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.

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The recent introduction of high amortization mortgages was originally intended to help buyers qualify for mortgages. In effect, it made it easier to get a higher mortgage based on the same amount of income that would have qualified you for much less based on a 25 year amortization. For the most part, the train of thought has been that if you can afford to qualify based on a shorter amortization, you should probably take the shorter option such that your mortgage is paid off quicker. Well, that is a good theory, but there are other more lucrative options should you be willing to look for them.

For example, the title of this post indicates that by amortizing your mortgage over 40 years, there is the potential to make $3,000,000. This is indeed true, if you are willing to look at the situation from a different angle than most. Lets look at the following example. (more…)

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Selecting the right mortgage broker is similar to selecting the right realtor. The first thing you want to do is select someone you trust. If you don’t know a mortgage broker personally, find someone who does, and ask for them to put you in contact.

Once you get in contact with your mortgage professional, get to know them a little bit. Ask them questions about how long they have been in the business, what their previous background is, and if they are willing to provide you with the names of a couple past clients that you can call as a reference. If you don’t feel comfortable dealing with that person, then find someone else. Remember, this is likely the biggest transaction you will ever make, so be sure you are comfortable with who you are dealing with.

One thing to really watch out for is a mortgage broker or real estate agent that is over anxious to get you to commit to them. If you feel like you are being pressured to use someone specific, that should be a sign to be a little bit more diligent. Most realtors will have a mortgage broker they like to deal with, but if you feel like the realtor is pressuring you to use them, ask for the names of a couple of other options, they are required to provide you with alternatives. A realtor is not allowed to pressure you in any way to use somebody they know, and you are always entitled to a second opinion. That being said, realtors in many cases choose to deal with specific mortgage brokers because they know that the client will be well taken care of.

A good mortgage broker will never feel the need to pressure you to deal with them, and will always be willing to help you out any way they can. The best rule of thumb as in any other transaction is to go with your gut. Find someone you like and trust, and avoid the tendency to go elsewhere because another broker promises you a better rate. In the long run, the broker you trust will always be able to get you the deal that is best suited to you.

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The two simplest reasons among many are:

a) a realtor deals in mortgages everyday, and thus knows what they are doing. Would you buy your medical prescriptions from a computer store? No, because the computer guy knows nothing about medicine. So why would you buy a house from someone for sale by owner, typically they will know less about selling a house than the computer guy knew about which hand cream will cure your cold.

b) Realtors are regulated and required to maintain professional standards. That means that if they mess up, you will have a prescribed course of action against them, and you will be much more protected than if you bought a house privately.

Buying a house is the most complicated transaction you will ever make, use a professional to take care of the dirty work for you.

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Thats a simple question to answer. The minimum down payment required to avoid needing mortgage insurance is 25% of the purchase price. Thus, if buying a house for $300 000, you would require a $75 000 down payment in order to have an uninsured mortgage.

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