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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.
Mortgage Deferral Agreements and Their Impact
CMHCs Fall 2020 Residential Mortgage Industry Dashboard discusses mortgage deferral agreements and their impact.
At the end of the second quarter, credit unions, mortgage finance companies (MFCs) and mortgage investment entities (MIEs) have allowed mortgage deferral agreements for about 6%, 7% and 7% of their respective residential mortgage portfolios.
Chartered banks have allowed 16% of mortgages to go into deferral since the beginning of the pandemic. Of these, close to 2 out of 3 borrowers had resumed payments on their mortgages at the end of the third quarter of 2020. In the coming months, we could see higher delinquency rates if some borrowers are unable to resume their payments; these mortgages will have to be booked as arrears.
These deferral agreements have affected financial institutions cash flows, with reductions of:
4% in scheduled mortgage payments
3% in non-scheduled payments (accelerated monthly payments and lump-sum payments)
While remaining at low levels, mortgages in arrears (90 or more days delinquent) have increased slightly between the first and second quarters of 2020 from:
0.24% to 0.26%, on average, for chartered banks
0.23% to 0.25%, on average, for non-bank mortgage lenders
We also observe an increase in early-stage delinquencies (31 to 59 days and 60 to 89 days), which suggests that arrears could continue on an upward trend.
Bank of Canada will maintain current level of policy rate until inflation objective is achieved, continues its quantitative easing program
The Bank of Canada today maintained its target for the overnight rate at the effective lower bound of percent, with the Bank Rate at percent and the deposit rate at percent. The Bank is maintaining its extraordinary forward guidance, reinforced and supplemented by its quantitative easing (QE) program, which continues at its current pace of at least $4 billion per week.
The rebound in the global and Canadian economies has unfolded largely as the Bank had anticipated in its October Monetary Policy Report (MPR). More recently, news on the development of effective vaccines is providing reassurance that the pandemic will end and more normal activities will resume, although the pace and breadth of the global rollout of vaccinations remain uncertain. Near term, new waves of infections are expected to set back recoveries in many parts of the world. Accommodative policy and financial conditions are continuing to provide support across most regions. Stronger demand is pushing up prices for most commodities, including oil. A broad-based decline in the US exchange rate has contributed to a further appreciation of the Canadian dollar.