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Issue No. 8                    "Representing Your Best Interest!!"May 19 , 2010
 Enlightenment to New Government Regulations

On February 16, 2010, the Government of Canada announced a series of regulatory changes to support the long-term stability of Canada's housing market.  The following changes came into effect as of Monday April 19, 2010:


Qualifying Rate:

         Fixed Rate Mortgages of terms less than 5 years and all Variable Interest Rate Mortgages: Applications will be adjudicated based on the greater of the 5 Year Bank of Canada Benchmark Rate**, OR the actual customer rate (inclusive of any customer discretion).

         Fixed Rate Mortgages of terms 5 years or greater: Applications will be adjudicated based on the actual customer rate (inclusive of any customer discretion).

         This change applies to both conventional and insured mortgages.


Maximum Loan to Value when Refinancing on Owner Occupied Residential Property:

         The maximum loan to value ratio for the refinance of an owner-occupied property has moved down to 90%.


Maximum Loan to Value for Non-Owner Occupied (Rental) Residential Properties:

         The maximum loan to value ratio for the purchase, porting or refinance of 1 to 4 unit non owner occupied investment properties will be 80%.


Rates as of May 19, 2010
Fixed Rate Mortgages  
6 month convertible           4.90%
1 year open                          6.50%
1 year closed                       2.49%
2 year closed                       3.20%
3 year closed                       3.95%
4 year closed                       4.34%
5 year closed                       4.49% 

Variable Rate Mortgages    
5 year closed - Prime* - .50%  ****
5 year open   - Prime* + .80%

Home Equity Line Of Credit

Please call for product availability and rates.

Information from sources deemed to be reliable. Product availability and borrower qualification apply.
*Prime = 2.25%
Rod Minnes
Global West Mortgage
 Parents Buying Homes For Kids 
 Garry Marr, Financial Post 

Here's one way to tackle the red-hot Canadian housing market: Get someone to buy you a home.

That someone would be your parents. According to a new survey from TD Canada Trust, 10% of Canadians are considering buying a condominium for their adult children. A year ago, only 5% of parents thought about buying the kids a condo.

"It could be something that the parents are looking at as a long-term source of income, letting their children live it in for now," says Chris Wisniewski, associate vice-president of real estate and secured lending with TD.

It could also be that parents know condominium prices, like detached homes, have climbed to unprecedented levels, making it difficult for adult children to come up with a minimum 5% down payment, let alone the 20% needed to avoid costly mortgage default insurance.

Toronto condo research firm Urbanation Inc. says the average existing condominium in the city sold for $331,000 in the first quarter of 2010. Based on an average $369-per-square-foot price, that's a 900-square-foot unit.

For a new one, prices averaged $443 per square foot in the first quarter, so about $400,000 for that same-sized condo.

Ms. Wisniewski says low interest rates are convincing parents to step up and buy their children homes. The condominium represents an attractive alternative to those parents because the costs are stable.

"They know what the maintenance costs will be," she says. "[Parents] are thinking, 'I'm not worried my children are too young to accept the responsibilities of home ownership if I set them up in an apartment. They don't have to recognize the responsibilities of maintenance in an apartment.' "

Parents might also see a condominium as a way to get their kids to start a family. The survey found 36% of Canadians are willing to raise families in a condo.

"One of the reasons for that is affordability," says Ms. Wisniewski. "Where are the new condominiums being built? They are being integrated in really nice existing neighbourhoods with all the infrastructure and all the schools and amenities."

Brian Johnston, president of developer Monarch Corp.'s Canadian division, says he doubts families will ever be integrated into the condominium stock, but does agrees with the premise that parents are helping to buy housing for their children. He says parents often want to keep children close to them so they'll chip in for a condominium in a nearby neighbourhood.

"How do we know they're helping out? They tell us when they are writing the cheques for the deposit," Mr. Johnston says.

Mr. Johnston said when it comes to recent immigrants to Canada, there is "lots of help" from family members to get that first home. "Condominiums are not inexpensive and they're going to need that help, particularly if the younger ones have not had time to build up their finances."

The builder has his own children and, based on today's prices, he figures he's going to have to lend a helping hand. "I don't expect them to be able to buy a condo ... before they are 30. That is just part of the deal [for parents]," says Mr. Johnston.

It's not like Baby Boomers don't have the cash. There have been endless studies that suggest the Boomers are set to inherit billions of dollars in the coming years from their parents.

Craig Alexander, deputy chief economist with TD Bank Financial Group, says there is no hard data to suggest how much parents are helping children, but they certainly have the financial capacity to lend a hand.

Canadians have $1.5-trillion invested in stocks and mutual funds with $500-billion of that figure in capital gains.

"The generation before the Baby Boomers were big savers and, as a consequence, there is a very large income transfer going to take place over time," says Mr. Alexander, adding it makes sense that some of that money is going to end up in housing and real estate.

For first-time buyers facing rising rates and increasing prices, the helping hand couldn't come at a better time - just ahead of tighter mortgage financing rules. Most of them probably hope their folks go from "considering" buying a condo to actually doing it.

 Rod's Musings

Now that Europe appears to have bought itself some time from those vicious currency and bond speculators (and what a price tag, at a cool trillion dollars), individuals are also feeling a little more relieved about their finances.  And they are indeed quite eager to put May behind them. 

For now, though, let's assume there are no further shocks to the system for the coming weeks and that volatility subsides.  The focus for individuals and households should then return to their own fundamentals.  What does the job and income situation look like?  Are financial plans still intact?  And what about that mortgage coming due next month?

Ah, the dreaded mortgage decision.  Despite the signs of an impending rise in the general level of interest rates and warnings from government officials, I find that there is still a lack of conviction among Canadians as to whether they should lock in their mortgages at prevailing rates, versus holding on to a floating rate mortgage.  It's therefore a good time to review the facts and fiction out there so that you can make a better educated decision.

Regardless of the recent jump in fixed rates, we still look to be at the bottom end of a trend in mortgage rates since 1981.  You may remember that year, when five-year term rates were in excess of 22% in Canada. It came at the same time that North America fell victim to a painful double-dip recession.  Of course, inflation was also sitting around 12% at the time.  Many families lost their homes to be sure, but the threat posed by higher rates today is greater because of the fact that debt levels are much higher today than back then.  The increased leverage in the housing sector, to say nothing of general credit among individuals, increases the sensitivity to rates - something we saw so very clearly in the US housing sector from 2003 to 2007. 

Today, floating rate mortgages are still trading at various spreads to the prime rate, which itself hasn't budged from 2.25% since April of last year.   That said, whether you chose a floating versus fixed rate mortgage doesn't matter anymore since the new federal regulations went into effect last month.  You must now meet the requirements or standards of a five-year term mortgage even if you want the adjustable rate variety.  In other words, if you're not going to budget for the possibility of short-term rates rising to where prevailing five-year rates are today, the government has done it for you.  Today, to take a variable product mortgage you must qualify on the Bank of Canada Qualifying Rate, at writing today is 6.10%! What many people do not realize though is that for a 5 fixed year term, we can still qualify at the current 5 year rates! The Bank of Canada Qualifying rate only applies to terms lower than 5 years and variables. So in essence, the government is attempting to get people to lock in their rates instead of hedging on a variable to avoid a US like catastrophe if rates rise significantly. If everybody was on a variable rate mortgage and could not afford the increases we would have a similar meltdown. I personally think they started this a little late, but nonetheless, it is a good safeguard for the industry as a whole! 
That five-year rate has been a bit of a bouncing ball over the past year.  In April 2009, the conventional five-year rate (or the posted rate) fell to a generational low of 5.25%, (3.79% on the market)coinciding with the last quarter-point rate cut by the Bank of Canada.  Through the summer and fall of last year, the rate got as high as 5.85% (4.39% on the market), but then eased back during the early months of this year as equity markets got a little shaky and bond yields stabilized.  That all changed towards the end of the first quarter.  Economies were looking a lot better, equities picked up the pace and inflation fears began to creep back in the market.  There was also a definite shift in opinion as to when the Bank of Canada would start hiking rates, with the consensus focused on June 1st.  Since bond yields needed to price in this new anticipation, other rates went up in sympathy, including mortgage rates.  To give you an illustration, the five-year Government of Canada yield rose from about 2.4% in February to 3.2% in April. The five-year mortgage rate, which reached a low of 5.25% in March, shot up to 6.25% (4.49% today) by late April. 


But, have a look at where things are today.  Despite the recent mortgage increases to cover yields, bond yields are rising again as investors move money from fixed income to stocks (not what I'm necessarily recommending).  Assuming the European calm persists, economic fundamentals in North America continue to firm and China doesn't upset the apple cart too much with its measures to rein in credit in that country, bonds will likely come under more pressure, sending yields higher.  This should pave the way for five-year mortgage rates in Canada to climb to 6.5%(4.89%) and then potentially to 7%.  Note, the high before the recession was only 7.5% - a level which could be reached this year under ideal economic conditions.  


So what to do! The Government wants you to lock in, and is factoring in guidelines to make sure that IF rates go up, people in variables can handle the increases! I think that tells you all you need to know! Rates are going up, simple as that, and historically, the current 5 year Fixed rates are still way below average over the past 40 years! We were spoiled a little when the rates were hovering around 3.79 or so, but that needed to change, has changed, and will continue to change in an upward direction. It was creating a false economy of house owners, those who barely qualified at these rates and have no wiggle room if rates went up. 


 Hopefully we do not experience sticker shock in 5 years when the fixed mortgage rate mortgages mature! The people in variables will be able to get used to increased payments on a tiered basis as rates go up, but in the end, I really think we will all end up in the same place, with Fixed versus Variable winners or losers decided by timing and small amounts, higher rates driven by inflationary times, and all we can do is watch our debt levels to be sure we can work with the new interest rate world!