Gina Burgio

In response to the recent Financial Post article (link below), do you feel like the tighter mortgage rules will show a great deal more cheating?

I'm torn because I know that a 20% downpayment from an investor is difficult, though not "impossible" as this article states, to find for some investors. But I have to wonder if it is not exactly what we need to protect the market from people who really shouldn't be investing in some cases. Speaking from personal experience, it takes a good deal of credit and/or liquid assets to manage a property properly and not be hanging on by your fingertips. After all, if the mortgage payment is reliant on rental income there has to be some kind of padding for carryover for at least a few months in a tenant-less or "worst case" scenario.

What are your thoughts?

Original Article:

Tighter mortgage rules may lead to more cheating

By Andy Holloway, Financial Post

Mortgage fraud may not be the most serious crime in the grand scheme of things, but it's not something the government should be helping. But that's exactly what real estate professionals say is a likely result of the new mortgage rules being put into place on April 19.

"There's going to be a dramatic increase in mortgage fraud again," says Don Campbell, president of the Real Estate Investing Network, a Calgary-based association of investors who collectively own more than $3 billion in property. "You watch this thing start to take off."

The reason? It's virtually impossible for investors to buy a third rental property without putting 20% down because the new Canada Mortgage and Housing Corp. rules use a 50% add-back policy instead of an 80% offset for rental income. Essentially, that means investors get less mileage from the rent that is typically used to pay off the mortgage.

Read More:
http://www.montrealgazette.com/business/fp/Tighter+mortgage+rules+lead+more+cheating/2743481/story.html

We all expected to see this but I'm surprised to see it happening so soon. Undoubtedly rates will now only continue to rise.

GB

Banks bump up mortgage rates

Other banks expected to follow suit

www.cbc.ca

Mortgage rates have begun to rise from their record lows, with news Monday that several Canadian banks are increasing several fixed mortgage rates by up to 6/10ths of a percentage point.

The biggest jump is attached to the popular five-year fixed closed rate, which moves from 5.25 per cent to 5.85 per cent at Royal Bank, TD Canada Trust, and Laurentian Bank. That's the posted rate, which is routinely discounted by the big banks.

RBC's new discounted rate for the five-year term also rises 6/10ths of a percentage point to 4.59 per cent. TD's rises the same amount to 4.55 per cent. The discounted rate at Laurentian moves up to 4.54 per cent.

How much difference will that make? A $200,000 mortgage amortized over 25 years costs $1,051 a month at a rate of 3.99 per cent. At 4.59 per cent, that jumps $66 a month to $1,117.

The banks also raised their three-year and four-year fixed closed rates. The posted three-year rate at Royal Bank and Laurentian climbs one-fifth of a percentage point to 4.35 per cent, while the posted rate at TD jumps 4/10ths of a point to 4.70 per cent.

The posted four-year rate at all three banks jumps 4/10ths of a percentage point to 5.34 per cent.

Other banks are expected to follow suit. The new rates, effective Tuesday, represent the first hike in Canadian mortgage rates since last October. The posted five-year rate is now back to where it was for much of last summer.

New mortgage rules that go into effect next month require borrowers to qualify at the five-year rate, rather than the old three-year standard, even if they are applying for a variable rate mortgage.

Variable rates expected to rise soon

Variable mortgage rates, which rise in tandem with the Bank of Canada's key overnight lending rate, are not affected by Monday's announcement. But they are likely to be heading up soon too.

Bank of Canada governor Mark Carney warned last week that inflation was higher than expected. That had some market watchers forecasting that the central bank could move to raise its key lending rate as early as June. The possibility of an earlier rate hike sent bond yields up, and that appears to have prompted Monday's mortgage increase. Fixed mortgage rates tend to move higher when long-term bond yields rise.

The key rate has been at a rock-bottom 0.25 per cent since April 2009 to help the economy recover.

A report out Monday from CIBC World Markets said rising rates shouldn't be enough to derail the stock market rally - pointing out that the market is historically strong six months before and after rate increases.

A survey released last week by RBC found almost two-thirds of respondents expected the cost of servicing a mortgage to rise this year.

Read more: http://www.cbc.ca/money/story/2010/03/29/mortgage-rates-up.html#ixzz0jlqjf9St

I heard an interesting fact today about the financial state of first time homebuyers: According to reports, 75% of 18-34 year old first time homebuyers would be in trouble if their paycheck was delayed one week.

That's huge. Mortgages are expected to rise up to 3 percent over the next two years. Will we be faced with an influx of foreclosures when mortgage rates rebound?

I certainly hope not and there are changes currently being introduced to avoid such an issue. One such change is documented in a recent news article:

"Mortgage loans will be income-tested against the five-year posted interest rate, as opposed to the three-year rate currently used. According to TD Financial, the current five-year closed variable rate is 2.25 per cent, but people must have enough income to pay the three-year fixed rate of 4.3 per cent, to prove they will be able to handle future rate increases. Under the new rules, you will need to make enough income to pay the five-year rate of roughly 5.5 per cent. With the TD example, you will need annual household income of $68,838 rather than $59,626 to get a mortgage on a $337,000 home." (Toronto Real Estate News)

Another change is the reduction of refinancing from 95% of house value to 90%. This is where I feel the aforementioned group of financially unstable new homebuyers will have trouble. That extra 5% of equity when even a single paycheck is a setback could prove to be the straw that breaks many a camel's back, so-to-speak.

I can forsee this spring in Canada being huge for mortgages and real estate. With an already booming real estate market and incredible mortgage rates business looks like it will be great. I can imagine a big push on sales before the HST comes into play. And with spring already being the prime season for the industry I'm prepping myself for some late nights and long weekends working. And very excited to do so, if I may say so!

I'm interested to know your take on the situation? Do you think it will be a lot of hype?

The Bank of Canada cut its lending rate today by half point to 0.50%, the lowest level ever. The decrease was inline with most economists expectations.

Various Canadian Banks followed this announcement by cutting their Prime Rate by 0.50% to 2.50%.

The Bank of Canada also stated that its latest projections for the Canadian economy now look optimistic in the light of the latest economic data.

Gina Burgio, Mortgage Agent
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Email: gina@ginaburgio.com

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