Credit report errors costly to consumers

Mistakes on credit reports resulting in false credit scores can cost consumers thousands of dollars. A recent investigation by CBC News found that credit reporting errors have not only prevented consumers from getting loans, lines of credit and credit cards, but consumers are charged higher interest rates. In many cases, consumers are unaware of negative information on their reports.

It’s not surprising. The two credit reporting agencies – TransUnion Canada and Equifax – are inundated daily with hundreds of pieces of information with regard to consumer accounts and payment histories. That information comes from companies such as phone service providers and banks. These companies pay a fee for the bureaus to track clients and in return the credit bureaus provide the companies with access to consumer credit reports, which contains information from all the reporting agency’s client companies.

A national survey in 2005 conducted by the non-profit Public Interest Advocacy Centre found that 18 per cent of the people surveyed found mistakes in their credit report and 10 per cent of those believed they were denied financial services because of those errors.

One Toronto, Ontario paralegal who has represented clients in credit disputes, estimates the percentage of errors is higher than 18 per cent. Of his 3,000 clients, one-third of them have found inaccuracies in their credit reports. Inaccuracies can range from:

• Mistaken identity, whereby a collection gets registered against the wrong consumers – this usually happens when names are similar
• Numerous undischarged items under public records
• Unverifiable late payments
• Incorrect names, DOB, SIN 
• Statute of limitations with collections and other debts

The onus is on the member companies to provide accurate information to the two bureaus and it’s up to those companies to rectify any errors. When a consumer exposes an error, both Equifax and TransUnion require the creditors who supplied the information to sign off. Even that can take some time and isn’t always effective.

With so much emphasis on credit scores, it’s important that consumers are aware of what’s being reported in their individual files. Consumers can request to see their credit rating, however few do. Unknown errors can be there for months, sometimes years, and could potentially lead to extra interest costs or other issues.
At this time, there is no federal oversight however under provincial consumer protection legislation companies can face fines if misinformation is not amended.

Consumers can request their credit report information via mail or online. Credit reports via mail are free but do not include your credit score. Credit reports and scores area available online, for a small fee.  For more information visit Equifax at www.equifax.ca and TransUnion at www.transunion.ca.

You can also contact your mortgage professional who can help you access your report and offer advice on how to remove inaccuracies and how to improve your credit score.

What You Think About Mortgages

Whether you currently own your home or are a first time buyer, most of you consider home an investment rather than an expense.  A recent poll conducted by Scotiabank found that a 77% of
Canadians think that way. Here is what else we know:

•  For Canadians who see the home as an investment, not as expense - the differences between the regions are as follows: Quebec (79%), Manitoba/Saskatchewan (80%) and Alberta (69%).
• Women (80%) are more likely than men (73%) to agree that homes are an investment, not an expense.
•  Among Canadians who don't own a home, 12 % plan on purchasing a home within the next year.
• Women are more likely than men to be renting their home (30% of women vs. 24% of men).
•  Two-thirds (69 %) of Canadians report owning a home. For Canadian home owners, 40% are living mortgage-free.  
• Canadian homeowners over 55 are the most likely to currently be mortgage-free.
•  One-third of Canadians (34% say they will be relying on their home equity to support them in retirement.  
• Those who are between the ages of 35-54 are the most likely to say they are relying on their home equity to support their retirement (41%).
• The majority (81%) of Canadians agree it is important to become mortgage-free as soon as possible. 
• The most common step Canadians are taking to pay off their mortgage faster is to increase the frequency of their regular payments (29%).  
• Male mortgage holders are more likely to be able to make additional mortgage payments (70% vs. 51% of women).

Here are some ways to pay off your mortgage early:

1. Increase your regular payments
2.  Make lump sum payments whenever possible
3. Move to accelerated bi-weekly payments

How can you do this as pain-free as possible?

1. Pay off all your debts to avoid higher interest expenses
2. Refinance to pay off your debts and make the same payment  
3. Use any new found money such as pay raises to increase your regular mortgage payments.

For more ways to pay off your mortgage early, contact your mortgage broker.

How Much is Enough Mortgage Friction?

By Mark Kerzner, President, TMG The Mortgage Group Canada Inc.

A mortgage consumer recently described the cost and work involved to switch lenders, either at mid-term or at maturity, as "mortgage friction." This is an interesting comment. If there are savings to be had, how much “friction” would be acceptable? The old adage, "you can't get something for nothing" might apply here.

We hear countless stories of people willing to pay hundreds of dollars in cancellation fees to switch cell phone, cable or even home security providers yet when presented with an opportunity to save thousands of dollars, some mortgage holders don’t seem to want explore their options.

When you add in the fact that banks routinely charge higher interest rates to existing clients than they do to new ones, mortgage holders may be better served by shopping around at renewal time. Clearly, the best way to shop for rates is by using the services of a mortgage broker, yet 73% of Canadians choose not to, even though, on average, the ones who did, saved 19 basis points on their mortgages. Those who renewed or renegotiated with a mortgage broker reported an average rate decrease from posted  of 1.4 basis points, compared with 1.0 points among all renewers.

While 48% of first-time buyers used a mortgage broker only 27% of those refinancing and 21% of those renewing used one. At renewal, 88% of consumers remained loyal to their lender. So, with a discrepancy of up to 40 basis points at renewal, why are so many staying loyal to their existing lenders?

It might make sense to stay with your original lender, but not always. After all, your mortgage broker offered you the best mortgage and interest rate at the time of purchase. But some lenders such as FirstLine have now left the market, while others, including your existing lender may have changed their pricing strategies.

To know whether changing lenders is right for you it is vital to understand the process and the costs. The number one cost or "friction" is the need to re-qualify. Most lenders will automatically offer their good customers a renewal. If you need additional funds or plan on transferring or switching to another lender, that new lender will first have to re-qualify you.

When you switch lenders you or the new lender will request a payout statement -- in many cases your mortgage broker can assist you with this.  There may be a discharge fee, perhaps a penalty on your existing mortgage and an appraisal may be required. In some instances the new lender will pick up the cost of legal fees and appraisal costs.

There are no penalties when a mortgage reaches maturity, however, if you transfer or refinance your mortgage prior to maturity there may be contractual penalties. The most common are the Interest Rate Differential (IRD) for fixed rate terms and three months interest for adjustable/variable rate mortgages.

So let’s assume that financially it makes sense to switch –now let’s look at the numbers. Assuming a mortgage balance of $250,000 on a 5-year fixed rate and an amortization of 25 years, here is a comparison of three scenarios:

$250,000 mortgage, 5 year fixed, monthly payments, 25 year amortization
(numbers are used for illustrative purposes only)

     Rate        Payment          Int. cost (term)       Balance (end of term)           Increase cost over #1
1   3.19        $1,207.63       $36,918.05           $214,460.25
2   3.38        $1,232.40       $39,167.47           $215,223.47                         $2,249.42
3   3.59        $1,260.09       $41,658.85            $216,053.45                        $4,740.80


The savings identified above are after tax dollar savings, which can be significant.

It is worth it to consult with a mortgage broker. Reviewing options with a broker does not negate an offer to renew with your existing lender.  In the end the broker may advise you to stay where you.  However, it’s worth finding out whether or not you can financially benefit by switching.

Cost and rate aside, mortgage brokers can lessen the “friction” by facilitating the process on your behalf. With a single application and credit review they can navigate the market on your behalf, assessing options from multiple lenders. They will advise on product features including prepayment options and penalty calculations to match you with the right product for your unique circumstances. 

Call your local mortgage broker today.

Is household debt a threat to our economy?

Here are the facts:

1. Canadian household debt is indeed equal to 154% of disposable income
2.  The housing market is softening and prices are going down in many areas of the country
3. Canadians will be impacted by higher interest rates

Even given these facts; it’s unlikely that Canada will experience a financial crisis.

Household debt has been increasing steadily over that past 30 years as interest rates continue to decline but, for the most part, Canadians gear their borrowing to what they can afford.  Jobs are holding steady and business is confident about future prospects. So, lower interest rates mean less money goes to servicing debts.

In accumulating debt, Canadians also have a large asset, namely their homes. And although some in the financial community are concerned about the massive debt, Eric Lascelles, chief economist at RBC Global Asset Management recently said that assets outweigh debt by a factor of five.

It’s true that high household debt does put homeowners at risk but a closer look at the stats tells a better story. Overall Canadians exercise fairly good judgment when it comes to borrowing. The more vulnerable – seniors and low-income earners -- carry lower debt loads. It’s also true that the housing market carries a big part of household debt,  however the percentage of income earmarked for mortgage payments is not burdensome.

The new mortgage rules will certainly have an impact on the housing industry as will declining house prices; and interest rates will rise. Perhaps this will lead to some weakening of the economy. Delinquencies might increase a bit but the risk of the economy going into a recession is low. High-ratio mortgages are insured and our sub-prime market is small.

As for the weaker growth, Flaherty has said that the government could increase its deficit to shore up the economy. “If we ran into a serious world economic crisis arising out of the European situation, or something else, “he said, “Then of course we’d be responsive if we had to be to protect the Canadian economy and protect Canadian jobs as we have done in the past.”

The Affordability of Canadian Housing

Once again we have mixed messages in the media about the affordability of Canadian housing.  In March of this year, the Globe and Mail reported that housing affordability is improving in Canada due to house prices softening and low interest rates.

The Royal Bank of Canada’s (RBC) quarterly release found all housing categories became more affordable. This came at a time when there was considerable debate over whether some Canadians are overextending themselves by taking out mortgages they can’t afford – particularly in hot markets like Toronto and Vancouver.

At this point, housing in Canada was as affordable as it was a year prior. Then just last month RBC released its housing trend report and determined that increases in housing prices and mortgage rates have slightly eroded housing affordability in the second quarter of 2012. The report was released in the same week the Canadian Real Estate Association (CREA) predicted average home prices will fall 1.1 per cent this year, to an average of $359,100, before rebounding 0.9 per cent in 2013.

So what happened? Did prices go up or did they fall?

The RBC report found that affordability deteriorated in two of three housing categories – detached bungalows and two-storey homes – while condominiums were flat. The erosion of affordability levels in the first quarter of this year stemmed mostly from dramatic increases in a single market – Vancouver.
The Toronto-area market also deteriorated. Strong activity worsened affordability in Saskatchewan and Manitoba, and Atlantic Canada suffered a modest deterioration. Montreal and Alberta bucked the national trend by showing some improvements in affordability.

When we take a look at the resale market versus new home sales and especially the condo market, we get a much clearer picture of what’s been going on.  At the national level, the resale housing market, on the whole, appears balanced. The ratio of listings to sales stood at 6.1 months this past July and has shown little variation in almost two years. This stability, however, is hiding the recent softening in the Toronto and Montreal condo market and the entire resale market in Vancouver.

The softening in these three major metropolitan areas is also coinciding with a high number of homes under construction. In Toronto, for example, the number of condos unsold, which includes those that are pending construction, has surpassed the previous peak reached at the end of 2008. Clearly developers would like to see some of the supply sold before launching new projects. It’s the reluctance of these developers to move forward that will contribute to a decline in the overall construction of new dwellings across the country.

The unfortunate part is that these reports look at what has already happened, rather than at what is happening right now.  Mortgage brokers and Realtors across the country are reporting different levels of activity in different areas of the country following the overall pattern of activity already described. For example Atlantic Canada has slowed somewhat, yet centres like Halifax have increased activity. Part of Ontario has slowed but other areas have seen increases in sales activity. The one thing that has not happened is the market has not stopped.

We have not yet heard of massive foreclosures, which mean that households continue to pay their mortgages and their debts. House prices are coming down, interest rates are still relatively low and while it’s true that recent changes to the length of amortizations and the amount of equity a homeowner can take out of his or her home has had somewhat of an impact, as long as the economy keeps moving forward, it’s just a matter of playing the waiting game.   It’s not the worst of times.

Brokers can manage mortgage changes

By Mark Kerzner, President, TMG The Mortgage Group Canada Inc.

What a summer it has been so far for the mortgage industry and quite a year overall for both homeowners and those of us who work in it.

Here is a quick recap:

January – BMO’s 5 -year fixed rate dropped to 2.99% and started a mini-rate war.

February - FirstLine Mortgages – a leader in non-bank mortgage -- lending went up for sale.

March – Canada Mortgage and Housing Corporation (CMHC), the country’s leading mortgage default insurer,  starts to approach its $600B debt ceiling and BMO reintroduces 2.99%.

April – Minister of Finance Jim Flaherty says he will not be making additional mortgage changes.

May – The Office of the Superintendent of Financial Institutions (OSFI) now overseas CMHC and recommends credit guideline change.

June - The Minister of Finance surprises us with his announcement of the fourth round of mortgage guideline changes in the last three years.

July - FirstLine Mortgages shuts its doors.

August - It's reported that the Canadian arm of ING is up for sale.

Also in that time the following lender changes have occurred:

•  TD  exits the sub-prime market
•  Laurentien changes to B2B Bank and later it purchases AGF
• Resmor is sold to MCAP, closes and relaunches as RMG Mortgages
•  Lenders quickly change their lending guidelines on self-employed programs, on equity take-outs and New to Canada programs.

Those of us in the industry may feel under fire from lenders and Government, and for good reason. Over the years, the broker rate advantage has slowly eroded as banks start to advertise their own discounted rates. Mortgage brokers no longer have a monopoly on the lowest rates so we differentiate ourselves by offering better service, choice and knowledge. This actually transferred some power from lenders to brokers as lender sales channels and branches only offer single product lines.

When there is less choice and more restrictions, it’s sure to have an impact on the market and the business of mortgages. Perhaps I am naïve but I feel that some bank lenders still don’t understand the broker channel and what we offer. Possibly they feel threatened or maybe they want to support their own proprietary channels first.

Banks have been under intense scrutiny from OSFI and the Minister of Finance over the last few years and costs of capital have increased. With limited amounts of capital, lenders look to put it towards the best risk-weighted returns.

So what does this all mean? It means that lenders are both being selective and increasingly sensitive to their costs. It also means that mortgage brokers must continue to demonstrate the immense value we have among mortgage consumers. There are still approximately $1.2 trillion worth of mortgages outstanding and hundreds of thousands of housing starts and resales each year. Even in the wake of increased guidelines and fewer lenders to choose from, our role as a client's advocate is NOT going away and Canadians still need mortgages.

We are incredible partners for lenders.  We represent distribution as well as quality control.  We must continue to offer feedback on clients’ wants and needs so customers are well-served, which is a positive reflection on mortgage brokers as a whole. We MUST support those who support us.
So what can we do? We can be proud of the work we do with our customers. We can be proud of our profession. We can be willing to work a little harder and a little smarter and continue to offer real value to our customers and to our lenders.

Can Canada have it all?

Bank of Canada (BOC) Governor Mark Carney made a bold statement in an interview with the British Broadcasting Corp. (BBC) recently. He said that he has done all he can to boost Canada’s economy and it is now up to business and politicians to increase economic growth. And who could blame him? It was his monetary policy that has kept Canada from succumbing to the financial woes experienced in other countries. The record-low prime rate has helped boost the domestic economy and has kept us chugging along while we wait for global economies to catch up. But we are nearing the end of what the BOC can do. It is, indeed, up to us.

The BOC can lower interest rates to spur more spending, mortgage lenders can lower fixed rates and discount variable rates (spreads permitting), but it may not be the prudent thing to do anymore because the economy needs reviving in other areas– namely infrastructure, small business investment and tackling the trade deficit.

Let’s take a look at infrastructure. Imagine yourself as the CEO of your country. Your bridges are starting to crumble. Your air-traffic control system doesn’t use GPS. Your advisers estimate that you will need to make more than $2 billion in repairs and upgrades.  But there’s good news, too. Because of the global slow-down, construction materials are cheap. So is labour. And your borrowing costs have never been lower. That means a dollar of investment today will go much further than it would have five years ago -- or than it’s likely to go five years from now. So what do you do? If you’re thinking like a CEO, the answer is easy: you invest. It’s a fast way to create jobs, keep the manufacturing industry happy and “stimulate” the economy.

In an interview with CTV, Carney said Canadians should quit worrying about the European debt crisis because it’s out of their control. “Canada has relatively little exposure to Europe, and the country’s banks are solid enough to withstand a worst-case scenario.” He went on to say that Canadians need to focus on growing the economy themselves and business, especially, needs to look at the long-term by developing economic relationships with major emerging markets.

“We can’t solve the euro crisis for the Europeans. We can’t fix the U.S. fiscal situation. What we can change is how productive our businesses are. We can change the markets into which we sell,” he said.
Bassett & Walker International (BWI) out of Toronto, Ontario is a good example of how Canadian business can tap into the surging growth in developing countries. BWI is one of only about 100 agricultural product brokers who collectively do half a trillion dollars in trade every year. Companies in other sectors are doing the same thing – there is enormous potential in emerging markets worldwide.

Carney also said that inbound capital flows are stronger because international investors see Canada as a safe place to park their money. But Canada isn’t taking advantage of that windfall, he said.

“Our challenge as a country is how do we use that capital that comes in? We can use it to grow our economy, invest in new productive assets in industries, or we can build houses,” he said. “Our view is we should do the former.”

Perhaps we can do both. As the economy grows, through investment by business and through infrastructure investment, more money flows, there are more jobs and consumers start looking at purchasing homes. Can Canada have it all? I think so.

Why do interest rates continue to fall?

What can we make of the low interest rate environment we are now seeing? Fixed rates are dropping and one lender has dropped its variable rate. Will more lenders follow suit?

When the five-year fixed rate fell to under 3% earlier this year, Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney cautioned consumers and warned lenders to be careful with debt loads. Clearly it didn’t slow the robust housing market – purchases and refinances continued at a pace not seen since 2007.

Then Flaherty announced some changes to the mortgage rules to slow down the pace of rising debts. So what happened? We had a couple of weeks of quiet as the summer was also upon us.

It appears both lenders and investors are not comfortable with a lull. They have been taking advantage of lower bond yields, which accounts for lowered fixed rates. Even the seven and 10-year rates are looking very good. At the time of this writing a seven-year rate can be had for 3.69%. The spread between the posted rate on a five-year mortgage of 5.24% and a government of Canada five-year bond is almost 400 basis points — the highest it’s been since the financial crisis in 2008.

Also, a few monoline lenders – lenders who specialize in mortgage lending only -- are now offering their variable rate under prime --something we have not seen consistently since last Fall. Clearly, these lenders have an appetite for funding right now. It will be interesting to see if this initiates a mini-price war in the variable rate market. But there is always the threat that the government will step in and introduce even tougher rules.

These rates continue to tempt consumers. This may be the best time to consolidate even if it’s only to 80% of the value of your property.  On the other hand, the challenge is the increasing debt loads that a low interest rate environment can create.

Craig Alexander, chief economist at Toronto-Dominion Bank suggested in a recent news article that consumers should not abuse this opportunity by taking on new debt but should take advantage of it.

The Canadian Real Estate Association had previously forecast housing sales in 2012 and 2013 that were roughly on par with the 10-year average for annual activity. The updated forecast now predicts activity slightly above the long term average. The national average price is also forecast to rise modestly in 2013, edging up two per cent to $378,200.

It’s hard to heed the warnings from government when the economy, the job market and the housing market seem to be doing so well.

Inflation, interest rates and 2014

The more things change, the more they stay the same. 

We’ve seen changes in mortgage rules and bank lending rules for lines of credit. We’ve seen interest rate wars among banks. The new Galaxy Android hit the market with a lot of hype. Tablets and half –tablets are getting talked up. RIM, makers of the ubiquitous Blackberry, has lost market share.  We can even pay for purchases using our Smartphones.

We get to pick the TV channels we want to watch – goodbye to bundling -- thanks to a new CRTC ruling. Life just keeps on moving forward no matter what’s happening to the economies in Canada, US and globally. 

Canada continues to reinvent itself within the context of gloomy global economies. The country remains a stable, conservative market. Canada’s annual inflation rate rose slightly to 1.5% in June, and most consumer prices remained stable. Increases in the price of passenger vehicles, electricity, food, and homeowners’ replacement costs were mostly responsible for June’s slightly higher rate, which was up three-tenths of a point from May according to Statistics Canada.

Even with the recent launch of an aggressive discounting program from auto dealers, it’s unlikely the inflation rate will come close to the 2% that Governor of the Bank of Canada (BoC) Mark Carney holds as the magic number – anything over that and Carney would consider raising interest rates.

Gasoline prices continued its downward trend in June. The overall price of consumer goods and services also fell. Food prices may change, though, since many areas of the country, as well as in the US have experienced severe drought, which may put pressure on prices.

With dismal global growth and no spectacular numbers coming out of the US, it’s safe to say, barring any major catastrophes, the inflation rate will remain low for some time despite record low interest rates designed to pump up spending. Consumers and business have hunkered down and have taken a wait and see attitude with regard to the economy, putting on hold any major purchases.

The new mortgage-lending rules are expected to help cool down the housing market and household debt growth from any moths to come.  On July 17, Carney kept the overnight rate at 1% for the 15th consecutive policy meeting dating back to September 2010.

The BoC also predicts some moderate growth and it has forecasted that the Canadian economy will strengthen by 2.5 per cent in 2014. But until then, we can expect a lackluster economy – not stagnant --but slow and steady.

Jobs an indicator of healthy economy

Canadians have heard it often during the past four years – the economy has weathered the global financial crisis and came through it with flying colours. The economy has grown and thrived without the disasters that befell other countries. The dollar is strong, the housing market hasn’t busted up despite warnings of bubbles. The GDP is growing, the rate of inflation is slow and interest rates are low. Although low rates have fuelled the economy to some extent, consumers have been reining in the pace of its debt accumulation after warnings from government of the potential dangers of  servicing high household debt.

One of the main indicators that point to a continued healthy economy is the job numbers. Without jobs, household budgets get tighter, consumer purchases slow down, manufacturers scramble to reduce inventory, which could lead to lay-offs, and bankruptcies rise. Job loss is also the leading cause of mortgage default.

Three reports this month – one on manufacturing, the other two on jobs -- show that Canada is still on track to continue its growth – albeit at a slower pace. This is happening despite the continuing crisis globally. Interstingly, Canada is benefitting from an increase in U.S consumer demand, especially for autos.

Bucking the global trend, in June, factory orders rose, according to an RBC survey. The RBC Purchasing Managers Index – considered a leading indicator of manufacturing business conditions — inched up to 54.8 last month in Canada, its highest level since last September. A figure above 50 indicates manufacturing is expanding, while a figure below 50 indicates the sector is contracting.

Then, CIBC released its Employment Quality Index, which found the Canadian economy created 155,000 new jobs in the first six months of 2012 and these were high quality jobs. Another good sign was that full-time employment rose by 1.1% during the first half of the year -- ten times faster than growth in part-time employment. And the number of jobs in high-paying sectors rose 1.6% -- more than double the pace of low-paying sectors.

Statistics Canada’s release saw an increase in jobs in the public sector – 7,300 more people were working in June, much stronger than the 5,000 number forecasted by analysts. That number is not quite as high as the number of new jobs created in previous months, but still, it's not bad.

The report also showed the public sector gained 38,900 jobs in June and full-time employment rose by more than 29,000.

While these are good numbers and show a healthy, growing economy, there have been cuts in information, culture and recreation. The agricultural sector lost 20,000 jobs and manufacturing declined by 800.

Consumer spending accounts for approximately 60% of the economy. So far, even with the anticipated softening, as longs as job numbers continue to increase, the economy will continue to weather the storms and is well-positioned to improve when global economies turn around.

Could US fallout account for recent mortgage changes?

Canadians have, on average, 15 years left on their mortgages, according to a survey released last week by BMO Bank of Montreal. And, according to a recent editorial in the Globe and Mail Canadians hold more than twice as much real estate and almost four times as much equity in it than Americans. The latest Environics Analytics WealthScapes data, found the average household net worth in Canada was $363,202 in 2011; in the U.S. it was $319,970, making the average Canadian household more than $40,000 richer than the average American household.

Yet, we keep getting dire warnings that we are financially overextending ourselves and increasing our debt load. We hear talk of housing bubbles and market crashes. And yet our dollar remains strong, our GDP has increased, our resource sector is hot and our job numbers are going up, albeit at a snail’s pace, but going up nonetheless.

Canadians have been, traditionally, more cautious than Americans. However, in recent years, we have loosened the hold on our own personal financial policies and started to spend, not unlike American households did before its economic downturn in 2008.

Canadians also learn quickly. When the messages about the increases in household debt started to appear in media reports, coupled with warnings from the government and the Bank of Canada, consumers listened and started to curb their spending and made plans to decrease their debt. However the government did not believe it was happening fast enough and implemented changes to curb spending, especially as it pertained to mortgages.  Perhaps the Minister of Finance knew something we didn’t.

Last week, CBC Canada reported the findings of Nanos Research that showed how Americans dealt with the economic downturn – it wasn’t a pretty picture. Economic numbers from the US Census Bureau show that between 2005 and 2010, American households lost 35 per cent of their average net worth. It points to two things: the decline of U.S. real estate values and changes in the stock market.

Perhaps Finance Minister Jim Flaherty’s saw this as an omen for cities such as Vancouver and Toronto, where housing bubbles could be a concern. And despite media reports questioning his reasons for making the latest round of mortgage rule changes, it might be as he says -- protecting Canadians with high debt loads against the eventual rise in interest rates.

Fixed rate mortgage accelerator strategy

By Mark Kerzner, President, TMG The Mortgage Group Canada Inc.

When I worked as a lender we saw a lot of Adjustable Rate Mortgages (ARMs) - variable rate transactions. From the early-to-mid-2000s that product seemed to be the mortgage product of choice by the brokers we worked with.

Many brokers devised strategies to demonstrate how the ARM was more advantageous to the homeowner than a standard fixed rate mortgage. The "pitch" ranged from paying less interest, to having lower payments, to aggressive principal reduction, and so on. With the benefit of hindsight, for those consumers who chose variable rate products throughout the last decade, they have, for the most part, come out well ahead.

With fixed interest rates continuing to hover at historical lows (5-year fixed rates are approximately 3.09% to 3.29% at the time of this writing) and the small spread between discounted ARMs and fixed rates right now, consumers are choosing fixed rate mortgages. The main advantage for choosing a fixed rate is that payments and rates do not change over the term of the mortgage. The most popular term is the 5-year fixed, although the 10-year fixed rate is starting to take on some momentum of its own.

A couple of years ago the Government of Canada began changing mortgage qualification criteria. One change was to use a benchmark interest rate to qualify buyers for ARMs and for fixed terms less than five years. The benchmark rate is tied closely to the bank’s posted 5-year rate, which is currently 5.24%.

The reason for this change is that ARMs and shorter term mortgages are vulnerable to higher interest rates when the mortgage renews. By building in a buffer, in this case making sure clients qualify at the higher benchmark, then at renewal, if the interest rates have increased, there is less payment shock. It also ensures that mortgage holders would be able to afford higher payments. That interest rate buffer now sits at more than 2% for clients taking out ARMS for terms less than 5 years. That means if you choose to take one of those products you have to be able to make payments on them if rates were to rise by 2%.

Once a client has decided to take a fixed term mortgage as opposed to an ARM then the next question is what term to take. Generally speaking, the longer the term you choose, the higher the interest rate. The rate for a longer fixed term may be higher but it also offers greater security against a  future rise in interest rates. My advice to all mortgage consumers today would be to set your payments as if you took the 10- year term whether or not you select that product.

If selecting a fixed rate product is similar to purchasing interest rate insurance, then purchase the insurance that is likely to pay you back in the end. If the amount of “insurance” you pay during a term results in a lower principal balance at the end of the term than that is like being paid back at the expiry of your mortgage term.

Here is an example:

Let’s take a conventional 5-year mortgage, which is under 80% loan-to-value, which also means there are no additional mortgage insurance premiums. Let’s assume a mortgage amount of $250,000 amortized over 25 years. Payments are monthly, compounded semi-annually. The seven and 10-year terms illustrated below are examples if you were to set your payments on your 5 year fixed term at the corresponding rates of each of the 7 and 10 year terms. The Total Payments and Balances at Maturity are the amounts at the end of five years.


Term        Rate        Monthly P&I       Total Payments         Balance at Maturity
5-year        3.29         $1,220.63          $73,237.80               $214,863.60
7-year        3.69         $1,273.38          $76,402.80               $211,430.47
10-year      3.89         $1,300.19          $78,011.40               $209,685.57

As illustrated above you are paying more over the life of the term but you are also accelerating the principal repayment by an even greater amount.  More aggressive strategies would have you setting your payments at the benchmark rate, which is the rate that the government is suggesting all consumers should be qualified at. If you choose, and can afford this option, you will benefit by aggressively paying down your principal during the current term. That will create numerous options for you down the road including;

1. Greatly reducing the amount of interest you pay over the life of your loan.
2. Significantly reducing the number of years it will take to repay your mortgage in full.
3. Providing you with options at (term) maturity. For example, you may decide to change the amortization to free up cash flow.

There is also another way to get the benefits without burdening your cash flow-- simply choose the accelerated bi-weekly payment options. This means you are making set payments every two weeks, which comes out to 26 payments a year.

If cash flow permits, consider combining the 10-year payment option with accelerated bi-weekly payments for added savings and balance reduction.

These options do require necessary cash flow and in many cases money may be tight right now. The beauty of a fixed rate mortgage option is that you can start this strategy at any point. If times are tight right now you can start in a year or two.

There are so many options to consider when dealing with mortgage products and there is an option that fits your individual need and situation. Talk it over with your mortgage broker.

Mortgage changes concerns for borrowers

The Department of Finance has posted this Q A on its website.

Q. I already have an insured mortgage. How will these changes affect me?
A. Mortgage insurance is good for the life of the mortgage. Borrowers renewing their insured mortgages will not be affected by these changes. For example, if a borrower had a 30-year amortization and there are 27 years remaining on the mortgage, the mortgage can be renewed with a 27-year amortization, as long as no new funds are being added to the mortgage.

Q. What is required to qualify for an exception to the new parameters?
A. The new measures will apply as of July 9, 2012. Exceptions will be made to satisfy a binding purchase and sale, financing or refinancing agreement where a mortgage insurance application has been made before July 9, 2012. While the changes come into force on July 9, 2012, any mortgage insurance applications received after June 21, 2012 and before July 9, 2012 that do not conform to the measures announced today must be funded by December 31, 2012.

Q. Will a purchase and sale agreement dated prior to July 9, 2012 be considered binding if there are outstanding conditions that have not been fulfilled prior to July 9, 2012?
A. Yes, if the date on the purchase and sale agreement is earlier than July 9, 2012, and a mortgage insurance application has been made prior to that date, the new parameters will not apply, even if the conditions of the agreement have not been waived.

Q. Will the new refinancing rules allow a borrower with a mortgage above 80 per cent loan-to-value (LTV) to refinance by extending the amortization period?
A. No. Effective July 9, 2012, borrowers will not be permitted to refinance a mortgage above an 80 per cent LTV, unless the borrower has a binding refinance agreement dated prior to July 9, 2012, and a mortgage insurance agreement has been made prior to that date. 

Q. I have a written mortgage pre-approval from a lender, dated before July 9, 2012 with a 30-year amortization. Will I still be eligible for a 30-year amortization if I don’t sign an agreement of purchase and sale until July 9, 2012 or later?
A. No, a mortgage pre-approval without an agreement of purchase and sale is not sufficient to qualify for a 30-year amortization. You may have a 30-year amortization only if your agreement of purchase and sale is dated before July 9, 2012 and you have made a mortgage insurance application before July 9, 2012. You may wish to discuss with your lender to revise your mortgage pre-approval using the new parameters announced today.

Q. Will the new parameters apply to assignment (“switch” or transfer) of a previously insured loan from one approved lender to another?
A. No. As long as the loan amount and amortization period are not increased, the new parameters will not apply to a switch/transfer/assignment of the mortgage to a different lender.

Q. If I sell my current home and buy another, will the new parameters apply if I transfer the outstanding balance of my insured mortgage to the new home?
A. As long as the outstanding balance of the insured loan, the LTV ratio and the remainder of the amortization period are not increased, the new parameters will not apply when the mortgage insurance is transferred from one home to another.

Q. What if I need to increase the amount of my insured loan when I sell my current home and buy another?
A. In this situation, the new parameters will apply for any insured loan.

Q. If I bought a condo that is not expected to be built for another two years, will the new parameters apply?
A. If you bought a condo and have made a mortgage insurance application on or before June 21, then the new parameters would not apply. If you buy a condo and make a mortgage insurance application after June 21, the new parameters will apply if the mortgage loan is not funded by December 31, 2012.

More changes to mortgage rules

 Guest Blog by Mark Kerzner, President of TMG The Mortgage Group Inc.

The current round of mortgage changes introduced by Minster of Finance Jim Flaherty today, June 21, 2012 took me by surprise.

First a brief recap of the changes:

1. All changes are in respect to insured mortgage loans 
2. Reduction in the maximum amortization from 30 years to 25 years
3. Reduction in the maximum amount Canadians can borrow to refinance their current homes from 85% to 80% loan-to-value
4. Mortgage customers are going to be qualified on maximum gross debt service ratios of 39% and total debt service ratios of 44%
5.  Maximum property values to qualify for mortgage insurance must be less than $1 million.
6.  These changes are going to come into effect on July 9th as opposed to previous announcements that any changes would come with 60 days notice
7. These changes are in addition to the changes previously announced by OFSI about limiting the maximum loan-to-value on HELOCs to 65%

What are the implications of these changes?

According to published reports of leading economists these changes are going to help facilitate a "soft landing". Many are commenting that they are prudent given the continued run up of the debt-to-income ratios and extended period of ultra-low interest rates.

My concern is that these changes have targeted first time homebuyers to a much greater extent which could have a more significant impact on the housing market in Canada. I still believe our housing market, our financial system and our national economic health are all very strong but there are implications.

Moving amortizations from 30 years to 25 years is NOT the same as when they were reduced from 35 to 30 years. For example:

A $250,000 loan amount for 5 years with fixed interest rate of 3.29% the monthly P&I payments are as follows:

25 year amortization = $1,220.63
30 year amortization = $1,090.44 (The monthly cash flow difference between 25 and 30 years is $130.19)
35 year amortization = $999.86 (The monthly cash flow difference between 30 and 35 years is $90.58)

In this example the delta between the two is nearly 30% - a significant difference. In an economic report released this morning from CIBC it was estimated that "the direct impact of this move alone might cut the value of mortgage originations by close to 2%."

In January of this year, CIBC published a report showing that debt-to-income ratios were skewed towards habitual borrowers. It went on to say "A rising share of the highly indebted are over 45 years old, an age where accumulating net assets ahead of retirement should be paramount. Canadians nearing retirement, who should be in their prime savings years, are, instead, getting themselves deeper into debt." This is clearly not the same group most affected by today’s change in policy.

Reducing maximum amortizations by another 5% will make the cost of borrowing more expensive for mortgage consumers who are on the margins. For those who, in the past, used this opportunity in a prudent manner to consolidate higher interest credit then used the cash flow savings to more aggressively retire debt, those options have just been reduced.

For those borrowers who do need to refinance and who are now unable to will seek out more expensive private, unsecured lending products and credit cards to do so. When you consider such a high percentage of mortgage refinance dollars were spent on home improvement and consumer spending, I am concerned about the impact of this change on the economy as well.

Setting a $1 million mortgage insurance limit on property values is clearly going to target the larger urban areas such as Vancouver, Calgary and Toronto.


Why did these changes come into place?

Clearly the extended ultra-low interest rate environment we have been experiencing lately has spurred borrowing and had a positive impact on home prices across Canada. The Governor of the Bank of Canada, Mark Carney had been hinting at his desire in recent months to raise rates. This change gives Carney room to NOT raise interest rates. In fact, if the global economy does worsen, he may, in fact, have the ability to lower rates. A TD Economics report released today asserted that the tighter restrictions can target the risk more directly and have roughly the equivalent impact to a 1% increase in interest rates.

The global economy is still in bad shape.  While we have all been reading the headlines about Spain, Greece, the elections in France, etc., our world financial leaders must believe we are in for prolonged economic recession. As such, there is no time soon when interest rates are likely to rise. The Government decided to target the mortgage debt as a means to deal with the Bank of Canada's inability to raise interest rates.

I am disappointed, though. It was just two short months ago on April 10, 2012 that Flaherty was quoted as saying "I have no present plans to intervene in the housing market in Canada…there has been some moderation in the market of late. I would prefer the market itself to correct to the extent a correction is necessary."

 This reminds me when former US President George Bush said "Read my lips, no new taxes."

What do we do now?

I believe more strongly at this moment than ever, that Canadians should and MUST consult with a mortgage broker. After all, there is no channel more knowledgeable and informed than the broker channel in Canada. Secondly, changes are happening fast. There is no 60-day notice period. If you want to purchase or refinance, talk to your mortgage broker today.

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Few changes to mortgage rules…so far

The anticipated mortgage rule changes haven’t materialized – yet. Maybe it was the strong messages from insiders in the mortgage industry that helped the Office of the Superintendant of Financial Institutions (OSFI) take a softer stand on new mortgage underwriting rules, a move that should lessen the fears of banks and mortgage brokers. 

The contentious issue around requalification for renewing has been shelved for the time being. Mortgage brokers had feared such a rule could cause some people to lose their homes. Banks tend to focus on a borrower’s payment history, as opposed to rechecking income levels or property values, when mortgages come up for renewal. Lenders were worried that renewals would be denied if either of those elements had deteriorated since the consumer took out their mortgage, said Jim Murphy, head of the Canada Association of Accredited Mortgage Professionals (CAAMP) in an article in the Globe and Mail.

Home equity lines of credit (HELOC) products have been capped to 65% LTV – not as bad as what was originally bandied about. The original proposal was that banks would have to amortize these lines of credit. Now, HELOCs can continue to revolve, as opposed to forcing consumers to pay them back within a shorter time frame.

Some industry watchers suggest that firmer rules are still coming. One in particular srrounds the use of automated appraisals. Banks often use automated appraisals rather than human appraisers because software is cheaper and can be turned around quickly. It looks as if OSFI will be watching this very closely and lenders are already upping their requests for on-site appraisals, which, some fear, may result in lower valuations.

Once again, we need to caution the government and OSFI to tread carefully with these changes. The changes are in part an effort to try to prevent another housing crisis like a subprime mortgage disaster. I think it’s time we put the “subprime” disaster and “bubble” fears to bed. While the new guidelines are intended to cool the country’s overheated housing market, the market has been correcting itself. It’s unfortunate that decisions are made on reports and data that are based on what has happened previously rather than on what is currently happening.

We have an economy that is already slowing down, despite low interest rates; household debt is becoming more manageable as consumers have made it a priority to pay off credit cards and loans; and consumers are becoming more financially aware. 

OSFI, the Bank of Canada and the government need to tread carefully. So far, Canada has managed to keep the economy strong and growing, despite the global crisis – let’s not stop that forward momentum.  OSFI will release its final guidelines with regard to mortgage lending, likely in July. We can only hope that the changes, if any, will keep the economy growing and not dampen it completely.

Where’s the tipping point?

Guest Blog by Mark Kerzner, President, TMG The Mortgage Group
 

We have a new development in the mortgage industry. We have The Office of Financial Institutions (OFSI) looking at exerting their newly-given influence on the mortgage guidelines in Canada.  The fact that OFSI has been granted additional responsibilities that include oversight of key lending guidelines -- vis-a-vis what CMHC will insure and therefore what the banks will lend on -- seems to simply be a catalyst to accelerate additional guideline policy changes. Make no mistake about it; these were discussed long before OFSI came onto the scene.

The Government made a number of credit changes following the Global Economic Crisis to instill more responsible lending practices and reduce the risk of a similar housing meltdown that was experienced in other countries, including the US. In retrospect, those changes -- reducing maximum amortizations, increasing down payment requirements on rentals, reducing the amount you could refinance, etc., were prudent. After all, house prices continued to appreciate, real estate activity remained strong and arrears levels remained muted.

And even more recently (since January 2012) we have seen the banks further tighten their own lending guidelines in the absence of formal required changes as set out by the Minister of Finance. An example would be the additional tightening of the Business-for-Self and Equity programs.

The Canadian economic recession was relatively short lived following the global economic meltdown. In fact, Canada was the first significant country to increase its overnight rate in June 2010. The Bank of Canada continued to increase it three more times in the summer of 2010 to 1%. So, given we have already survived the various credit and qualification changes and our market has remained strong, why am I concerned at the prospect of further tightening?

For me, it starts with this question: Where is the tipping point? What change will cause our market to slow down, which is the obvious goal, and what change could cause our market to head into a tail-spin? Or will the market remain the same whether changes are made or not? I don't have the answer for this but the last time I felt this way I was playing PLINKO with my kids not knowing which straw would cause the remaining balls to fall.

My sense is that if there are additional changes focussed on ensuring affordability and suitability -- that would make sense. Those are responsible changes. However, if as an industry, we have to re-evaluate how a renewing customer who has a perfect repayment history has to requalify for a mortgage - that is worrisome. That is the type of change that, in its worst case scenario, could force an increase of supply of homes in the market from people forced to sell because they can no longer qualify BUT who had no intention of defaulting on their mortgages.

Changes focussed on refinances and renewals may impact those with a proven ability to make their payments.  It is not impacting potential supply (ie. new construction) but existing supply.  On top of that, a large percentage of additional funds taken out in refinances are used in home improvements, which increases the value of the property, and for consumer spending. A slowdown of either of these two components could prove problematic. And let us not forget that guidelines now require a minimum of 15% equity for a refinance – up from 5% just a few short years ago.

I understand why a slowdown is desirable. I have heard some experts say, "If there isn't a slowdown it makes a crash more likely.”  I get that, and I support that position. I just want to ensure that a manufactured slowdown targets habitual borrowers and not the demonstrated responsible ones.
 
There are more guideline changes and restrictions coming. The Bank of Canada, the Minister of Finance and many regulators would like to see the Canadian housing market cool off. However, changes must be stress tested against the worst case scenario, which would be triggering a market collapse.