Mortgage Brokers

The controversial harmonized sales tax (HST) was passed through legislature recently. When the HST kicks in on July 1, 2010, it will add 8% sales tax in Ontario and 7% sales tax in British Columbia to many items that were previously only taxed GST at 5%. Not unsurprisingly, the HST isn't very popular.

In addition to the increased cost in taxes on real estate purchases, all transactions relating to the purchase and sale of homes will now be subjected to the HST, including: real estate commissions, lawyer's fees, closing costs and home inspections.

Both agents and mortgage brokers are concerned that the increased transaction costs will result in homebuyers looking to spend less money on a house than they might have otherwise.

In the long run, with the current state of the housing market, only time will tell the amount of impact that the HST will have on sales.

My parents just sold the house where they'd lived for close to thirty years. Like a lot of retired people, they wanted to live closer to their grandchildren. So, they bought a new house 400 km south of where they'd lived for most of their lives. Over the years, my father had lovingly upgraded the house with numerous home improvements and three days after they put it on the market it sold for an excellent price.

However, they did have one quibble: what's with real estate agent fees? Why does a real estate agent get paid the same amount for selling a listing in three days as three months?

The disagreement over fixed commission rates for agents goes back a long time. Some say that agents have high overheads and deserve the standard commission rate and others say that it's highway robbery.

I could see how it would be nice to have some of that money to put towards your mortgage down payment or home improvements. However you feel about the commission controversy, it's important to choose an agent that you feel comfortable with as part of your home buying team.

You're finally ready to buy a home and with interest rates close to historical lows it seems like a good time to dip your toes into the real estate pool. You've been squirreling away money for your down payment, been pre-approved for a mortgage and spend all of your free time scouring the MLS website for your dream house.

The bank says that you can afford a mortgage, but can you really afford as much as you've been pre-approved for?

When you apply for your mortgage the lender takes into account the mortgage payment, cost of heating your house, property taxes and current debt. What they don't take into account is any other cost of living: food, insurance, gas, Internet, or cable television.

In the end, a mortgage broker can help make sure that you're taking on a mortgage for an amount that you - not the bank - are comfortable carrying.

Canadian Tire Financial Services announced recently that they would be saying farewell to their Mortgage Department.

In a press release, Canadian Tire stated they would be selling their mortgage portfolio of about 1000 mortgages to National Trust, in a transition that will take place early next year.

For a national company, 1000 mortgages is three years is a relatively small number, so it makes sense that Canadian Tire would let it go and focus on the stronger elements of their financial services offers. The Canadian Tire MasterCard, for example, is the most popular credit card in Canada. They've also been notably aggressive in savings and GIC rates.

The mortgage business is tough, so while it's understandable Canadian Tire would exit the arena, it's a little disappointing. The offer of the One and Only account was a sound premises that I was hoping would kick start a mortgage revolution. Using your everyday banking to beat back interest on a mortgage is a great resolution for Canadians who are more prone to spending than saving.

Alas, with Canadian Tire's announcement, that leaves Manulife and National Trust to dominate the market of interest offsetting mortgages.

When reading your local real estate papers, you will have come across ads for mortgage brokers. If you've never dealt with a broker before, you will probably have no idea as to what services they provide or if there is a fee to using them. Hiring a mortgage broker can be your best choice in terms of flexibility and availing yourself of as many options for your mortgage choices as possible.

Brokers have access to information from lenders on daily interest rates and the best possible amortization period that you would qualify for. When you visit a mortgage broker, you fill out the same paperwork that you would at a bank. Once complete, the broker will send out your information to possible lenders to see if an institution is willing to give you a mortgage.

The payment for a mortgage brokers services does not come from the client. Rather, the lender pays the broker a commission when the deal is complete. This works well for the client, as there are no extra fees incurred. One slight detriment to using a mortgage broker is that they may steer you to the lender with the highest commission offered. However, you will always have the final choice in lenders.

Using the expertise of a mortgage broker when acquiring your next mortgage is a good decision. You will know that you did everything you could to ensure you received the best deal on your mortgage.

If you are home shopping for a home in Toronto this week, here are the price tags you can expect to see:

• $536,404 for a new home in Toronto (Source: Canada Mortgage and Housing Corporation)
• $384,605 for the average Toronto resale home (Source: The Toronto Real Estate Board)

Toronto resale homes are still priced well below Vancouver homes, where the average price is $535,598. Toronto home prices are just below those in Calgary, where the average price is $390,599.

If those prices are too rich for your blood, try Windsor or Oshawa. These are the areas most likely to advertise many homes at cut-rate prices, because auto sector workers have recently lost their jobs.

Don't count on readily picking up a distressed property for a song this week without much searching, because there are only 20,000 to 25,000 Canadian residential mortgages in arrears 90 days or more, which represents 0.27% of all home mortgages (Source: The Canadian Association of Accredited Mortgage Professionals). This percentage is substantially less than it was during the last big recession of 1992, when the default rate was 0.6%. By contrast, the U.S.A. has a default rate of 22%, of which 4% are prime mortgages (those with a down payment) and 18% are subprime (with no down payment). Your mortgage broker might be able to find you a distressed vacation property in the southern U.S.A., if you have at least a 30% down payment.

If you are selling a home in Toronto this week, know that Ted Tsiakopoulos, the Ontario economist for Canada Mortgage and Housing Corporation, predicts that Toronto homes will not be devalued, but will not appreciate in price as quickly as they have been. Toronto homes will likely appreciate steadily at the rate of inflation, so the housing market will be balanced and prices more reasonable. Last year, a record 93,193 homes were sold in Toronto. Mr. Tsiakopoulos predicts sales will fall to 79,000 - the level of 2003 - because of slower job increases and lower demand for housing. If you list your home today, expect to sell it in 36 days, which is about a week slower than it would have sold in the spring.

Canadian fixed-rate mortgage prices rose last week to a whopping 7.2%. Today, calmer banks are offering fixed-rate mortgages hovering around a more reasonable 6.14%, and it is possible to get a 5-year fixed- rate with a credit union at 4.99%.

The Toronto mortgage rate hike is a response to the American mortgage crisis, which decreased the value of the Canadian financial market by almost 15% in one week - its worst performance since 1980. Variable-rate mortgage prices followed the rise of fixed-rate mortgages this week. Ninety percent of home buyers during the housing boom took out variable-rate mortgages to circumvent the high fixed-rate.

Home buyers with less-than-perfect credit could easily obtain a variable-rate mortgage at 1% less than the prime lending rate. This week, buyers pay the prime rate, even if they have an exemplary credit record. You can obtain a 5-year open, variable rate mortgage for 4.75%, providing you have a minimum down payment of 5%. The days of no money down are over. You cannot leverage as much as you could in 2006.

Buyers must evaluate their risk tolerance with a knowledgeable mortgage broker: Do short term savings with a variable-rate quench your fear of American economics spilling over into Canada? After all, the U.S.A. is responsible for generating 25% of the world's income. Most home buyers are opting for the safer 5-year fixed-rate mortgage this week, even though rates are artificially high because of U.S. recession fears. If you are a first-time home buyer and do not have any risk tolerance, then a fixed-rate mortgage is probably right for you.

However, if you are an experienced home owner and can manage some degree of risk, then a variable-rate would benefit you, because it will take a few increases in the prime rate for you to be paying more than your fixed-rate counterparts. Market watchers predict interest rates will remain stable in the short term, and may even fall if there is a recession.

Ultimately, there is no doubt that mortgage brokers have yet to penetrate the Canadian mortgage market to the same extent as their southern cousins in the US. Some borrowers likely believe this is a positive, as a result of negative media coverage of the mortgage industry.

What many borrowers are not aware of, however, is the two-tiered lending system maintained by the Canadian mortgage lending oligopoly, which continues to post high sticker-prices on their loans to provide for negotiating room. With a penetration rate of 25+%, and an increasing average quotation rate by Canadian consumers, there is no doubt that the mortgage broker profession is helping to reduce borrowing costs for home owners and buyers alike.

With today's interest rate spread of approximately 1.75% (the different between top mortgage broker interest rates and the equivalent term's posted rate), it is important as ever to shop around on your bank and make sure that they are working to earn your business.

Rob Carrick, The Globe & Mail's personal finance columnist, points out that, "(u)nwary mortgage borrowers are always a mark." Nonetheless, Mr. Carrick sounds a note of cautious optimism in his survey of the current Canadian mortgages landscape. Optimistic about the mortgage deals out there to be had - and cautious about the options on some of those mortgage deals that might leave you with a sense of 'being had'. With the wide range of mortgages out there, the savviest move may be to consult a mortgage broker who knows both the terrain and the traps.

In his April 17th article, Mr. Carrick notes that the gap between the interest rates posted by major Canadian banks for five-year fixed rate mortgages and the interest rate the Government of Canada is paying on its five-year bonds is a key differential that needs to be understood when shopping around for Canadian mortgages. The difference between the banks' posted five-year fixed mortgage rates and the Government of Canada's five-year bond rate is essentially the 'wiggle room' that the banks have to offer you a lower mortgage rate and keep you from going down the street to secure a better deal.

Mr. Carrick points out that "there is a bigger gap than in the past between the fictional world of posted mortgage rates and the actual discounted rates that smart borrowers pay." With an ultra-competitive market for Canadian mortgages due to the general volatility caused by the U.S. sub-prime mortgage mess and the large number of financial institutions offering a wide variety of mortgage options, Mr. Carrick notes that, "interest rate discounts are readily available." But, he cautions, there is some market 'savvy' that is necessary "to avoid being hustled." Along with the opportunities out there for smart borrowers, there are also hidden traps for the inexperienced or uninformed borrower who is looking for deals without an adequate depth of knowledge.

With the wide range of mortgage products and options now offered, whether you are first-time buyer or a current homeowner comparison shopping for a mortgage renewal, second mortgage, construction loan or equity loan, the 'savvy' move may be to enlist the services of a knowledgeable mortgage broker to get the best deal out there and avoid the pitfalls and hidden traps Mr. Carrick highlights in his article.

What is the 'ABCP' market, what has happened to it and how will this impact the ability of homebuyers to obtain affordable mortgages? Will the seeming collapse of the ABCP market impact the availability of Toronto mortgages for current homeowners or first-time homebuyers in Canada's largest real estate market? What do you need to know about ABCP and market liquidity when talking to your mortgage broker?

ABCPs are investment funds consisting of 'asset-based commercial paper'. They are a form of 'securitization' designed as short-term investments. Essentially, commercial lenders - banks, credit unions, other commercial lenders, retailers etc. - lump together secured loans, credit card debt, car loans and/or mortgages. Thousands of individual loans are bundled together and sold at a discount to investment dealers who package them as investment funds. Investment brokers, in turn, sell shares in these funds to investors and other investment funds as short-term investments.

ABCPs pay slightly higher interest rates than more traditional short-term investments like GICs. Formerly, there has always been a ready aftermarket for ABCP making it easy for investors to cash out when they need their money. ABCP had been seen as a very secure investment. (Interestingly, ABCP funds first took off when the financing arms of the Big Three automakers securitized the large volumes of car loans they held on their books and sold them to third party investors. These loans were seen as being very, very secure and led to the rise of the ABCP market. Investors recognized that nobody wants to have their car repossessed and most borrowers will make sure their car payments are up-to-date before servicing almost any other type of consumer debt.)

All was well until turmoil in U.S. credit markets caused by the sub-prime mortgage meltdown rocked investor confidence. As a result, investors have almost totally shied away from buying asset-backed commercial paper in Canada and the resale market for ABCP has essentially dried up. Share prices in ABCP funds have dropped accordingly. Investors who are already holding ABCP are currently negotiating with industry stakeholders seeking to restructure the ABCP market.

Canacord Capital Inc., Canada's largest player in the ABCP market, recently offered to buy back the ABCP held by 1,430 of its smallest investors - those holding less than $1 million in ABCP issued by Canacord. The buyback offer, while great news for small investors, has angered larger investors. Canacord is restructuring and its recent offer will be voted on at an April 23rd meeting of all investors and shareholders.

Canacord announced on April 14th, that it has agreed to sell up to $69 million in common share equity to a consortium of six institutional investors. Canacord's move and the readiness of institutional investors to come on board indicates continuing investor confidence, despite the seeming liquidity crisis. The announced share sale will more than offset the $58.2 million price tag of Canacord's bailout of its smallest investors.

Homebuyers, particularly first-time homebuyers, should realize, however, that volatility and difficulties in Canada's ABCP market are a problem for investors - not borrowers. While an enhanced level of scrutiny and heightened prudence among lenders to weed out applicants who may be questionable borrowers does now exist, the ABCP meltdown should not affect the overall ability of qualified borrowers to access commercial credit or obtain mortgages - particularly in stable, growing markets like that for Toronto real estate.

Potential homebuyers who are concerned that the recent turmoil in U.S. markets and the breakdown in the Canadian ABCP market could affect their ability to qualify for a mortgage should consult a reputable local mortgage broker.