Toronto Mortgage

At the beginning of the month, Mark Carney (Governor of the Bank of Canada) held a conference call with the leaders of The Big 5 Canadian banks (RBC, TD, Scotiabank, CIBC, and BMO). The Big 5 are headquartered in Toronto, so their concerns strongly reflect the Toronto mortgage market. They discussed what solutions Canadian Finance Minister Jim Flaherty should present this weekend in Washington, when he meets with the other G7 finance ministers to discuss how to minimize the impact of the ongoing U.S. credit crisis on world markets.

There are two promising Canadian proposals on the table:

1. Increase the deposit limit guaranteed by the Canada Deposit Insurance Corporation (CDIC) from its current $100,000 to $250,000 to reassure depositors and make them more comfortable with leaving their money at the banks.

2. Make the Canada Mortgage and Housing Corporation (CMHC) a term lending facility.

Let's explore item 2 further. You probably already recognize CMHC as one of two Canadian agencies that offers mortgage default insurance. (The other is Genworth Financial.) CMHC guarantees mortgages where the applicant has only a 5% down payment. These 'weak' mortgage applicants account for only 24% of the current Canadian market, or $190 billion. The Big 5 want CMHC to substantially increase the amount of its guarantees by extending them to many other properties. Canadian bankers are experiencing problems borrowing international money to lend to Canadian consumers this week.

Short-term international loans are extremely expensive because financiers are wary of getting involved with 'iffy' North Americans who may not pay them back. The Canadian bankers' strategy is to obtain cheaper funding by packaging together more of their mortgages for CMHC to absorb - not just those with minimal down payments. CMHC would give the banks securities in return. CMHC already sells securities as government guaranteed mortgage bonds to investors through the Canada Housing Trust.

The banks want a bond sale and repurchase agreement with CMHC called a term repo. The banks hope to use the securities as collateral for short-term loans obtained through international financiers. If Canadian banks can obtain international money at a reasonable interest rate, they can lend it to you, the Canadian consumer, at lower interest than is presently available.(Today's prime rate is 4.50%.) You can use the low interest loan for crucial costs associated with buying your new home, like repairs, furniture, and moving expenses

Over the past few years, Toronto home sellers were certain of a quick sale, even when the price of the average home reached $380,132. Sellers would often refuse routine home inspections and ignore buyers without a pre-approved mortgage in place, because bidding wars were commonplace. Most homes sold within 31 days.

Now that Toronto home sales have declined 14% in one year, and prices have declined 3%, sellers are more uncertain and willing to negotiate. Sanity prevails, as the price of the average Toronto home fell to $368,549, and sales take 36 days. Buyers realize the Toronto housing market is still overpriced by approximately 20% of its true value, but are willing to pay the premium for the convenience of a short commute.

A mortgage broker is the key to capitalizing on this Toronto buyers' market. Lenders are scrutinizing every buyer carefully this week because the stock market downturn has made credit very tight. Applying to multiple banks adversely impacts your credit rating because each credit inquiry is recorded on your credit history. Equifax keeps all inquiries on the consumer's credit history for three years. A mortgage broker protects your credit rating by making only a single inquiry and submitting the results to several lenders on your behalf. TD Canada Trust raised its rates for variable mortgages and home equity loans today to 5.75%, which is 1% above prime. Other banks and credit unions are expected to follow suit.

Mortgage brokers are still able to obtain 5.5% interest on five-year fixed mortgages for their customers, and have greater clout than an individual buyer when negotiating amortization, portability, and repayment schedules.