One of the key distinctions being made between Canada’s mortgage market today and the one of the 80′s, where housing prices dropped drastically, is the cost of borrowing money. Many bankers, realtor’s, and mortgage brokers point to the fact that in those days interest rates neared 20%, nowhere close to the low rates they are at now. So how then, could we possibly see any sort of drastic downturn in housing prices?

Well, one must look back to why interest rates have become so low in the first place. When interest rates are lowered it is typically done so to strengthen the economy, think kicking a horse in the side with spurred boots to get it to go faster. In fact, this is exactly why rates have become so low in the last fifteen years, due to the US Federal Reserve Board lowering interest rates to avoid a severe downturn in the early part of the decade. Of course, with the close link between the Canada / US economies, the Bank of Canada followed suit, although not to the same degree. The cost to borrow as a result became incredibly cheap and not necessarily for the better. Alan Greenspan was quoted as saying, “I don’t know what it is, but we’re doing some damage because this is not the way credit markets should operate.” The damage is the fallout in subprime lending in the US.

Most of the real estate and mortgage industry in Canada has continued to believe that the same will not happen in Canada. Those of you who know me know that my favorite saying is “there are two types of economists, macro and micro, micro economists are wrong about specific things, macro economists are wrong about things in general.” The truth is no one knows what will happen in the future as there are far to many factors to predict. There are two things that are certain however, it is still cheap to get credit, and no matter what housing prices do, if you get in the market and stay in the market you will never lose.

You can read more about How Credit Got So Easy And Why It’s Tightening in the US market here.

Popularity: 1% [?]

Tweet This Post

That’s a good question. A conventional mortgage is one where the borrower is willing to put down at least 25% of the properties value as a down payment. That means if they are buying a $400000 house, they are borrowing only $300000. A high ratio insured mortgage is one where the borrower puts up less than 25% of the value of the property as a down payment. In this case the mortgage must be insured either privately or through the Canadian Mortgage and Housing Corporation, Genworth Financial, or AIG United Guarantee. If the mortgage is insured, the borrower is responsible for an additional insurance premium, this premium is paid to the mortgage insurer. If someone was to default on their mortgage, the idea is that the insurer would repay the costs to the lender. That doesn’t mean you can default on your loan, it just means the bank is covered. If you do fail to repay your mortgage it will be reflected on your credit and you are very unlikely to get a mortgage again for a very long time.

Popularity: 2% [?]

Tweet This Post

In the last post we talked about how the rate a client receives is generally based on how much of a risk they are to lend money to. Part of that risk analysis has to do with an individuals credit score.

Credit scores typically range from about 350 to 850. 850 represents a client who is extremely likely to pay back any loans they take out in full, a 350 score represents somebody who is highly likely to default on their loans. Most people fall into the high 600′s low 700′s range.

Your credit score is incredibly important in determining whether or not a lender will lend you money. It is based on your past credit history and is usually a pretty good predictor of a clients risk. To keep the score high you should only apply for credit when you need it, and make all of your monthly payments on time. If you don’t, it will take approximately seven year for your credit to recover.

To find out your credit score is simple, and should be done about once a year. Go to equifax.ca and request the Score Power Credit Report. It will cost you about $25, but will give you a pretty good indication of where you stand in the eyes of a lender.

Popularity: 1% [?]

Tweet This Post

The first thing that anyone should know about what rate they will get when they apply for a mortgage, is that it is based on more than just how well you barter. In most cases the rate you will receive will be based on a combination of how good your credit is, how stable your job is, and the overall risk associated with a lender providing you money. In many cases what value of a client the lender views you to be will influence what rate you receive as well.

This is where a mortgage broker comes in handy. In most cases the mortgage broker is the highest value client a lender can have. The reason for this is simple, mortgage brokers can provide millions if not billions of dollars worth of business to a lender. Thus, lenders will usually provide a mortgage broker with the best rate available, without the broker having to barter for it.

That being said, a client who chooses to deal with a mortgage broker will automatically have the opportunity to receive the best rate possible, an opportunity they would likely not have if they were to deal with a lender directly. From there it is a matter of looking at the clients individual situation and determining what rate they are eligible to receive.

Therefore every client who deals with a mortgage broker starts out at the same rate, the best one, from there the clients individual circumstances will determine if they stay at that rate or if it goes up from there. A client who is looking for a specialty product such as a zero down mortgage will likely have a slightly higher rate, a client who is a high risk will likely pay a substantially higher rate.

Either way, a client who deals with a mortgage broker will likely be much better off due to the fact that the lenders are much more willing to provide them with lower rates due to the substantial amount of business that a broker can provide.

Popularity: 1% [?]

Tweet This Post