I was speaking to one of our lenders last week and suggested that he send me a summary of all the changes happening in the Canadian residential mortgage market. He said he would once they figured it all out. I found that amusing given the Minister’s press conference was back on February 16, 2010. It has taken two months to sort it out, but here is a brief summary of the changes. If you would like to call me to discuss in more detail I would be happy to do so.

• Refinances: The maximum LTV has been reduced from 95% to 90%
• Non-owner occupied rentals: The maximum LTV has been reduced from 95% to 80%. Lenders may require these mortgages be insured if over 65% LTV
• Qualification rate: For loans with a greater LTV than 80%, the qualifying interest rates used to calculate Gross Debt Service ratio (GDS) and Total Debt Service ratio (TDS) are:

–       On a fixed term of 5 years or more: The ‘contract rate’ (the rate offered in the contract)

–       On a fixed term of less than 5 years and on all variable rates: The greater of the contract rate, or the benchmark rate (5-year conventional rate, published by the Bank of Canada)

• Rental income (subject property): The new formula for calculating TDS determines the borrower’s gross annual income based on 50% of gross rental income from the subject property instead of the previous 80% of gross rental income from all rental properties
• Rental income (other properties): If the borrower has other non-owner occupied, rental-income generating residential properties, then:

–       Net rental income can be included in the borrower’s income; and,

–       PITH (principle, interest, taxes, and heating) for these properties can be excluded from the debt service costs.

• Business for self: Maximum of two units where one is owner occupied. 90% LTV on purchases, 85% LTV on refinances. “Stated income” is accepted, but commission income is ineligible.

April 27, 2010 is the annual LSTAR Annual Trade Show at the Best Western Lamplighter Inn in London, Ontario. We hope you all drop by our booth and enter our contest. If you mention your read this article you will receive a second chance to win. It is always nice when life gives you a “do over”, and you thought this only happened on the golf course.

With all the focus and media attention given recently to changes in the mortgage rules, one very important change went virtually unnoticed and this change will have a significant impact on self employed mortgage applicants. Effective April 9, 2010 the loop hole that allowed the self employed to purchase property based on “stated” income versus “proven” income is essentially closed, with limited exceptions. The “stated” income product used for qualifying purposes was widely used, given the propensity for the self employed to show minimum personal income for tax purposes. The self employed will now need traditional third party validation of income.

This change along with those previously mentioned in my blog, How Do The New Mortgage Rules Affect You? www.casbmanagementgroup.com/blog will have a substantial impact on the local real estate market. Fewer individuals eligible to qualify for mortgages will result in a softening real estate market.

We welcome your comments.

I see that the Bank of Canada has backed off their earlier position in respect to mortgage rates as per my previous blog.

In a speech in Edmonton, bank official David Wolf ruled out increasing interest rates to discourage mortgage lending.

Wolf, an adviser to bank governor Mark Carney, said that in the central bank’s view it is premature to be talking about a housing bubble in Canada.

“We see the housing market requiring vigilance, not alarm,” he said.

He added that even if the bank was convinced housing prices were getting out of hand, raising interest rates would be too blunt an instrument, since it would mean cooling off all economic activity.

“We would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession,” he said in a speech delivered on behalf of deputy governor Timothy Lane, who could not travel to the Alberta capital for personal reasons.

“As a result, it would take longer for economic growth to return to potential and for inflation to get back to target,” he added.

Wolf said the bank considers the current hot market to be a phenomenon based on temporary factors, such as pent-up demand from the recession, and low mortgage rates. Moreover, he noted with starts below long-term demographic requirements, the number of houses on the market is still declining.

Better ways to cool market

Wolf, a former chief economist with Merrill Lynch Canada, said there are better ways to cool the housing market.

Finance Minister Jim Flaherty has also mused about such measures, including raising the minimum down payment requirement above five per cent, or reducing the maximum length a house can be amortized from the current 35 years.

The bank has been highlighting for months the danger of Canadians getting in over their heads in purchasing homes, warning that buyers should ensure they don’t take on too much debt.

The bank’s worry is that homeowners with large mortgages that are manageable now with interest rates at record lows won’t be able to afford their monthly payments once interest rates start rising, as is expected later this year.

On the economy as a whole, Wolf said the bank believes the economic recovery is still dependent on government support and that “growth drive by the private sector has yet to materialize.”

Notes from the speech were posted on the bank’s website.

With files from The Canadian Press

Based on my experience here are the 7 most common mortgage mistakes made by home buyers. Mistakes can cost you thousands of dollars. Fortunately our clients are exempt from these pitfalls.

1.       Overextending Yourself

Realtors often encourage buyers to purchase the most house they can afford, based on their ability to qualify. In a low interest rate market this can be very tempting. What happens however when that 3.75% five year mortgage jumps to 5.75% at renewal time. Can you afford a 50% increase in your monthly payments? Having a monthly payment that you are comfortable with, will give you peace of mind now and in the future.

2.       Discounting The Cost Of Bad Credit

Having poor credit not only makes it more difficult to qualify for a mortgage, you could be subjected to much higher interest rates or a larger down payment. Your habit of not honouring your financial commitments on time will end up costing you thousands in preventable interest payments. If you want to qualify for the best rates, pay your bills on time and don’t max out your credit facilities.

3.       Not Knowing Your Down Payment Options

Do you have the typical minimum 5% down payment required? If not, do you have an investment that could be cashed in? First time home buyers or those not owning a home for five years can tap into RRSP’s with no penalty. Do you have the ability to borrow the 5%? Do you know of a relative that will gift it to you? Will the vendor of the house you are purchasing assist you? Can you sell another asset like a vehicle? Get creative.

4.       Not Budgeting For Closing Costs

Transfer, tax, legal fees, title insurance, interest adjustments, appraisal fees, home inspections, home insurance and property taxes are examples of the type of additional expenditures you may need to incur before during or after closing on your home. A good rule is to budget 1.5% of your purchase price for legal and transfer taxes. Appraisals and home inspections will run in the $250-$300 range. Make sure you have accumulated these funds as well as your down payment, to avoid any surprises and disappointment.

5.       Not Getting Pre –Approved

There is nothing worse than finding the home you want and then finding out you cannot afford it. This wastes your time, your realtor’s time and lowers your enthusiasm when you are still thinking about those nicer homes you saw, but can’t afford. The pre-approval also shortens the time required to obtain your actual mortgage approval and allows you to lock into today’s rates now, should they increase during your search.

6.       Not Choosing The Right Mortgage Product

When it comes to getting a mortgage, there are a number of products and options to choose from including fixed rate, variable rate, interest only, open, closed, long term, short term, various amortization schedules, etc. Choosing the product that is best for you may be the most important financial decision you ever make. A mortgage is not only a mortgage; it is the corner stone of your financial and retirement plan. Given its importance, it is funny how most financial planners rarely talk about it. Reviewing these mortgage options with an unbiased mortgage agent -such as myself- could save you thousands of dollars.

7.       Believing The Bank Is Your Friend.

The bank is not your friend. The banks make millions of dollars off of unsuspecting consumers who simply don’t know of a better way to get a mortgage. Need proof? Have you ever renewed a mortgage with a bank? You will receive a letter in the mail asking you to select one of their current mortgage options, return the letter by the specific date and you are done. Simple right? Unfortunately the rates offered are not the best available in the marketplace, and no one has taken the time to review how the new mortgage fits into your overall financial plan. Unfortunately most people simply return the letter. The banks know this and that’s why they do it. At no cost to you, we shop the market to find the best lender, the best mortgage product, the best available rates, terms and an amortization schedule that fits your budget. Call or email today and we can get started in helping you towards a better financial future.

We welcome your comments.

I got the idea for this blog from a Forbes magazine article. As the title suggest you can purchase real estate throughout Canada and the United States using your credit card. I am not suggesting this is the route to go given the higher interest rates associated with credit cards or unsecured credit lines over traditional mortgages, but in theory if you possessed a credit card with say a maximum limit of $100,000 you could take out a cash advance and buy that property outright with no financing required. Check your local MLS listings for properties under $100,000 and you will be surprised by the availability in today’s marketplace. Even in major urban centers like the GTA, apartment style condo’s can be found for under $60,000.

We welcome your comments.