Canadian Mortgages

Prospective home buyers are strongly encouraged to obtain pre-approval before even beginning the process of looking for a new home. Pre-approval means a lender has examined your financial situation, and approved you for a home loan of a pre-determined amount. Usually, you will receive a certificate or confirmation detailing the loan amount, and the fixed interest rate that will be guaranteed for a set length of time.

Pre-approval will tell you how much you can afford and how you are going to finance the purchase of your home. It will also allow you to negotiate a price that you know will be within your budget, as well as the maximum you can afford.

The mortgage pre-approval process is generally a free service provided by most lending institutions, and will give you peace of mind during the search process. It will also tell sellers that you are serious about purchasing a home.

The announcement by Wells Fargo that it is ceasing to offer consumer mortgages in Canada caught many industry observers by surprise. Wells Fargo was one of few major "alternative" lenders in Canada, i.e. a lender that offers non-prime or subprime mortgage products.

The press release was brief, stating only that after reviewing its operations and the current market, the company decided to pull out of the mortgage business in Canada. It will still honour existing mortgage commitments and offer personal loans.

Wells Fargo is the fourth-largest bank in the United States and the biggest originator of mortgages in that country. Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals, was quoted in the Globe & Mail as saying that the departure of Wells Fargo will have a "very large impact on segments of the market."

The word "subprime" has, of course, some very negative connotations, largely because of what happened in the U.S. during the recent mortgage crisis. The situation in Canada is very different. North of the border, the subprime market makes up only about 5% of the overall mortgage market. There are many reasons why subprime lending never took off in Canada, but the bottom line is that for some borrowers, subprime works.

Subprime loans are certainly not for everyone. They are more costly and they carry higher risk, but the financial culture in Canada ensures that the risks are manageable. In reality, these types of mortgages are beneficial for certain home buyers, allowing them to enter the real estate market and rebuild their battered credit ratings.

While the departure of Wells Fargo will be a bit of a blow (they are not the first subprime lender to leave Canada either), there are other players in the game, many of whom are accessible through mortgage brokers.

A recent article in the Calgary Herald points out the many online resources for vacation home mortgages and property listings.

It is an excellent summary of the tools available online. Some highlights of the article include cottagemania.ca, all about the cottage lifestyle. There's information about vacation home rentals at holidayhomes.ca, and advice about checking sites specific to each province, like Relocation B.C. Of course they also include a reference to MLS, the positively addictive multiple listings service created by the Canadian Real Estate Association.

Using these online resources can help you in your search for a vacation home before you ever get an agent involved. Of course, before you start searching you should ensure you know the ins and outs of vacation home mortgages, since they do differ significantly from the mortgage you obtained for your primary home. The CMHC Website provides a good introduction for you to review before you consult with your mortgage broker or financial professional about your cottage purchase. 

Recent mortgage funding across Canada remains strong, as evidenced by the growth in Manulife Financial and BMO, as well as recent dividend hikes by the likes of Laurentian Bank.

 While some Canadian banks such as CIBC are struggling to absorb large losses in its US investment portfolio, other banks are well capitalized and continue to take advantage of the monetary stimulus emanating from the Bank of Canada. Mortgage credit is projected to expand by 10 - 11% in 2008, as reported recently by CAAMP.

While the percentage of home mortgage loans is shifting away from home purchasing and into home refinancing, mortgage market activity overall remains robust.  Broker-focused mortgage lender Merix today boasts of over $5 billion in mortgage assets on its books after only three years in business, while Scotia Bank's recent acquisition of Maple Trust puts it in the top three of Canadian residential home mortgage lenders.

 A reduction in the overall number of mortgage lenders acting in the country, however, has resulted in a shift in the overall market shares of some of the major banks.  Tighter competition and higher wholesale funding costs have resulted in lower margins, and the end result has been a tightening of credit standards.

 High-ratio home mortgage loans are expected to require a minimum credit score of 620 as of October, up almost 40 points within the past six months.  Luckily, a strong non-bank lending community has stepped up to the plate to continue to provide liquidity to the Canadian real estate market.

Mortgage affordability is being reflected in the drop off in new housing construction reported last month and bare gains being reported in the prices builders are selling newly built homes for. The latest numbers from the Canadian Mortgage and Housing Corporation (CMHC) and Statistics Canada show a substantial slowdown in new home construction, led by a pronounced drop in multiple-family condo construction in Toronto, and very moderate growth in the price of new homes offered by builders.

The CMHC reported a 13.6% drop in new home construction between June and July of this year. The pain was felt hardest in Ontario' s condominium market," reports the Financial Post, "where the construction of multiple family apartment units was down 57.9% in July from August." The 186,500 new homes built in July was considerably less than the 210,000 new homes forecast by industry analysts. "The drop in starts in July was likely slightly overstated with the weakness largely concentrated in Ontario," said Paul Ferley, assistant chief economist with RBC Economics. "However," he noted, "housing activity is definetly on a downward trend consistent with indications of deteriorating affordability through last year."

The tightening of Canada's mortgage and housing market was reflected in the very modest growth in new house prices reported by Statistics Canada. Numbers released yesterday by StatsCan indicate that the price of new housing in Canada barely grew in June, with many regions reporting an overall drop in the price of newly built homes when prices are adjusted for inflation. "The continued correction of house prices in the previous boom regions of Western Canada, particularly Alberta, caused growth in the national new-home price index to ease to an annual rate of 3.5% in June compared with 4.1% the previous month," says the Financial Post.

The marked slowdown in housing starts and stalled new housing prices do not, however, necessarily herald the beginning of a U.S.-style housing meltdown that was triggered by that country's lax mortgage lending and securitization practices. The Globe and Mail reports TD Securities economics strategist Millan Mulraine advising clents that the CMHC's report is a further addition "to the growing body of evidence pointing to the cooling in the Canadian housing sector. "However, according to Mr. Mulraine, the recent slowdown “is in no way comparable to the prolonged correction that we have been seeing in the U.S. Going forward, we expect a bit of a bounce back in starts, as we believe that the long-run trend for starts remains somewhere in the 200,000 to 220,000 region."

The steep decline in new housing construction and barely perceptible growth in the price of new houses reflects a tightening of Canada's housing market, where a steep runup in housing prices over the past six to ten years has made mortgage affordability an issue for Canadians looking to enter the housing market. With record numbers of new and existing homes listed for sale on many real estate boards across the country, the demand for new housing can be expected to ease off as supply outstrips demand.