Monday, August 16, 2010

Interest Rates

Between appointments I was sipping my favorite branded coffee when I got talking to a Heating, Ventilation and Air-Conditioning Technician (HVAC) at the local Tim Hortons. 

He inquired about the future of mortgage rates. With the experience that I have dealing with the Mortgages and the Financial Markets I thought I did a good job of explaining to this HVAC guy why the Variable is going up while the Fixed Rate (bond related) was slowly coming down.  Soon enough, a sweet elderly couple from the adjoining table excused themselves into the discussion. 
At the back of my mind I am always thinking that when the banks increase their Prime rate the banks also increase their lending rates. The mortgage is in line with the prime rate increase but some smaller loans like auto, small business and the credit cards are at the same time quickly increased by .50% when the prime has gone up by only .25%. 

However, there is absolutely no increment in the GIC or other fixed deposits that my parents and all the other pensioners have at the banks!

Interesting isn't it?  If you have a lending question, feel free to send me an email.


Tuesday, August 10, 2010

Answering Jim's question

This morning I made myself a mug of java and took it with me to take the dog for a walk.

I noticed that the neighbourhood kids had toppled over the local mail box during their overnight exploits. Poor ‘Spotty’ lost his support for doing his early morning job; it did not take Spotty long before he found the neighbourhood tree to relocate his washroom.

I ran into one of my neighbours, Jim, a realtor for the past 25 or so years. Jim had a mortgage question. Jim refers his business to an in-house mortgage broker at his office. Jim’s question was, “Why are so many of my deals being declined at the banks these days?” This took me aback, because I know that Jim has been in the business for a long time and should have been kept abreast of the trends and laws and the action and effect that are being anticipated by many in the financial industry. Anyhow... here’s is his answer.

The market has slowed down but not completed halted. The reasons are many.

The main ones are that while (the past 10 years) the mortgage rates had been low and lending guidelines relaxed, the lending was in done using fairly strict guidelines. Same cannot be said of the folks south of the boarder.

The collective guideline of the Bank of Canada, The Treasury (Ministry of Finance) and CMHC has required the banks to use newer guidelines to qualify borrowers. It has been published widely in the media, however, I will attempt to list them here.

First of all the mortgage applicants will be qualified on BOC (Bank of Canada) 5 years mortgage rates. The lenders may discount the rates but to qualify for the loan itself the borrowers must now be qualified using the 5 years BOC rate.

To add to this, the new rules (which came into effect in March of this year) the amortization period must be 25 years. The bank may extend the amortization period to 35 years but the qualification must be processed using 25 years.

Additionally, unless the mortgage is insured for occupancy by the borrowers, the down payment must be a minimum of 20%. This was done to discourage speculators who did not have deep pockets.

For Canadians to occupy their own home the qualification has not changed much. They can still be qualified for the contracted interest rate (discounted rate) and can continue to use the amortization of maximum of 35 years (40 years is now disallowed) This is strictly for the homes that are going to be owner occupied and not rentals or speculative nature.

Keep in mind that the CMHC has a social mandate to house Canadians.

My neighbour Jim should have been updated with this information by his in-house broker.

It is now time to go and feed the dog.

If you have any mortgage questions, please feel free to comment below.