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.

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