford the loan payment.
* Introducing new loan documentation standards to ensure that there is evidence of reasonableness of property value and of the borrower’s sources and level of income.
Measures Announced Today
Today, the Government announced three changes to the standards governing government-backed mortgages.
Qualifying at a Five-Year Rate
Current interest rates are at record low levels, which has improved the affordability of housing for Canadians. It is important that Canadians borrow prudently and are able to manage their debt loads when interest rates rise.
Lender and mortgage insurers look at two key ratios when assessing the ability of a borrower to make payments on a mortgage loan:
* Gross Debt Service (GDS) ratio—the ratio of the carrying costs of the home, including the mortgage payment, taxes and heating costs, to the borrower’s income.
* Total Debt Service (TDS) ratio—the ratio of the carrying costs of the home and all other debt payments to the borrower’s total income.
Currently, the interest rate used to determine the mortgage payment for these calculations is either the rate fixed for the term of the mortgage or, in the case of a variable-rate mortgage and mortgages with terms of less than three years, the greater of the contract rate and the prevailing three-year fixed rate.
The adjustments to the mortgage framework will require mortgage insurers to ensure that borrowers qualify for their mortgage amount using the greater of the contract rate or the interest rate for a five-year fixed rate mortgage when calculating the GDS and TDS ratios.
This measure is intended to protect Canadians by providing them with additional flexibility to support mortgage payments at higher interest rates in the future.
Limit the Maximum Refinancing Amount to 90% of the Loan-to-Value Ratio
Borrowers seeking financial flexibility can currently refinance their mortgage and increase the amount they are borrowing on the security of their home up to a limit of 95% of the value of the property. This type of refinancing lowers the borrower’s equity in their home. The adjustments today will lower the maximum amount of the mortgage loan in a refinancing of a government-backed high ratio mortgage loan to 90% of the value of the property, consistent with the principle that home ownership is a tool for savings.
Discouraging Speculation by Requiring a Minimum Down Payment of 20% for non-owner-occupied properties
This measure will require a minimum down payment of 20% for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation. Currently, borrowers may purchase a residential property with a 5% down payment. Today’s change will require a 20% down payment for small (i.e., 1- to 4-unit) non-owner-occupied residential rental properties. Borrowers purchasing owner-occupied residential properties which also include some rental units (e.g., borrowers purchasing a duplex to live in one unit and rent out the other) will still be able to access government-backed mortgage insurance with a 5% down payment.
Moving to the New Framework
These adjustments to the mortgage insurance guarantee framework are intended to come into force on April 19, 2010. Exceptions would be allowed after April 19 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19, 2010.
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Contact the Jeffrey Team for more information - 416-388-1960
————————————————————————————————————
Related posts:
- New Real Estate Rules Government of Canada Moves to Protect and Strengthen Canadian Housing...
- Impact of new mortgage rules limited Ottawa's tougher mortgage rules have sparked a rush by home...
- Flaherty announces mortgage crackdown The new rules, which go into effect April 19, mean...
- Home ownership at record levels… so is mortgage debt By Colin Perkel – The Canadian Press Never before have so...
- First Time Home Buyers For most of us, the purchase of a home is the...
