Understanding Mortgages

For most people, a mortgage is the largest debt incurred in a lifetime and as well their largest single asset. As a result, the impact of a mortgage on financial planning strategies needs to be considered carefully.

A mortgage is a secured advance of funds for the purchase of an asset such as a home. Mortgages originated as a way to circumvent onerous laws against borrowing. The debt is secured with title to the asset. Mortgages allow the borrower to spread the acquisition of a major asset, such as a home, over a period of 20 years or so.

For most people, a mortgage is the largest debt incurred in a lifetime. At the same time, a home purchased with a mortgage may be the largest single asset. As a result, the impact of a mortgage on financial planning strategies needs to be considered carefully. Different mortgage payment options to provide liquidity and flexibility should be considered, as they permit the mortgage to be more customized to an individual’s requirements. Mortgages were once relatively generic with few or limited options, but today there are many types of mortgages and options available.

Mortgage Term and Amortization

The mortgage term is the length of time for which a mortgage is extended to the borrower. Normally, the term for a homeowner’s mortgage ranges from about 6 months to 10 years, which permits the interest rate and associated payments to be fixed for up to 10 years. At the end of the mortgage’s term (the maturity date), the borrower must either repay the mortgage or renegotiate it.Many mortgage borrowers choose to lock in their mortgage term for 5 years, the most popular mortgage term.

The total cost of the mortgage and the time that it takes to repay it are impacted by the mortgage amortization period. A longer amortization period will provide lower monthly payments. However, with the mortgage amount outstanding for a longer period of time, the total interest paid, and therefore the total price paid for the home, is higher. Even with a long amortization period, prepayments speed the repayment of the mortgage and reduce the remaining amortization period. Finally, given the long amortization period, small changes in the mortgage interest rate are magnified result in substantial changes in the total cost of borrowing.

Mortgage rates reflect current interest rate conditions. The relationship between short term, medium term, and long term interest rates is encapsulated in the yield curve. Since a typical yield curve exhibits higher interest rates for longer terms to maturity, a mortgage with a 5 year term typically has a higher interest rate than a 1 year term. In addition, open mortgages have a higher interest rate than closed mortgages given the same term. The advantage of a fixed interest rate is that the homeowner knows what the mortgage payments will be for the term of the mortgage.

The amortization period of the mortgage is the number of years during which payments occur. All else being equal, the longer the amortization period, the lower the monthly payments and the higher the cost of the mortgage. Although 25 year amortization periods are common, many homeowners choose shorter amortization periods to lessen the interest expense. There are likely to be several mortgage term renewals during the amortization period.

There are several mortgage payment options available that impact the total cost of the mortgage and the time that it takes to repay it. The higher the amortization period, the lower the loan payments, all else equal. In addition, the more payments made per year, the faster the mortgage can be repaid, all else equal. Finally, the lower the interest rate, the lower the total cost of borrowing. Since most mortgages amortize payments over 20 years or more, small changes in any of these variables are magnified and can impact the total cost or term of a mortgage substantially.

Mortgage Features

A mortgage is a major commitment, and any features that are available and that improve its attractiveness to the borrower should be sought. Some of the features available to a borrower when obtaining or renewing a mortgage include assumability, portability, and a selection of prepayment privileges.

Assumability is the ability to have a new purchaser assume the mortgage if the borrower needs to sell the property in the future. This feature can make it easier to sell in a weak property market. Although the buyer may still need to be qualified by the bank or mortgage lender in order to assume the mortgage, it may be an attractive feature. This feature is particularly attractive as a real estate selling tool if the mortgage rate is less than current mortgage rates.

Portability is the ability to use an existing mortgage to finance a borrower’s new home if the original home is sold. This is an alternative to allowing a buyer to assume an attractive mortgage, by allowing the borrower to maintain the existing mortgage. If additional funds are required to purchase the new property, the new payments will be a blended amount of the existing mortgage with the new mortgage.

The ability to prepay a mortgage is one of the most important features to a mortgage buyer in the current interest rate environment. At one time, mortgages permitted prepayments on the anniversary of the mortgage only, and borrowers who could not take advantage of that window had no recourse. Mortgages are available as closed, partially closed, and open. Closed mortgages have no prepayment privileges, or only allow pre-payment with a stated penalty. Partially closed or partially open mortgages allow prepayments at specific dates to a maximum amount of the principal. These are the most commonly found mortgages today. Open mortgages permit prepayment at any time and in any amount by the borrower. In reality, many mortgages today that are called closed mortgages do, in fact, permit some prepayment, often up to 10% of the mortgage principal each year.

Another popular method for mortgage prepayment is with “accelerated” weekly or bi-weekly payments. By increasing the total annual payments slightly each year, and by paying the mortgage more frequently than monthly, borrowers can shave years off their mortgage amortization.

The interest savings as a result of prepayment privileges are a tremendous incentive to individuals, and mortgage prepayment should be considered an important part of the overall financial plan. Since most mortgage interest is non-deductible, it should be retired once no further high-interest debt remains ahead of it.

Sources of Mortgage Funds

Mortgage funds are available from a variety of lenders. Most commonly, mortgages are obtained from financial institutions such as banks, credit unions, caisses populaires, or trust companies. The mortgage market is relatively competitive, since financial institutions realize that borrowers often bring other fee-generating requirements with them, such as registered retirement savings plans and mutual fund portfolios.

Mortgage funds may also be obtained from private lenders through the use of a professional mortgage broker. A mortgage broker arranges lenders for mortgage borrowers, collecting fee income for doing so. Mortgage brokers are often used when the subject property does not meet the standards for a conventional mortgage, or when the borrower does not have adequate financial resources to meet the lender’s criteria.

Funding from family members is often used for first home purchases. A private mortgage can then be made available for an individual who might not otherwise qualify for a mortgage from a traditional source. In addition, many sellers who own their homes free of mortgage are often willing to take a mortgage from the buyer. Known as a vendor take back (VTB) mortgage, a private mortgage can be an attractive selling feature to buyers with weak or limited credit ratings. The financial advisor should ensure that a good real estate lawyer and agent be involved in arranging non-traditional sources of mortgage funds.

Another source of funds for new home buyers are mortgages arranged by builders of homes, condominiums and townhouse developments. Although buyers must still be approved by the sponsoring financial institution, developers may negotiate special terms to help buyers put together financing for purchasing their homes. Prospective buyers will want to check the terms of financing carefully to ensure that they are as attractive as they appear to be. Sometimes, the advertised “low monthly payments” or “lower than rent” payments are obtained with a substantial ($100,000 or more) down payment and a long amortization period of 30 years.

For a discussion of how first-time buyers can use Registered Retirement Savings Plan (RRSP) funds to finance a downpayment of up to $20,000, see the section on the Home Buyers’ Plan (HBP) at http://www.professionalreferrals.ca/article-376.html

Conventional and Non-Conventional Mortgages

Conventional mortgages are those where the lender provides no more than 75% of the pre-purchase appraised value of a property or the purchase price, whichever is less. In addition to the limit on the mortgage amount, individual lenders determine what form of property is acceptable for a conventional mortgage. For example, a home without a poured concrete foundation, or a very small home, may not meet the lender’s criteria for a conventional mortgage, even if the borrower needs to finance less than 75% of its value.

A non-conventional, or high ratio, mortgage exists where the borrower makes a down payment of less than 25%, so that the mortgage amount provided by the lender is more than 75% of the property’s appraised value or its purchase price, whichever is less. Borrowers who do not have sufficient assets to make the necessary down payment on a home need to find another source of funds or apply for a high ratio mortgage. In Canada, high ratio mortgages are insured by Canada Mortgage and Housing Corporation (CMHC). Since the chances of default are greater for mortgages of a high value relative to the value of the home, borrowers are required to purchase CMHC insurance, which adds to the cost of the mortgage. The cost of the insurance increases as the percentage to be financed increases, up to about 3.75% of the mortgage amount.

For borrowers who choose a high ratio mortgage, the CMHC insurance is an additional cost that must be paid. Many mortgage lenders arrange to have the insurance premiums added to the mortgage and amortized over the life of the mortgage, rolling the insurance premiums and mortgage payments into one convenient monthly payment. However, this adds greatly to the interest costs, since the amount paid for the premium is substantially higher when amortized over 20 or 25 years. The borrower may decide to pay the CMHC insurance fee up front, saving thousands in interest costs.

Alternatively, borrowers without the necessary 25% down payment may use a personal loan for the difference between the available down payment and the requisite 25%. Provided that the borrower has sufficient income to assume a personal loan and meets the credit criteria, the benefits are twofold. First, the mortgage insurance is saved, a cost which is never recovered by the borrower. Second, a personal loan will amortize the remainder of the required down payment over a relatively short period of time, such as 3 or 5 years. This will save thousands of dollars in interest, even on a relatively small mortgage, as the debt is repaid over a shorter amortization period than if it had been part of the mortgage.

Of course, the disadvantage of using a personal loan is the increased level of personal indebtedness. Since the purchase of a home entails often unexpected expenses and cash outlays, the additional debt burden may be prohibitive. If this is the case, the financial planner should not overlook private sources of funds, such as parents, single siblings, or other family members.

Some employers provide home relocation loans to employees who are required to move as a result of their jobs. The CCRA provides some relief to the tax consequences associated with these loans, and this may be an interesting alternative for individuals moving as a result of employment. A low interest or zero interest relocation loan should always be requested as part of the compensation package when an employee is asked to move to another location for work.

Fixed and Variable Rate Mortgages

Both conventional and non-conventional mortgages are available as either fixed or variable interest rate mortgages. The choice between a fixed or variable rate mortgage is an individual one, often based on the financial stability and risk tolerance of the borrower. Borrowers who choose a fixed rate mortgage are assured of the interest rate for a predetermined period of time. A two year fixed mortgage has a fixed interest rate in effect for the two years of the mortgage. When the mortgage is due at the end of the term, it must be renewed at then-prevailing mortgage interest rates.

Borrowers who choose a variable rate mortgage have an interest rate that varies with market interest rates. Some financial planners suggest using variable rate mortgages if interest rates are high when the mortgage is initiated and interest rates are expected to fall. However, this theory presupposes that an individual borrower has the ability to predict interest rates better than the professionals who make a living attempting to do so.

The greatest risk with a variable rate mortgage is that interest rates actually rise, and that the borrower is no longer able to make the higher mortgage payments. Many variable rate mortgages allow the borrower to convert it to a fixed rate mortgage anytime or at a predetermined time. The interest rates applicable to a variable rate mortgage depend on the flexibility features of the mortgage available to the borrower, but they are usually lower than those of fixed rate mortgages.

Borrowers considering variable rate mortgages should consider both interest rates and their own financial situation carefully to determine that there is sufficient advantage to a variable rate mortgage to justify the increased risk.

Refinancing

Refinancing a home can be used for many purposes, some of which have nothing to do with home ownership. Homeowners may need funds for a variety of purposes, from furthering an education to home renovations or travel. In addition, homeowners may wish to access the equity in their homes for investing in financial assets.

Funds borrowed to purchase a home are not normally tax deductible, but loans undertaken for the purchase of an investment are tax deductible. Therefore, investors with a mortgage-free home sometimes use the equity in their home to invest, refinancing the home with a loan or mortgage for investment purposes. As with any debt, care should be taken that the refinancing does not produce too high a debt ratio which could jeopardize the equity in the home or the home itself.

Second and Third Mortgages

A mortgage secured by the title to a dwelling is usually a first mortgage. This means the lender will lay claim to the property in the event of default by the borrower. Second and third mortgages are financing agreements that are secondary or tertiary to the first mortgage holder. From the lender’s perspective, it is far less favourable to be a second mortgage holder than a first mortgage holder. In the event of a default, there may be little or nothing left for the second mortgage holder. Clearly, the least attractive lending position is the third mortgage holder, which is relatively infrequent.

In the past, second mortgages were considered for individuals who could not afford an adequate down payment. This was more common when real estate prices were rising rapidly and second mortgage holders stood a better likelihood of being repaid if the borrower was unable to make payments. However, they are also often used by individuals with a sudden need for funds, resulting from a loss of employment, for example, as a means to access some of the equity in the home. A second mortgage on a home should be discouraged by the financial advisor if there are alternatives, since it may result in a level of indebtedness that is difficult to reduce and impossible to support. It may be more prudent to consider a reduction in living expenses by selling the home and purchasing a less expensive one (or renting) rather than engage in multiple mortgages on the same property.

Home Equity

Home equity, or simply equity, is the portion of a home’s value that is no longer covered by a mortgage. For example, a couple who own a home with a $200,000 market value and a $75,000 mortgage outstanding against it are said to have $125,000 in home equity. This equity can often be tapped in an emergency using a home equity line of credit or to refinance the home.
All else being equal, the greater the equity in the home, the greater the financial strength of a potential borrower. A strong home equity position may entitle a borrower to obtain lines of credit for investment or other purposes. Any new debt will require assessment of the ability of the borrower to pay, as discussed earlier. Most homeowners strive to be debt-free, so that all of the home’s value is equity.

If the value of a home declines past the amount of mortgage outstanding, the home is said to have negative equity. As a result, the home owners will have to continue to pay for an asset that is worth less than the outstanding mortgage. Negative equity is most likely when buyers make a very small down payment such as 5% and during severe financial downturns. With a mortgage equivalent to 95% of the value of a home, a small decline in market real estate values will result in negative equity.
Needless to say, it is in the best interest of financial institutions to encourage buyers to have a down payment that is larger than 5%. The more equity a home buyer has, the greater the chance that the home buyer will do whatever is necessary to make the monthly (or weekly) mortgage payments. From the bank’s perspective, buyers with 5% down have less equity in their home, and therefore less stake in the obligation.

Reverse Mortgages

Reverse mortgages are offered by some financial institutions in Canada. Aimed at retired home owners with a lot of equity in their home, reverse mortgages, or reverse income mortgages, allow a financial institution to take a claim (often 10 to 40%) in exchange for a regular payment to the owners. This may be in the form of a reverse annuity mortgage or a reverse mortgage line of credit.

Commonly, a reverse mortgage consists of an individual taking out a mortgage on his or her house and buying an annuity with the proceeds. The mortgage continues to grow until the individual dies (or, if the individual is married, when the individual and his or her spouse have died) or the mortgage term ends. Typically, the house is then sold and the proceeds used to pay off the mortgage. Conveniently, the annuity income from a reverse mortgage is received tax free since it is, in effect, a loan to the taxpayer.

Reverse mortgages can be relatively complex, and their use should be considered carefully by the planner in conjunction with other options available to the client. In addition, if the value of the home is not increasing substantially, it is possible that a surprising amount of its value will be absorbed by the interest on the reverse mortgage. In addition, there may be substantial interest penalties to exit from the strategy if the home owner decides not to continue with it.
Reverse mortgages should be examined carefully only if other options do not exist.

Canadians Writing Off Their Mortgages: how to make your interest payments on your mortgage tax deductible

Western economies are susceptible to recessions approximately every 15 years. While most Canadians will never face a bigger debt in their lifetime than their mortgage payment which can span over a 20 to 25 year period, they are rarely provided with strategies that will lessen this burden. As economic times change from good to recession and back to a strong recovery again, the debt load of the Canadian property owner is always present. Currently 3.5 million mortgages in Canada are non tax-deductible. The question that many Canadians ask themselves and their trusted advisors is:

“Does it have to always be this way?”

The quick answer is no. To take advantage of mortgage debt and find tax relief, the mortgagor can turn Lemons into Lemonade by taking control of their financial situation. One control method which is fully tax deductible is to write-off mortgage interest as an investment expense. Few Canadians know or understand how to leverage this Canadian tax strategy which is readily available and can increase ones net worth (return on equity) and save thousands of dollars, while shaving years off their mortgage payments.

The typical mortgage strategy concept on its own is a very simple one, but the knowledge and tools require a sophisticated understanding of how to take advantage of a number of tax saving dollar strategies. What clients want today is a road map that will maximize their financial resources. Unfortunately the advice they receive only applies to one area of their financial life at a time - be it tax planning, investment management, insurance or what ever else. Rarely is a multiple disciplinary approach taken. Thus, allowing the individual to combine multiple strategies together to gain maximum results by implementing a solution that addresses the client’s essential needs.

Today’s savvy clients are demanding from their advisors a more blended tax saving planned approach. This approach not only will increase personal profits while lowering expenses, but further allows a client to utilize all their assets. Getting more out of every dollar is the ultimate end game. Mortgage interest deductibility provides this additional benefit of holding an investment portfolio while owning a home simultaneously.

How does this work?

This strategy requires clients to sell off their non-registered investment portfolios to pay off or pay down their mortgages and then borrow the equal amount again for the purpose to invest. The client’s debt does not increase, but this debt conversion process allows the client to turn non-deductible mortgage payments into deductible interest payments. Resulting in the interest caring cost from a traditional mortgage to be reduced by a client’s marginal tax rate.

This concept allows the mortgagor to save upwards of hundreds of thousands of dollars in interest payments and years off their mortgage, while placing their hard earn money back in their pocket where it belongs.

By looking at the following example one can see how tying a mortgage to an investment portfolio offers the best tax savings road map a savvy investor would want to utilize.

Example
Let us imagine Client A invested $200,000 into his portfolio, and his shares have dropped in value. Today Client A’s investment portfolio is now worth $150,000 due the market decline which created a paper loss of $50,000.

Client A also holds a mortgage for $150,000 and is paying 5% per year or $7,500 after tax interest. If Client A is in a 46% marginal tax bracket it actually costs him $13,889 of pre-tax income to pay the $7,500 interest cost after tax per year. By selling off his $150,000 investment portfolio using these funds to pay down his mortgage and then turning around and borrowing $150,000 to re-invest, Client A’ will save $6,389 per year in tax dollars. This occurs because the mortgage is for now investments purposes so it becomes a write- off for the interest paid on the $150,000. Now the loan for Canadian Revenue Agency purposes has been reclassified from being a mortgage to an investment loan.

Now let’s look forward at Client A. He re-invests in the same investment portfolio as before using a 6% rate of return compounded over 5 years, the $150,000 grows to $200,734 and earns back $50,734 which he lost on paper when the investment markets went down.

For this example, lets round the figure off to $50,000. Now let’s assume Client A sells his investments and receives a $50,000 capital gain, which is written off against the $50,000 capital loss he took five years earlier. It’s at this moment, Client A receives a 23% tax savings or $11,500 which would have had to been paid as his capital gains tax on the $50,000 to CRA.

Lets assume that Client A invests his entire $6,389 of the tax savings from restructuring his mortgage to an investment loan into his RRSP and it earns him 6% compound yearly for 5 years. Client A will have invested $31,945 of his tax savings into his RRSP during this period which will have earned an additional $6,231 to a total value of $38,176 at the end of the 5 year period.

If we sum up the two savings together ($38,176 + $11,500), this individual is wealthier utilizing the portfolio / mortgage strategy by $49,676. These savings would not have been possible if he had not combined these strategies of realizing his capital loss on his portfolio, making his interest on his mortgage deductible and re-investing the tax saving in his RRSP.

By implementing this model, all of us can create a worthwhile tax saving plan while becoming mortgage debt free sooner then the traditional mortgage routes available. Obviously, this approach requires a specialty in areas such as accounting, mortgages evaluation, investment management, and tax. Many clients and their accounting professionals will need to seek educational services to aid them in the setup and maintenance stages. Therefore, it is worth the time and money to hire the right professional consultants to assist in the design, implementation and maintenance of this solution.

---

Peter J. Merrick, BA, FMA, CFP,TEP, FCSI

What is a Mortgage Broker?

A mortgage broker (or mortgage consultant in some jurisdictions) is an independent agent, an intermediary between you the consumer and the mortgage lender. The mortgage broker will shop the available lenders to find the mortgage product that offers the best combination of features, options and rates to suit your individual circumstances. The best part - depending on your credit picture - there is no charge to the consumer for the service! The mortgage consultant’s fee is normally paid by the lender.

Why use a Mortgage Broker?

With the fluctuation in interest rates of late, homeowners have become more aggressive in seeking out the best possible terms from a lender. The appeal of a mortgage consultant lies in the opportunity for you to effectively search a large segment of the mortgage industry for the optimum terms, rather than negotiate personally with only one or a few lenders. As a result, the popularity of mortgage brokers is growing - more mortgages in Canada are being concluded through a mortgage broker than ever before.

A mortgage consultant can also be an independent source of information and an unbiased help in wading through the myriad of options available in the mortgage industry today. Wondering about the advantages of refinancing? Want more information on the Home Buyers Plan? How about advice on adjustable term mortgages? Maybe you’re having problems getting a mortgage because you’re self-employed or you need special help arranging financing for an investment property. These are the kinds of issues a mortgage broker can help with and usually at no cost.

Encore utiles, les courtiers ?

Les institutions financières les plus importantes tournent le dos aux courtiers hypothécaires. Vaut-il encore la peine de faire affaire avec ces derniers ?

RBC Banque Royale, la plus importante banque du pays, n'a jamais utilisé les services de courtiers hypothécaires. La plus importante institution financière du Québec, Desjardins, a remercié ses courtiers il y a plus d'un an, comme l'avait fait quelques mois plus tôt BMO. Si les produits des plus grands prêteurs ne sont plus disponibles chez les courtiers, est-ce encore une bonne idée de faire affaire avec eux ?

Oui. Même si plus de 50 % du marché de l'hypothèque échappe aux courtiers, rien ne vous empêche de leur soumettre une demande de financement et d'en faire autant avec d'autres institutions. Le courtier hypothécaire négocie avec plusieurs prêteurs potentiels afin de vous obtenir les meilleures conditions d'emprunt. Il évalue votre situation financière, il vérifie votre cote de crédit et il cherche ensuite à vous procurer le financement requis dans les meilleurs termes. Les services du courtier sont payés par votre prêteur seulement si le prêt est accordé.

La concurrence entre les prêteurs permet encore aux courtiers d'offrir un éventail varié de produits financiers. Leur connaissance du marché vous ouvre les portes de prêteurs potentiels auxquels vous n'auriez sans doute pas pensé, tout particulièrement des institutions financières qui n'ont pas pignon sur rue, telles les banques virtuelles comme ING ou la filiale de produits d'assurance des banques.

" Au cours de sa vie, le consommateur moyen n'aura que deux ou trois occasions de négocier une hypothèque ", rappelle Jacques St-Pierre, titulaire de la Chaire SITQ en immobilier et professeur à l'École des sciences de la gestion de l'UQAM. Les courtiers possèdent un autre avantage de taille : un volume de prêts qui accroît leur pouvoir de négociation.

Le marché hypothécaire a ceci de particulier que vous pouvez toujours obtenir un taux meilleur que celui qui est affiché par les institutions financières.

" Votre prêteur ne vous offrira jamais les meilleures conditions du premier coup ", insiste Pierre Martel, pdg de Multi-Prêts Hypothèques et président de l'Association canadienne des courtiers hypothécaires accrédités (ACCHA).

47,7 %

À elle seule, Desjardins s'approprie près de 48 % du marché québécois.

Rémunération du courtier

Les courtiers obtiennent du prêteur une commission d'environ 0,05 % de la valeur du prêt, soit 500 $. par tranche de 100 000 $. Les conditions de rémunération offertes aux courtiers ne varient guère d'un prêteur à l'autre. Cette rémunération peut varier, notamment en fonction de la durée du prêt.

TROIS MAUVAISES RAISONS D'IGNORER LES COURTIERS HYPOTHÉCAIRES

1 " Je veux avoir mon hypothèque à l'institution financière où j'ai mes comptes et mes autres prêts. " Beaucoup de gens hésitent encore à négocier un prêt ailleurs qu'à leur banque, de peur d'avoir des ennuis lors des transferts de fonds. Cette crainte n'est pas fondée.

2 " Les produits des plus importantes institutions financières ne sont plus disponibles chez les courtiers. C'est louche. " Les institutions qui ont laissé partir les courtiers l'ont fait soit parce qu'elles avaient déjà investi dans leur propre réseau de distribution, soit parce que la clientèle amenée par les courtiers n'était pas assez payante. Cela dit, les courtiers peuvent trouver de meilleures conditions d'emprunt ailleurs. Même les prêteurs qui ne font pas affaire avec les courtiers leur ouvrent leur portefeuille de produits pour développer certains marchés.

3" Les courtiers favorisent parfois les produits de prêteurs qui leur offrent la meilleure rémunération. " Rien n'empêche le client qui doute de son courtier de demander des propositions à d'autres courtiers.

Alain Castonguay

Mortgage Prepayment Penalty

Compensation Amounts

If you wish to make a prepayment of more than 15% of the original borrowed amount in any single year, there will be a compensation charge. The compensation charge is equal to the greater of Three Months' Interest Cost, or an Interest Rate Differential Amount.

Here is how you can estimate the Three Months' Interest Cost and the Interest Rate Differential Amount. We use a precise formula that credits you for the amount of principal you would have paid off each month. You can obtain the exact amount by contacting your branch.

1. To estimate the Three Months' Interest Costs:

Step 1: ________ (A) amount you want to prepay
Step 2: ________ (B) the Interest Rate under your Mortgage expressed as a decimal (for example, 6.75% = .0675)
Step 3: ________ (C) A x B = C
Step 4: ________ (D) C ÷ 4 = D, D is your estimated Three Months' Interest Costs

2. To estimate the Interest Rate Differential Amount:

Step 1: ________ (A) the current interest rate under your Mortgage expressed as a decimal (for example, 6.75% = .0675)
Step 2: ________ (B) the current interest rate that we can now charge for a mortgage term offered by us with the term closest to your remaining term. The interest rate will be our posted interest rate for the term minus the most recent discount you received
Step 3: ________ (C) A - B = C, which is the difference between your current interest rate and the interest rate in B above (write C as a decimal)
Step 4: ________ (D) amount you want to prepay
Step 5: ________ (E) number of months for the remaining term of your Mortgage
Step 6: ________ (F) (C x D x E) ÷ 12 = F, F is your estimated Interest Rate Differential Amount

Rates as of: 13 February 2009

Rates as of: 13 February 2009

Mortgage products	Posted rates	My rates
5 years Variable	Prime 3.00 %	3.80 %
1 year	5.50 %	3.50 %
1 year open	7.45 %	7.45 %
2 years	6.25 %	4.59 %
3 years	5.75 %	4.14 %
4 years	5.75 %	4.29 %
5 years	5.80 %	4.19 %
6 years	6.40 %	5.40 %
7 years	7.00 %	5.90 %
9 years	6.90 %	6.60 %
10 years	7.35 %	6.05 %
15 years	9.65 %	9.35 %
18 years	9.65 %	9.35 %
25 years	9.75 %	9.45 %

*Some conditions apply, subject to change without prior notice.

Budget 2009: what it means for the mortgage industry

Tuesday, 3 February 2009



Now that the mortgage industry has had plenty of time to absorb the January budget - all 360 pages and 109 checkmarks - CMP spoke to people in the industry to find out what it means to them. Tell us what you think in the comments section below.
Tax credits and RRSPs
“[The] budget provides enhanced consumer confidence, especially as it affects housing – the largest investment for most Canadians.”
- Jim Murphy, president and CEO of CAAMP, in a statement
“Obviously the optional $25,000 that you can take our of your RRSP, tax free, for a down payment is going to help with first time homebuyers, but I’m not sure about the $1,350 tax credit for home renovations. As an incentive to build this seems pretty ineffective. I would say overall it seems like a budget that favoured big banks.
- Boris Bozic, president, Merix Financial
“I thought the government did a good job of considering a number of different ways to get immediate relief through to consumers, like the raising of the homebuyer program limit to $25,000 or some of the tax credits. I think they’re all good. But at the same time, the real issue in the economy has moved from affordability of homes to ‘am I going to have a job to pay for my home?’ So I think the focus on employment will be key."
- Peter Vukanovich, president and CEO, Genworth Financial Canada
“When the first-time homebuyers plan first came out, it had a tremendous effect on a number of people and their decision about getting into a new home. Anything that raises that withdrawal limit and doesn’t penalize people on an income tax basis is a good thing. I think the home renovation credit is phenomenal because it’s not just about the homeowner, it’s about all the trades that come to work to do the renovations.”
- Peter O’Neill, vice-president and COO, Bridgewater Bank
“The home renovation tax credit encourages people who have equity in their homes to not just refinance, but to do it in the next 12 months because the credit expires, which I thought was a very smart idea. Also, I think anything they’ve done to spur new home purchases is going to make a big difference to real estate, and I think real estate has been one of the areas hardest hit.”
- James Smythe, broker, Dominion Lending Centres
"When people build a home or when people remodel a home, they are spending money in other sectors of the economy and that's vital, so we're really pleased to see it directly addressed in the proposed budget."
- John Geha, president, Coldwell Banker (Canadian Operations)
Additional $50 billion of liquidity
“The Insured Mortgage Purchase program is not a program like in the US where government is trying to buy up toxic assets. It’s a program to buy mainstream mortgage pools that are already part of a very robust securitization methodology in Canada, and it allows a banking industry to gain access to capital in a quick and predictable way. But the reality is that not all banks and federally regulated financial institutions get to participate directly with that program.”
- Peter O’Neill, vice-president and COO, Bridgewater Bank
“For the big lenders and issuers who have the option to get into the auctions along with the big banks, they will have access to that additional $50 billion of government liquidity, but at a cost that is more than the CMB (Canada Mortgage Bond). And you have to ask what is this incurring debt going to do to the bond market? It will rise, and it’s inevitable that the fixed rate will rise as well – it’s just a matter of when.”
- Boris Bozic, president, Merix Financial
“The government is reacting to things after they happen, and I think in a lot of cases right now, it’s very clear what’s going to happen in the next six, twelve months. They should probably be proactive in their responses by creating excess pools of money to pick up the slack when things do become a problem. I think they should be doing significantly more now to curb the problems expected in the future.”
- James Smythe, broker, Dominion Lending Centres
100% backing for private insurers
“Genworth Financial Canada has approximately $4.5 billion dollars of assets available for potential future claims payment, which speaks to our financial strength and stability now and in the future. For these reasons, we continue to compete for, and receive business from, lenders all across Canada. What has become clear of late, however, is that the global credit crisis has exacerbated the differential between the guarantee purchased from the federal government by Genworth Financial Canada and the guarantee provided to CMHC. Lenders are under pressure to obtain the strongest possible assurances on their credit enhancement, and the 10 percent difference between CMHC and Genworth Financial Canada has impacted lender decision-making. As a consequence, over time, both consumers and lenders will have less choice, fewer products and less price competition if this imbalance is not corrected.”
-Peter Vukanovich, president and CEO, Genworth Financial Canada
"We believe increased competition has greatly benefited the Canadian market and has resulted in a number of positive changes within the mortgage default market, including more affordable premiums, the elimination of almost all mortgage insurance application fees, and product innovations that assist new immigrants and self-employed borrowers. While the current global economic uncertainty has impacted the Canadian market, a competitive dynamic remains important for our industry. We applauded the Government of Canada's decision in 2006 to foster mortgage insurance competition and we will continue to execute on our vision of providing additional choice and flexibility today and well into the future.”

- Andy Charles, president and CEO, AIG United Guaranty Mortgage Insurance Company Canada

"The private insurers are already at 90% so it wouldn’t have been an extraordinary stretch to go to 100%. CMHC has always done a great job, but they did an even better job when competition was introduced. Let’s face it, competition is good. We’d like to see a level playing field because in the long run it benefits the consumers."
- Boris Bozic, president, Merix Financial

Wells Fargo introduces new mortgage product, rate breaks

| Tuesday, 10 February 2009


Wells Fargo Financial Canada announced changes to its rate structure February 2, and introduced a new open mortgage product in December to accommodate more borrowers.

The new rate structure allows brokers who make deals between $150,000 and $200,000 to knock 85 basis points off the interest rate. Deals over $300,000 see a rate decrease of 160 basis points.

“We realized that for the non-conforming clients, especially in urban centres where house prices tend to be a lot higher, it becomes more difficult to qualify, so we decided to lower interest rates on the higher deal sizes,” said Steve Malone, vice president of home plan operations at Wells Fargo Financial Canada. “We think it’s a unique approach and allows more opportunities for home ownership.”

The alternative lender also introduced a new open mortgage in December, which allows borrowers to increase interest rates on the loan by 50 basis points so they’re able to exit the mortgage at any time without a prepayment penalty. Malone said more than 50% of issued commitments switched to the open mortgage program in January.

“As a lot of non-conforming lenders are exiting the market, we’re making proactive changes,” he said. “Everybody seems to be scaling back in reaction to the conditions in the market – we still think there’s a lot of opportunity.”

Canadian House Price Survey

CAAMP Stats/Statistiques ACCHA

 

February 4, 2009 Cliquez ici pour la version franзaise Welcome to the February issue of CAAMP Stats. Bank of Canada Interest Rate December 9, 2008 1.50% January 20, 2009 1.00% March 3, 2009 Next meeting date Source: Bank of Canada Bank Prime Lending Rate December 10, 2008 3.50% January 21, 2009 3.00% March 4, 2009 Next meeting date  Source: Bank of Canada US Federal Reserve Board Discount Rate December 16, 2008 0.00–0.25% January 28, 2009 0.00–0.25% March 17, 2009 Next meeting date Source: US Federal Reserve Exchange Rate ($CDN/$US) Exchange Rate ($CDN/$US) $CDN/$US December 31, 2008 0.8210 $CDN/$US January 16, 2009 0.8013 $CDN/$US January 30, 2009 0.8153 Source:Bank of Canada Government of Canada Bonds Bond Type December 31, 2008 January 14, 2009 January 28, 2009 1 Year Treasury Bill 0.89% (Dec 24) 0.71% 0.98% 3 Year Benchmark Bond Yield 1.32% 1.15% 1.61% 5 Year Benchmark Bond Yield 1.69% 1.52% 2.03% 10 Year Benchmark Bond Yield 2.69% 2.55% 2.97% Source: Bank of Canada Total New Housing Starts (Seasonable adjusted and annualized) Province October 2008 October 2007 November 2008 November 2007 December 2008 December 2007 Newfoundland/Labrador 3,100 2,700 2,700 3,000 4,000 2,900 PEI 600 500 800 1,000 900 600 Nova Scotia 4,300 5,600 3,600 4,200 3,000 4,400 New Brunswick 5,000 3,900 3,900 3,800 3,000 4,500 Quebec 48,400 47,700 48,200 39,600 44,000 39,200 Ontario 82,600 68,400 58,300 76,300 63,100 51,700 Manitoba 5,800 6,600 5,900 5,000 6,400 4,600 Saskatchewan 4,900 5,300 5,700 5,100 4,700 5,000 Alberta 24,700 45,900 20,400 42,600 20,000 37,900 British Columbia 32,300 40,900 22,400 47,800 23,100 33,900 CANADA 211,800 227,600 172,000 228,500 172,200 184,700 Source: CMHC Housing Now – January 2009 and January 2008. This seasonally adjusted data goes through stages of revision at different times of the year. Quarterly House Price Survey Market Detached Bungalows Standard Two Storey Standard Condominium Q4 2008 Average Q4 2007 Average % Change Q4 2008 Average Q4 2007 Average % Change Q4 2008 Average Q4 2007 Average % Change Halifax 215,000 201,333 6.8% 259,667 231,667 12.1% 159,500 148,500 7.4% Charlottetown 157,000 152,000 3.3% 188,000 180,000 4.4%       Moncton 150,000 151,000 -0.7% 126,000 135,000 -6.7%       Fredericton 162,000 155,000 4.5% 210,000 197,000 6.6% 133,000 126,000 5.6% Saint John 225,064 196,500 14.5% 294,695 255,000 15.6% 158,283     St. John's 190,050 157,667 20.5% 261,800 219,333 19.4% 203,000 165,000 23.0% Atlantic 190,921 173,150 10.3% 238,310 212,000 12.4% 174,183 145,429 19.8% Montreal 216,372 258,150 1.2% 334,850 342,491 -2.2% 200,284 202,859 -1.3% Ottawa 321,333 308,583 4.1% 317,083 306,500 3.5% 207,167 196,833 5.2% Toronto 411,483 448,133 -8.2% 513,417 550,705 -6.8% 299,675 306,830 -2.3% Winnipeg 219,650 214,494 2.4% 247,029 237,571 4.0% 132,083 127,408 3.7% Regina 274,167 229,200 19.6% 238,260 199,000 19.7% 172,917 144,000 20.1% Saskatoon 300,000 292,500 2.6% 328,750 321,250 2.3% 194,250 205,000 -5.2% Calgary 410,333 429,889 -4.5% 408,263 461,811 -11.6% 257,189 284,144 -9.5% Edmonton 301,429 336,786 -10.5% 337,075 370,000 -8.9% 206,854 240,500 -14.0% Vancouver 743,750 795,250 -6.5% 837,500 895,000 -6.4% 405,000 428,250 -5.4% Victoria 425,000 425,000 0.0% 433,000 456,000 -5.0% 265,000 292,000 -9.2% National Average House Price 319,640 335,845 -4.8% 376,140 401,299 -6.3% 233,230 246,048 -5.2% Source: Royal LePage, January 2009, Quarterly Survey 4 fйvrier, 2009 Bienvenue aux lecteurs de cette йdition de fйvrier 2009 de Statistiques ACCHA. Taux de la Banque du Canada 9 dйcembre, 2008 1,50 % 20 janvier, 2009 1,00 % 3 mars, 2009 Prochaine rйunion Source : Banque du Canada Taux directeur 10 dйcembre, 2008 3,50 % 21 janvier, 2009 3,00 % 4 mars, 2009 Prochaine rйunion Source : Banque du Canada Taux d'escompte de la Rйserve fйdйrale amйricain 16 dйcembre, 2008 0,00–0,25 % 28 janvier, 2009 0,00–0,25 % 17 mars, 2009 Prochaine rйunion Source : Rйserve fйdйrale amйricaine Taux de change ($CA/$US) Taux de change ($CA/$US) $CA/$US 31 dйcembre, 2008 0,8210 $CA/$US 16 janvier, 2009 0,8013 $CA/$US 30 janvier, 2009 0,8153 Source: Banque du Canada Bons et obligations du Canada Type 31 dйcembre, 2008 14 janvier, 2009 28 janvier, 2009 Bons du Trйsor, 1 an 0,89 % (dйc 24) 0,71 % 0,98 % Obligations, 3 ans 1,32 % 1,15 % 1,61 % Obligations, 5 ans 1,69 % 1,52 % 2,03 % Obligations, 10 ans 2,69 % 2,55 % 2,97 % Source: Banque du Canada Mises en chantier (dйsaisonnalisйes et annualisйes) Province Octobre 2008 Octobre 2007 Novembre 2008 Novembre 2007 Dйcembre 2008 Dйcembre 2007 Terre-Neuve/Labrador 3 100 2 700 2 700 3 000 4 000 2 900 IPE 600 500 800 1 000 900 600 Nouvelle-Йcosse 4 300 5 600 3 600 4 200 3 000 4 400 Nouveau-Brunswick 5 000 3 900 3 900 3 800 3 000 4 500 Quйbec 48 400 47 700 48 200 39 600 44 000 39 200 Ontario 82 600 68 400 58 300 76 300 63 100 51 700 Manitoba 5 800 6 600 5 900 5 000 6 400 4 600 Saskatchewan 4 900 5 300 5 700 5 100 4 700 5 000 Alberta 24 700 45 900 20 400 42 600 20 000 37 900 Colombie-Britannique 32 300 40 900 22 400 47 800 23 100 33 900 CANADA 211 800 227 600 172 000 228 500 172 200 184 700 Source : Actualitйs habitation de la SCHL – janvier 2009 et janvier 2008 Ces donnйes dйsaisonnalisйes sont rйvisйes а divers moments de l'annйe. Йtude trimestrielle sur le prix des maisons Marchй Maison isolйe Maison а йtage standard Condo standard Moyenne T4 2008 Moyenne T4 2007 % variation Moyenne T4 2008 Moyenne T4 2007 % variation Moyenne T4 2008 Moyenne T4 2007 % variation Halifax 215 000 201 333 6,8 % 259 667 231 667 12,1 % 159 500 148 500 7,4 % Charlottetown 157 000 152 000 3,3 % 188 000 180 000 4,4 %       Moncton 150 000 151 000 -0,7 % 126 000 135 000 -6,7 %       Fredericton 162 000 155 000 4,5 % 210 000 197 000 6,6 % 133 000 126 000 5,6 % Saint John 225 064 196 500 14,5 % 294 695 255 000 15,6 % 158 283     St, John's 190 050 157 667 20,5 % 261 800 219 333 19,4 % 203 000 165 000 23,0 % Atlantique 190 921 173 150 10,3 % 238 310 212 000 12,4 % 174 183 145 429 19,8 % Montrйal 216 372 258 150 1,2 % 334 850 342 491 -2,2 % 200 284 202 859 -1,3 % Ottawa 321 333 308 583 4,1 % 317 083 306 500 3,5 % 207 167 196 833 5,2 % Toronto 411 483 448 133 -8,2 % 513 417 550 705 -6,8 % 299 675 306 830 -2,3 % Winnipeg 219 650 214 494 2,4 % 247 029 237 571 4,0 % 132 083 127 408 3,7 % Regina 274 167 229 200 19,6 % 238 260 199 000 19,7 % 172 917 144 000 20,1 % Saskatoon 300 000 292 500 2,6 % 328 750 321 250 2,3 % 194 250 205 000 -5,2 % Calgary 410 333 429 889 -4,5 % 408 263 461 811 -11,6 % 257 189 284 144 -9,5 % Edmonton 301 429 336 786 -10,5 % 337 075 370 000 -8,9 % 206 854 240 500 -14,0 % Vancouver 743 750 795 250 -6,5 % 837 500 895 000 -6,4 % 405 000 428 250 -5,4 % Victoria 425 000 425 000 0,0 % 433 000 456 000 -5,0 % 265 000 292 000 -9,2 % National Average House Price 319 640 335 845 -4,8 % 376 140 401 299 -6,3 % 233 230 246 048 -5,2 % Source : Royal LePage, janvier 2009, Йtude trimestrielle