Easy to understand SlideShow on the new Canadian mortgage rules.

Mortgage Rule Changes for April 2010

As we had already reported last month, new mortgage rules are being put into effect from next April 19th, aimed at preventing home-buyers across Canada from getting into financial trouble once mortgage rates rise, as it has been anticipated.

Today, we are going to further elaborate on what are the implications of this new set of rules, and how they affect you, as the final customer.

Upcoming Change
INSURED MORTGAGES ONLY
The qualifying rate for any mortgage terms shorter than 5 years will now be the 5-year benchmark rate on the CMHC website.
Effective Date
April 19th, 2010
Reasoning
To protect borrowers from rising rates

Upcoming Change
Max 90% Loan-to-Value on Owner-Occupied refinances
Effective Date
April 19th, 2010
Reasoning
To prevent borrowers from losing their equity in the event their property value decreases. It also discourages borrowers from depending on their home equity to reduce personal debt.

Upcoming Change
INSURED MORTGAGES ONLY
Self-Employed borrowers with more than 3 years in the same business will be required to confirm their income and will not be eligible for “stated income” Self-Employed product.
Effective Date
April 9th, 2010
Reasoning
This product is intended for a small portion of borrowers who find it very difficult to document income- in particular, recently self-employed borrowers. It is assumed, individuals with longer time self-employed are able to confirm their income via a third party validation through financial statements, T4’s and other third party validations.

Upcoming Change
INSURED MORTGAGES ONLY
Maximum Loan-to-Value is 90% for purchase and 85% for refinances for Self-Employed borrowers unable to confirm their income via traditional third party sources
Effective Date
April 9th, 2010
Reasoning
As the associated risk is higher when the borrower cannot confirm income via a third party, a larger down-payment is required to mitigate the elevated risk.

Upcoming Change
Maximum 80% Loan-to-Value on Non-owner occupied rental properties
Effective Date
April 19th, 2010
Reasoning
To prevent investors from speculating about property values and to prevent a large influx of high-ratio financed non-owner occupied properties that may default if vacancy rates increase.

Upcoming Change
INSURED MORTGAGES ONLY
Where rental income is generated from the subject property, 50% of the gross rental income from the subject property may be added-back to the borrowers annual income
Effective Date
April 19th, 2010
Reasoning
To prevent investors from depending on rental income to qualify.

These new mortgage standards are primarily aimed at stopping housing speculators and ensuring homebuyers can adequately juggle their debts when interest rates inevitably rise.

The government has stressed that Canada’s real estate market is healthy, and that the new rules would only stop “negative trends” from development.

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For more information, please contact our team of mortgage brokers which are at your complete disposal. We are here to offer you the best mortgage rates, lowest prime rates, debt consolidation and Canadian housing assistance, and all other facets to help you achieve your dream home.

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The Bank of Canada says it doesn’t rule out interest rate increases in the future, but adds they would need to be “carefully considered.”

Mark Carney, governor of the Bank of Canada, leaves after holding a press conference on the bank’s October monetary policy report at the National Press Theatre in Ottawa Wednesday.(Sean Kilpatrick/Canadian Press)
“At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered,” the central bank said in its latest monetary policy report, on Wednesday.

The bank said the economic outlook for Canada has changed since its last outlook.

The bank now expects the economic recovery to be more gradual than it had projected in its July report, with growth of 3.0 per cent in 2010. Its previous report called for 3.5 per cent growth.

The bank reduced its forecast for growth in 2011 to 2.3 per cent in 2011, down from 2.9.

“This more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending,” the report said.

The bank also pushed out until later into the future its estimate for when the economy would return to full capacity. It now expects that by the end of 2012, rather than the beginning of that year as it had predicted in July.

It also extended by a year its prediction for when inflation would reach two per cent, to the end of 2012.

The central bank on Tuesday kept its overnight interest rate unchanged after raising it to one per cent over the course of its last three meetings.

In its October monetary report, the bank said, “This leaves considerable monetary stimulus in place.”

‘Slowest recovery on record’

Diana Petramala, an economist with TD Economics, said the bank’s outlook “represents the slowest recovery on record for the Canadian economy,” justifying low rates through 2011.

Petramala predicted in a commentary that the bank would keep rates on hold until March of 2011, then raise them gradually through 2011 and 2012, “bringing the overnight rate to two per cent and three per cent at the end of each respective year.”

The bank also renewed its concern about the issue of Canadians’ growing household debt as both a risk to the recovery and a drag on increased consumer spending.

At a news conference, bank governor Mark Carney raised the prospect of further regulatory changes by governments to discourage Canadians from taking on too much debt. In February, the federal government had introduced rules to tighten mortgage lending.

Carney said that while responsibility for not taking on more debt than they can handle begins with Canadians themselves, “authorities, broadly speaking, have to be vigilant.”

Banks and other lenders must ensure “that the debts their clients are taking on can be serviced in the fullness of time,” Carney added.

The bank also warned of the potential hazards if countries try to weaken their currencies in order to protect their export markets.

“Heightened tensions in currency markets and related risks associated with global imbalances could result in a more protracted and difficult global recovery.”

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Mortgages are by far the biggest component of a national debt load that has recently prompted warnings from the Governor of the Bank of Canada and one of the country’s largest banks.

Their concerns raise questions about the way in which financial institutions ensure people can afford the mortgages they need to buy a home. Raising a family and maintaining a home require finesse and constant financial maneuvering. And yet, the housing affordability measures used by bankers are strikingly simplistic. Read more

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Personal debts have become “excessive” and are a growing cause for concern, Toronto-Dominion Bank warned Wednesday.

Economic fundamentals suggest an appropriate personal debt-to-income ratio in the coming five years should be between 138 and 140 per cent, it said. The current ratio is 146 per cent and TD believes it will grow even further, to 151 per cent. Expressed another way, TD estimates that Canadians will soon owe $1.51 for every dollar of disposable income.

Read More

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The recovery in Canada is in “a very different spot” than that of the United States, Mr. Carney said Wednesday after releasing a report that said the third quarter was weaker than previously expected, and the next four quarters will also lag projections made in July. While acknowledging that the rebound has turned out to be more modest than the central bank anticipated, he urged households and businesses to stick to the long view and position themselves for when conditions in Canada, and around the world, pick up.

For households, that means remembering that today’s interest rates are far from normal and continually assessing whether their debt loads will be manageable once borrowing costs rise. For businesses, it means investing aggressively in machinery and equipment that will help them become more productive and competitive, to mitigate the fact weaker demand around the world and a strong currency could impede Canadian exports for years.

“The underlying momentum in the economy is there,” Mr. Carney later told reporters, adding it would be wrong to obsess about his estimate of 1.6-per-cent growth in the third quarter, the worst showing since the recovery started late last year.

“What we need to focus on, I would suggest, in Canada is the medium term, and getting productivity up, getting investment in place, making sure that household balance sheets are in a sustainable position.”

With many cash-strapped households already spending less as they trim their debt loads, and the U.S. economy too sluggish to put a dent into U.S. unemployment, the central bank said Canada’s economy won’t be operating at full tilt until the end of 2012 and the bank’s preferred gauge of inflation won’t be at its 2-per-cent target until then either.

The economy is expanding at a considerably slower pace than earlier this year, when output was buoyed by billions in government stimulus spending, companies were rebuilding depleted inventories, and newly confident consumers were buying homes and other big-ticket items.

Consumers piled up debt as they took advantage of record-low borrowing costs and rushed to get ahead of federal changes to mortgage rules and the onset of the harmonized sales tax in British Columbia and Ontario. First-quarter growth, for instance, came in at an annual pace of 5.8 per cent.

“People brought purchases forward, in particular in the housing market,” said Benjamin Reitzes, an economist with BMO Nesbitt Burns. “You’re getting the payback for that now.” For the entire year, the economy will grow 3 per cent, the bank said in its outlook, followed by 2.3 per cent in 2011 and 2.6 per cent in 2012. Those figures compare with the bank’s July forecast of 3.5 per cent this year, 2.9 per cent in 2011 and 2.2 per cent in 2012.

The central bank also cut its forecasts for the United States in each of those three years, and for the global economy as a whole in 2011 and 2012.

As a result, export growth will be slower than the central bank had anticipated, making it all the more pressing for companies to do what they can to increase their competitiveness. There is mounting evidence that companies now recognize this and are acting accordingly after business investment was a soft spot earlier in the recovery, Mr. Carney said.

“It is a difficult external environment,” Mr. Carney told reporters. “The renewed emphasis that Canadian businesses are putting on investment, on improving productivity, is absolutely appropriate, and that needs to continue through the next several years.”

As for household debt, the growth of credit taken out by Canadian families has already started to slow, but everyone from borrowers to authorities must “remain vigilant” so people don’t get too overstretched, Mr. Carney said.

“That responsibility starts with the individual; it starts with the household, it extends to the lender, and then ultimately goes to policy makers,” he said.

“We’re still living in relatively abnormal times, with respect to interest rates.” Indeed, Mr. Carney left his benchmark interest rate at a still-very low 1 per cent Tuesday after three consecutive increases.

Economists pointed to language in the quarterly outlook, which said the projections incorporate a gradual increase in borrowing costs, as a reminder that the central banker maintains a tightening bias and will raise rates as quickly as conditions allow.

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The Bank of Canada sees slower growth on the horizon and has no plans to raise mortgage interest rates in the short term.

The central bank left its trend-setting policy Edmonton mortgage rate at one per cent today, which means that consumers will not be paying more for car loans and credit.

Canada’s economy will likely grow by only 3 per cent this year, the bank said, mostly due to a strong start in the first three months of 2010. That’s down from the 3.5 per cent projection it made in July.

It forecast growth of 2.3 per cent for 2011, down from 2.9 per cent.

“This more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending,” the bank said.

Bank of Canada governor Mark Carney has the difficult task of balancing a fragile economic recovery with mounting household consumer debt. Economists worry that prolonging lower interest rates could prompt even more borrowing.

The recovery in the U.S. will also be weaker than initially projected, while growth in emerging market economies will also slow to a more sustainable pace.

“Heightened tensions in currency markets and related risks associated with global imbalances could result in a more protracted and difficult global recovery,” the bank said.

Inflation in Canada has been slightly below the Bank’s July projection.

The bank also revised its language about when to expect future Edmonton mortgage rate hikes, a signal it may stay put for some time.

“The message is in line with our thinking that the Bank of Canada is now on pause until the middle of next year,” CIBC World Markets economist Krishen Rangasamy wrote in a research note.

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At the heart of the overhaul is a switch to collateral-charge mortgages, which are similar to lines of credit. The bank is encouraging employees to approve customers at 125 per cent of a home’s actual value under certain circumstances, so the homeowner can easily borrow more money if their property increases in value.

Unlike traditional mortgages, the collateral mortgages are difficult to transfer from one lender to another, because they must be paid in full to be cancelled. That means if someone wants to change lenders, they need to renegotiate from scratch.

While other banks offer variations on the collateral mortgage, TD is the first to switch exclusively as of Oct. 18. Existing mortgages aren’t affected by the change.

The bank’s move comes as the housing market cools and fewer Canadians apply for mortgages. It’s an attempt to entice buyers who expect to tap into rising values and don’t plan to shop around for better rates in the future.

Competition for new business is intensifying; record low mortgage rates weren’t enough to stop a slowdown of new buyers in the market during the summer. Sales fell by more than 30 per cent in Toronto and Vancouver, sending lenders scrambling to secure new business with innovative products and even lower rates.

Bank of Montreal currently offers the least expensive five-year fixed term at 3.59 per cent, although only its best applicants are likely to qualify at the special rate. Bank of Nova Scotia offers its customers the ability to split mortgages into two or three different components, each with its own terms.

TD said its new offering will ensure customers don’t pay additional charges to tap into their rising equity, which it called “great news for both you and your customer” in an internal memo to its mortgage brokers.

“Customers may under many circumstances choose to register their collateral charge for more than the approved principal amount of the mortgage, up to 125 per cent of the property value,” the e-mail stated. “This will allow them to borrow additional funds in the future without having to re-register … eliminating any solicitor and in-house registration fees.”

A homeowner can’t simply call the bank and access the extra money they were approved for, however. The deal is dependent on values rising, and in each instance the bank said it would need to inspect the home.

“Part of our credit approval includes an assessment of the current value of the property – an appraisal of the property – to ensure the existing value can support the increased borrowing,” said spokesperson Kelly Hechler.

The move has sparked anger among the country’s independent mortgage brokers, who see the change as a direct shot at an industry that has been gaining market share from the big banks by competing fiercely on mortgage rates.

“Credit unions have always gone this route so it’s not like they are reinventing the wheel,” said Mike Averbach of Vancouver’s Averbach Mortgages. “People literally have to cash out if they want to change over, so it’s just another way for them to be handcuffed to the bank.”

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In a speech in Windsor, Ont., Carney said that given the risks of a renewed U.S. slowdown and amid slow consumption and housing activity in Canada, “any further reduction in monetary policy stimulus would need to be carefully considered.

Bank of Canada governor Mark Carney says ‘any further reduction in monetary policy stimulus would need to be carefully considered.’(Sean Kilpatrick/Canadian Press)
“The unusual uncertainty surrounding the outlook warrants caution.”

Carney’s remarks came the same day new data showed Canada’s gross domestic product shrank by 0.1 per cent in July, the first time it has contracted in 11 months.

The Bank of Canada has raised interest rates — described as tightening monetary policy — three times in the past four months, most recently on Sept. 8. The bank’s key overnight lending rate is currently 1.0 per cent.

Carney pointed out that during the same time in the United States, the Federal Reserve has held the policy rate at almost zero.

“While Canada’s circumstances and the discipline of the inflation target dictate a different stance than in the United States, there are limits to this divergence,” he said.

The recession may be over, he warned, but it’ll still a long road back to a strong economy.

Domestically, Canada’s relatively strong bounce-back from recession has been supported by housing expansion and personal consumption, two factors that can’t continue, Carney said.

Externally, he said, the world is facing a restructuring that could take 10 years and subdue growth in the advanced economies.

Even Canada’s supposedly strong jobs recovery is not as shining as it looks, he said.

The unemployment rate remains high at 8.1 per cent and many of the jobs created since July have come in the public service and what he called involuntary part-time work.

GDP decline predicted

The decline in the gross domestic product, which was announced Thursday, was in line with what economists were expecting, as the economy has been showing signs of a slowdown since the early stages of the government stimulus-led recovery in late 2009.

“The Canadian economy has lost much of its forward momentum, reflecting sluggish U.S. demand for the stuff we make and the payback for having home renovation activity and home sales pulled forward earlier in the year,” BMO economist Michael Gregory noted.

The Bank of Canada is expecting two per cent growth for the July-to-September period as a whole, but the central bank is set to update those forecasts at its next policy meeting on Oct. 21.

Speaking at an event in Ottawa, Finance Minister Jim Flaherty said he was neither surprised nor overly concerned by the negative showing.

“The month of July had a very small negative showing,” he said. “From time to time, there will be ups and downs in any economic recovery.”

He blamed the decline, in part, on the impact of the HST in Ontario, B.C. and to a lesser extent Nova Scotia. He also said Ottawa is confident the third quarter will show growth overall.

Finance Minister Jim Flaherty says July’s GDP drop was largely expected and not cause for undue alarm.(Sean Kilpatrick/Canadian Press)
“We’ve always said the recovery is fragile,” Carney said.

Manufacturing, retail and wholesale trade, construction and forestry all posted decreases.

“Consistent with faltering domestic demand and weak U.S. demand, manufacturing shipments fell the hardest in the month,” TD Bank economist Diana Petramala wrote in a note to clients.

Increases were recorded in the mining sector and, to a lesser extent, in some financial industries and the public sector.

“Although the GDP result comes as no surprise, that doesn’t make it feel any better,” Gregory noted.

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