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Housing and the Big, Bad, Budget
A lot has been said about Thursday's budget announcement. From Flaherty's shoe selection to a vague job-training program, many Canadian's were left slightly confused following the much-anticipated announcement. With that being said, Flaherty's eighth (and potentially final) budget announcement could have been worse, especially for the mortgage industry. Thursday's budget included a tightening of controls on mortgage lending once again, as well as another promise to further limit lender access to bulk mortgage insurance. While this will inconvenience some lenders, it's actually good news for taxpayers. The announcement is just the latest in a long line of moves from the Finance Department that touch on concerns over the housing market. As Canadian's continue to sink themselves deeper into household debt, Flaherty once again verbalized his mounting anxiety over interest rates. “Our concern, my concern for a number of years, is with very low interest rates that people can afford their mortgages when interest rates go up,” Flaherty told reporters while purchasing is budget-day shoes, a long-running Canadian tradition, at a Roots factory in Toronto on Wednesday. The Housing Market Under a MicroscopeFlaherty has made a career out of meddling in the in the mortgage market, influencing a number of policy changes in the past decade. And while home sales have slowed significantly and prices are beginning to drop in some of the critical markets since Ottawa's intervention last summer, Flaherty still feels that more needs to be done to protect consumers from themselves. As the economy slowly begins to right itself and interest rates eventually begin to rise, economists like Flaherty are worried that current mortgage holders won't be able to meet their increased mortgage payments. And since Ottawa backstops mortgage insurance, the Canadian taxpayer would be on the hook to cover this exposure. The Bad Side of Bulk Mortgage InsuranceMortgage insurance, which is backed up by the Canadian Mortgage and Housing Corporation, is intended to help consumers with low down payments enter the housing market more easily. Unfortunately, over time, it's also become a tool for banks to manage their risk. Banks' appetite for bulk mortgage insurance (also referred to as portfolio insurance) has continue to grow over the years. In fact, it's one of the main factors behind the government-owned CMHC's growing balance sheet. You see, whenever a new homeowner purchases a house without the mandatory 20 percent down, the mortgage needs to be insured to protect the lender. However, banks also offer this extended coverage to insure large swaths, or portfolios, of mortgages that don't necessarily need the protection. The budget states that, “With the financial crisis well behind us, the government is amending the rules for portfolio insurance to increase market discipline in residential lending and reduce taxpayer exposure to the housing sector.” New RulesFallout from the budget will include new rules that will gradually limit the sale of insurance on low loan-to-value mortgages (i.e. mortgages where the consumer ponies up a higher down payment) to those that are being used in Ottawa's securitization program through the CMHC. This will prevent banks from insuring their portfolio mortgage products in order to reduce their capital requirements. Flaherty's changes will also enable Ottawa to stop the use of any taxpayer-backed insured mortgages (even the high ratio ones)as collateral in securities that are not sponsored by the Canadian Mortgage and Housing Corporation. This will protect Ottawa's potential exposure. Flaherty and the Department of Finance noted that they intend to further consult with the finance industry before implementing this rules later in the year. In the meantime, financial institutions will continue to have access to a broad array of financing options. As always, we'll follow this story as it unfolds right here on the Mortgage Talk Canada Blog.
Canadian Income Survey, 2016
Canadian families and unattached individuals had a median after-tax income of $57,000 in 2016. Median after-tax income increased from 2011 to 2014, but held steady in 2015 and 2016. The slower growth in 2015 and 2016 was associated with the resource price slowdown, which began in the second half of 2014.
After-tax income is comprised of income from market sources and government transfers. Market income includes employment income, retirement income and income from investments, while government transfers include benefits to seniors, child benefits,
Employment Insurance benefits, social assistance and other benefits. While growth in overall median after-tax income slowed in 2015 and 2016, there was also a significant increase in government transfer income. Median income from government transfers rose from $5,800 in 2014 to $7,400 in 2016. About half of this rise was due to increased child benefits, which became a larger source of income for families with children.
In 2014, the median child benefit received by couple families with children were $2,500. This rose to $3,400 in 2015, and to $4,000 in 2016. For a lone-parent family, the median benefits rose from $5,100 in 2014 to $5,800 in 2015, and then to $6,400 in 2016.
Bank of Canada maintains overnight rate target at 1 1/4 per cent
The Bank of Canada today maintained its target for the overnight rate at 1 1/4 per cent. The Bank Rate is correspondingly 1 1/2 per cent and the deposit rate is 1 per cent. Global growth remains solid and broad-based. In the United States, new government spending and previously-announced tax cuts are anticipated to boost growth in 2018 and 2019. However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks.
In Canada, the national accounts data show that the economy grew by 3 per cent in 2017, bringing the level of real GDP in line with the projection in the Banks January MonetaryPolicy Report (MPR). In the fourth quarter, GDP growth was slower than expected, largely due to higher imports, while exports made only a partial recovery from their third-quarter decline. The gain in imports mainly reflected stronger business investment, which adds to the economys capacity.
Strong housing data in late 2017, and softer data at the beginning of this year, indicate some pulling forward of demand ahead of new mortgage guidelines and other policy measures. It will take some time to fully assess the impact of these, as well as recently announced provincial measures, on housing demand and prices. More broadly, the Bank continues to monitor the economys sensitivity to higher interest rates. Notably, household credit growth has decelerated for three consecutive months. The implications of the recent federal budget for the outlook for growth and inflation will be incorporated in the Banks April projection.
Inflation is running close to the 2 per cent target and the Banks core measures of inflation have edged up, consistent with an economy operating near capacity. Wage growth has firmed, but remains lower than would be typical in an economy with no labour market slack. Inflation is fluctuating because of temporary factors related to gasoline, electricity, and minimum wages.
In this context, Governing Council maintained the target for the overnight rate at 1 1/4 per cent. While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economys sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.