Fixed Rate or Variable Rate?….The Debate Continues

The following article was sent to me from one of my Bank representatives. It is a very interesting discussion with respect to variable rates. My personal opinion is that if you can sleep at night take the  variable, if you are going to stress take the fixed.

Fixed Rate or Variable Rate?….The Debate Continues There is so much information, theory’s and reports available that indicate that the variable mortgage is a better deal for your client. The key is knowing your client. Identifying their long and short term goals, their lifestyle preferences, and their monthly budget flexibilities, then presenting the options.   I was quoted by a local Ottawa broker something that I felt to be a powerful statement and with her permission allowed to share……..

“I sell VRM all the time, my rational has always been: Why pay the lender for the security of a payment when you can create your own payment and put the difference in payment directly to principal? This is far more financially responsible then paying for the security of a payment, which is why most clients want the fixed rate!”…Jacqueline Bushell, Centum City Mortgages So I decided to do another comparison to chart the differences if client paid both mortgages at the same rate as a 5 year mortgage………   Let’s compare a $200,000 mortgage at 3.79 fixed for 5 years with a P-.50 variable mortgage and this time we’ll assume a .75% increase in Prime annually for the next 5 years and we’ll pay it at the same payment level as the fixed payment for the first 4 years (year 5’s payment was slightly higher by $42.81.)

Mortgage Type and Rate	Monthly Payment	Balance
5 Years Fixed rate 3.79%	1029.40	End of 5 years $173,465
Variable Rate P-.50 Year 1 – 1.74%	1029.40
Year 2 – 2.50%	1029.40
Year 3 – 3.25%	1029.40
Year 4 – 4.00%	1029.40
Year 5 – 4.75%	1072.21	End of 5 years $166,570

$6895 in interest is saved over the term of the mortgage and only in year 5 did the payment slightly exceed the fixed payments.   We all agree rates are going to rise in the future, both in the fixed rate and in Prime, how much and how fast is the unknown. Taking the time to review some scenario’s and options with the RIGHT clients, coaching them how to manage their mortgage with the privileges available may just allow you to save them THOUSANDS of dollars! Under the Tools section on professor you will find some easy to use payment calculators and amortization schedules to create your own scenario’s.

CMHC Defines New Rules!

Qualifying Interest Rate

Effective April 19, 2010, loans with a fixed rate term of less than 5 years and for all variable rate mortgages, regardless of the term, the qualifying interest rate will be the greater of the benchmark rate or the contract interest rate.

CMHC defines the benchmark rate as the Chartered Bank – Conventional Mortgage 5 year rate that is the most recent interest rate published by the Bank of Canada.  The rate is currently 5.39%  This rate is set each Monday and can be found at
http://www.bankofcanada.ca/en/rates/interest-look.html

For loans with a fixed term of 5 years or more, the qualifying interest rate will be used for qualification purposes.

This has the effect of a level playing field on all High Ratio deals.  It is more important than ever to get a complete detailed pre-approval. There are differences in Underwriting between lenders and this become even more important with these tighter rules.

qualifying rate Advice – Avis 146

Stated Income Files for self employed

There has been a subtle yet drastic change to this product.

Stated Income files – max ltv on purchase reduced from 95% to 90% & on refinances reduced from 90% to 85%

The big change however, is that clients with business older than 3 years to not qualify and must prove income normally. The problem with this change is that they have not accounted for loans personally guaranteed by the business owner such as cars, equipment etc. That was the true reason the Self Employed product came in being in the first place.   We are moving back to a time of true underwriting for self employed clients and private money will become a necessary evil.

CMHC changes

New CMHC

I received a this today from one of my lenders and I thought I should post it exactly as I recieved it.

Chad

Good Afternoon Everyone,

As you know the new rules for government-backed insured mortgages are set to come into effect April 19th, 2010.

I have been getting some feedback from our underwriters, that I wanted to share with you.

It appears that it is getting more and more difficult to get deals approved by our insurers at the 95% level for refinances.  For the most part it appears that only deals with exceptionally strong beacons of over 680 are being considered.  Refinancing to 95% to ease over use of credit is not being viewed favourably.  Many applications are being declined due to high debt load or credit at limits.

Insured rentals (over 80% ltv) is another product being phased out on April 19th and we are currently seeing a large number of declines coming back for these submissions as well.  Only exceptionally strong applications are making it through.

No changes have been announced to the BFS Simplified Program or the Flex Down Programs, however these programs also seem to underwritten now without any flexibility resulting in a higher percentage of declines.

I wanted to pass this info along just so you are aware that you should be proceeding with extreme caution on these types of applications.  What was previously a “slam dunk” deal may today be declined without any negotiating or escalations available.

Now would be a good time to remember that it is always better to under promise and over deliver.

As always, please give me a call, if you have any questions or concerns.

Great site…

For those of you who like indepth economic discussion in a common sense way visit http://www.greaterfool.ca

Christmas Rush

There is always a bit of a last minute rush right before Christmas on mortgages and refinancing. If you are planning a home purchase, or doing anything with your mortgage make sure you have all the paperwork in and confirm with all parties involved. It is not uncommon to have a fax sit on someones desk for the holidays, so ensure your professionals are on the ball. (This includes your lawyer, bank, broker, insurance broker etc)

December Stats from CAAMP

Bank of Canada Interest Rate

September 10, 2009	0.25%
October 20, 2009	0.25%*
December 8, 2009	Next meeting date

Source: Bank of Canada
*Bank of Canada statement included reference to hold rate to end of second quarter 2010

Bank Prime Lending Rate

September 11, 2009	2.25%
October 21, 2009	2.25%
December 9, 2009	Next meeting date

Source: Bank of Canada

US Federal Reserve Board Discount Rate

September 22, 2009	0.00% 0.25%
November 4, 2009	0.00% 0.25%
December 15, 2009	Next meeting date

Source: US Federal Reserve

Exchange Rate $CDN($US)

October 30, 2009	.9243
November 13, 2009	.9519
November 27, 2009	.9421

Source: Bank of Canada

Government of Canada Bonds

Bond Type	October 28, 2009	November 12, 2009	November 25, 2009
1 year Treasury Bill	0.60%	0.54%	0.48%
3 year Benchmark Bond Yield	1.90%	1.87%	1.62%
5 year Benchmark Bond Yield	2.70%	2.70%	2.41%
10 year Benchmark Bond Yield	3.45%	3.51%	3.25%

Source: Bank of Canada

Total New Housing Starts (Seasonable adjusted and annualized)

Province	August 2009	August 2008	September 2009	September 2008	October 2009	October 2008
Newfoundland/Labrador	2,400	3,100	2,800	3,200	2,900	3,100
PEI	1,000	700	700	500	1,200	600
Nova Scotia	4,200	3,300	4,500	4,400	4,000	4,300
New Brunswick	3,700	3,800	2,900	4,500	3,600	5,000
Quebec	47,300	43,300	41,300	70,100	37,200	48,400
Ontario	44,200	89,800	50,200	84,200	57,600	82,600
Manitoba	5,000	5,400	4,400	5,600	4,200	5,800
Saskatchewan	5,100	5,300	3,700	6,400	3,600	4,900
Alberta	18,400	22,900	22,600	57,300	25,000	24,700
British Columbia	19,200	33,500	16,200	43,900	18,200	32,300
Canada	150,500	211,100	149,300	281,300	157,400	211,800

Source: CMHC Housing Now  November 2009 and November 2008.
This seasonally adjusted data goes through stages of revision at different times of the year.

Average MLS resale price for local markets

City	October 2008	October 2009
Halifax	$224,607	$235,465
Saint John, NB	$151,709	$178,632
Quebec	$198,357	$219,719
Montreal	$257,242	$284,024
Ottawa	$280,870	$320,561
Toronto	$353,018	$403,507
Hamilton/Burlington	$254,004	$296,253
Winnipeg	$190,374	$210,618
Saskatoon	$285,310	$274,759
Calgary	$388,565	$399,679
Edmonton	$317,744	$318,969
Vancouver	$556,682	$638,948
Victoria	$469,243	$481,500

Source: Canadian Real Estate Association

Housing Affordability Index

Standard Two-Storey

	Average Price		Qualifying Income($)	Affordability Measure
Region	Q3 2009 ($)	Y/Y % ch.	Q3 2009	Q3 2009 (%)	Q/Q Ppt. ch.	Y/Y Ppt. ch.	Avg. since ’85 (%)
Canada	344,100	-0.3	79,100	45.8	1.2	-5.8	43.3
British Columbia	557,400	-1.2	113,600	67.6	2.9	-8.5	53.7
Alberta	368,200	-4.9	82,200	37.9	1.3	-7.5	38.5
Saskatchewan	305,500	-0.8	73,200	44.0	1.0	-4.6	37.6
Manitoba	244,900	3.5	61,300	37.5	0.3	-3.4	37.5
Ontario	362,100	-0.3	85,300	45.2	1.0	-5.8	44.0
Quebec	240,100	2.8	59,000	40.4	1.2	-3.7	39.0
Atlantic	210,000	1.3	55,000	35.9	0.4	-4.7	38.7
Toronto	522,600	0.2	115,300	57.8	1.9	-7.5	53.7
Montreal	305,800	0.7	71,300	47.4	0.8	-5.5	41.3
Vancouver	678,900	-1.9	135,500	74.2	4.3	-10.2	61.7
Ottawa	320,800	1.0	81,000	40.5	0.4	-4.4	39.5
Calgary	414,600	-4.7	88,100	38.5	2.0	-8.1	40.0
Edmonton	365,300	-2.6	83,100	38.9	0.9	-6.7	36.8

Standard Condominium

	Average Price		Qualifying Income($)	Affordability Measure
Region	Q3 2009 ($)	Y/Y % ch.	Q3 2009	Q3 2009 (%)	Q/Q Ppt. ch.	Y/Y Ppt. ch.	Avg. since ’85 (%)
Canada	205,700	-1.0	47,600	27.6	0.5	-3.6	26.9
British Columbia	275,600	-0.3	57,100	34.0	1.2	-3.9	28.0
Alberta	219,300	-7.9	48,700	22.4	0.5	-5.2	22.1
Saskatchewan	186,200	-8.7	44,600	26.8	0.8	-4.7	24.1
Manitoba	130,100	4.8	33,400	20.5	0.3	-1.6	20.9
Ontario	217,200	-0.9	51,800	27.4	0.5	-3.6	27.9
Quebec	170,300	1.2	40,700	27.8	0.1	-3.0	27.0
Atlantic	149,800	4.8	37,700	24.6	0.3	-2.5	24.7
Toronto	292,700	-1.5	65,400	32.8	1.0	-4.7	31.2
Montreal	204,500	3.9	47,100	31.3	0.9	-2.8	29.0
Vancouver	351,500	0.4	70,600	38.7	1.7	-4.4	31.4
Ottawa	209,000	1.3	51,600	25.8	0.3	-2.8	23.6
Calgary	249,500	-7.3	52,700	23.0	0.3	-5.5	22.8
Edmonton	206,000	-6.8	46,800	21.9	0.5	-4.7	18.1

Source: RBC Financial Group Housing Affordability Index, November 2009. Index based on a 25% down payment and a 25 year mortgage loan at a five year fixed rate. The higher the index, the more difficult it is to afford a home. An affordability index of 50 means that homeownership costs including mortgage payments, utilities and property taxes take up half of a typical household’s monthly pre-tax income.

Caculations Differences

It is a little known fact but not all lenders are created equal. There are vast differences on prepayment, rates, service but one think most people over look is how they calculate TDS. TDS or Total Debt Service is a percentage guideline that all lenders use to determine affordability. In most cases the maximum TDS one can have is 44%. The general calculation is

Principle + Interest (your mortgage payment) + Taxes + other monthly obligations (debt, car loans etc) divided by your gross income.

For example:

Mortgage Payment: $1000

Taxes per month: $100

Car Loan: $200

Gross monthly income: $4500

The TDS would be $1000 + $100 +$200 / $4500 = 28.8%

IF you add rental income in the mix there is a huge divergence on how this is calculated. They basically fall into two camps. Using our example from above:

Mortgage Payment (New Home): $1000

Taxes per month (New Home): $100

Car Loan: $200

Mortgage Payment (Rental Property): $800

Taxes per month: (Rental Property): $100

Gross monthly income: $4500

Rental Income $1100 per month

Option 1

PIT + Monthly outside obligations - ( rental income x 80%)
Qualifying income of applicants

[($1000+$100) + ($800+$100) + $200] – ($1100 *.80) / $4500

= TDS of 29.3%

Option 2

PIT + Monthly outside obligations
Qualifying income of applicants+ ( rental income x 80%)

[($1000+$100) + ($800+$100) + $200] / ($1100 *.80) + $4500

= TDS of 40.08%

As you can see this is a huge difference and could mean the difference between getting approved and not.

It is important to work with a mortgage professional that understands all these aspects in addition to having the several lenders to choose from. In this case, I have a few lenders that will do Option 1, however the majority of them do option 2.

Still not out of the woods yet

It may appear that we are not out of the woods yet in the mortgage world. With the recent cessation of operations at Abode lending we have to be careful which lenders we deal with.

Many other brokers and lenders always wondering why I kept my business planted with major lenders and never used the latest and greatest flavour of the month lender. Looking back, I don’t have clients stuck with Accredited, CITI or Xceed where they are unable to renew their mortgages since these lenders are out of business.

This should be a warning call to all mortgage professionals to be very careful who are you partner with.

 

 

Abode Mortgage Holdings Corp. Announces the Closure of the Company’s Mortgage Origination Business

10:25 AM ET, November 30, 2009

VANCOUVER, BRITISH COLUMBIA, Nov 30, 2009 (Market wire via COMTEX) — Abode Mortgage Holdings Corp (ABD) (the “Company” ) today announces that the sale of its wholly-owned subsidiary, Abode Mortgage Corporation (AMC), as described in the Company’s November 27, 2009 press release is no longer proceeding. Further, the interim funding and mortgage loan purchase arrangements referred to in the release have terminated. Without an established funding and whole loan purchase arrangement, AMC cannot properly carry on its business and the Directors of the Company have decided to cease operations.

In commenting on these developments, the Company’s CEO, Mike Linehan, stated: “Management and the staff of AMC are devastated by the decision to cease operations. However, without a committed mortgage funding and whole loan sale partner, the business of AMC is not viable. We wish to thank our loyal industry partners and deeply regret our inability to carry on in business.”

About Abode Mortgage Holdings Corp.

Abode Mortgage Holdings Corp. is a public company trading on the TSX Venture Exchange under the symbol ABD.

SOURCE: Abode Mortgage Holdings Corp.

Abode Mortgage Holdings Corp.

Mike Linehan

CEO

Realtors edge toward MLS alternative

Realtors edge toward MLS alternative

Real estate’s big four may break lock on listings

Garry Marr, Financial Post

The country’s four largest real estate companies are close to an agreement to share their listings, a move that comes as the industry is trying to negotiate a truce with the Competition Bureau.

The Financial Post has learned that Century 21, Royal LePage, Re/Max Ontario- Atlantic Canada and Coldwell Banker have met several times over the past 12 months to hammer out an agreement under which they could take sales listings from each other’s websites and post them to their own.

The realtors say the move is unrelated to the ongoing Competition Bureau inquiry into the Multiple Listing Service and its restrictive access, but it could provide the industry with an alternative to the MLS system if it is forced to radically change in the wake of the government agency investigation, which started in 2007.

The MLS is controlled by the Canadian Real Estate Association (CREA), but the four major players are now listing on the MLS through their various agents.

The Competition Bureau has requested CREA remove all rules that prohibit or impede the posting of property information on MLS systems. Currently, only licensed real estate agents who are members of local real-estate boards can post listings on MLS. The change is expected to provide the public with improved and cheaper access to the system, while potentially lowering real-estate agent commissions. CREA is considering a settlement on the issue.

“We’ve been working on an agreement with real-estate companies for the past year,” confirmed Phil Soper, chief executive of Royal LePage. “It’s moving along. The agreement in principle is among the major real-estate companies, but it’s just a framework to move forward. The next move is we have to reach out to the real estate brokers and they have to agree to share [their listings].”

The main agreement is said to be between Royal LePage, Century 21 and Re/Max, with Coldwell Banker asking to be kept in the loop with the intention of joining later. Re/ Max of Western Canada and Re/Max Quebec are not part of the deal.

Mr. Soper said he’s not concerned about non-agents being able to pay to list their information on the MLS system.

“From my perspective there is so much else that goes into the advisory services that are provided by a professional than just the listing,” Mr. Soper said.

While the industry is gearing up to provide better access to its listings, it is also clear many plan to zealously guard who can take the listings and post them to their own site.

Century 21 Canada is suing Rogers Communications Inc. subsidiary Zoocasa Inc. for obtaining information from sites provided by the company’s brokers and representatives. Don Lawby said the fight with Zoocasa got him thinking about sharing data with the other real-estate companies.

“All of a sudden I had a competitor that was scarping listings from everybody else and I can’t get them and that’s where we started. The discussions started well before the Competition Bureau [investigation],” said Mr. Lawby. “We have brand names and we drive a lot of content. The more traffic we can get the better it is.”

He said it is too early to say whether the sharing of information between the real-estate companies would provide an alternative to the MLS system.

“Part of the problem was organized real estate got together [through MLS] to share data. It was never meant to go directly to the consumer,” said Mr. Lawby.

Technology has also been an issue impeding information sharing between brokerages because not all the data are compatible with each other, said a source. The purchase this month of Columbus-based Real Living Inc. by LePage parent Brookfield Asset Management Inc. will partially help get around that hurdle because Real Living’s technology helps interpret differences in data.

Some say the move by the brokerages to share data is coming too little too late.

“They are doing this to make themselves more relevant. Each of them has only a fraction of the data that is out there [on homes for sale],” said the owner of one independent brokerage, adding the real-estate companies can agree on a corporate level but that doesn’t mean agents will go along with it.

Canadian home builders scramble to meet demand

Garry Marr, Financial Post
The Canadian housing market’s surprising turnaround is spreading to new home construction as developers scramble to respond to a supply shortage that has sent pricing soaring for existing homes.

But any increase in construction on the new home side will likely not surface fast enough to feed the demand for housing that continues to be spurred on by record low interest rates.

Canada Mortgage and Housing Corp. said Monday there were 157,300 units constructed last month on a seasonally adjusted annualized basis, a 5.4% increase from a month earlier. Annualized starts at dropped as low as 118,500 in April.

“There is not a lot of inventory around,” said Gary Friend, president of the Canadian Home Builders’ Association, adding his industry has been careful not to speculate. “We have to watch our Ps and Qs, as we try to meet this demand.”

Any increase in supply would be welcomed as a shortage of new listings has lead to a spike in prices. The Canadian Real Estate Association said last month existing home prices across the country were up 13.6% in September from a year ago as a supply problem was evident in almost every city.

The shortage has yet to ease despite the suggestion higher prices would coax homeowners to sell. This month the Toronto Real Estate Board reported sale prices in October were up 20% from a year ago.

“The existing homes market is in short supply so we’ve gone from a buyer’s market to seller’s market. The way it gets linked is you get some spillover into the new homes market and that’s starting to happen,” said Bob Dugan, chief economist with CMHC.

The agency has already upped its forecast for new home construction for 2010 from 150,300 to 164,900. Even at that level though, construction is still well off the 211,000 new starts recorded in 2008.

Paul Ferley, assistant chief economist with the Royal Bank of Canada, said “at the margins” new home construction could help ease the housing crunch. “Builders are aware and will contribute where they can to advance construction activity but no they can’t turn on a dime.”

gmarr@nationalpost.com