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BLOG / NEWS Updates
The Spectrum
MORTGAGES
By Mehboob Sheriff, B.Comm., LL.B.
The Spectrums in Mortgage Lending
Even though I have been in the Real Estate and Mortgage fields for over 40+ years- all I can muster as an answer to what is the Mortgage Rate? is a weak depends.
Our topic for this article is Spectrums in Mortgage Lending. Basically, a spectrum is a range just like the rainbow has a spectrum of colours similarly in mortgage lending we have a range of borrowers, lenders, terms and properties. Each has its own spectrum which in turn determines the rate.
The Borrower Spectrum: There are many types of borrowers but for underwriting purposes they are evaluated by the 5 Cs of Credit which serve to form both a quantitative and a qualitative measure for lending. The five-Cs-of-credit are summarized as:
Character: This is mostly obtained from the Credit Report. The two credit reporting agencies in Canada are Equifax and TransUnion. The reports detail the loans you have and how good/bad are you in keeping to your commitments. These are then calculated into a score (referred to Beacon or FICO rating), which range from 300 to 900. Normally a score of 650 or above should qualify you for a standard loan.
Capacity: This measures the borrowers ability to meet his commitments. This is done by comparing the income against his debt or other recurring expenses called the DTI (debt to income ratio). As an aside, recently studies find that both Vancouver and Toronto are facing high DTIs. Usually, a lender would like to see DTI below 35% but may consider as high as 43%. We will discuss this more when we study the Spectrum of Lenders.
Capital: How much money does the borrower have and how much is he willing to put as a down payment on the property? The larger the down payment more security for the lender. The down payment also determines if a conventional or insured mortgage is obtained.
Collateral: What is the loan against? In other words what is the property value and what is the loan that a borrower is seeking. For this purpose, a lender would require an appraisal to determine the value of the property and the subsequent loan to value ratio (LTV). An LTV of 80% or less would be a conventional mortgage.
Conditions: What is the purpose of the loan, what is the term of the loan, are there options to prepay, interest only or blended payments, etc., all come under conditions. These terms and conditions help a lender match and determine the interest rate charged.
The Lender Spectrum: The lenders can basically be categorized as follows:
A Lenders: If you meet the lenders requirement of Character Capacity they would be your best bet for a low interest rate. They like a good credit rating (650, preferably higher) and good income ratio. Capital is not as important for if you do not have the down payment they would simply offer you an insured mortgage. Remember you pay the premium and their loan is insured!
B Lenders: They might be your second-best alternative to get a reasonable interest rate perhaps .50 to 1% above the A Lenders. You may have to approach them if you are a bit weak in your credit report or income.
Alternate Lenders: These are a very important section of lenders for those borrowers who for whatever reason cannot meet the criteria of the A B lenders. This could be because of the type of property, documentations, income verifications, Stress Tests, etc. They are more expensive than the first two and could be anywhere from 1% to 3% above the A lenders plus likely that they would charge a Lenders fee.
Private Lenders: The have always been a part of the Lenders Spectrum but they seem to be playing more and more role recently because of the stress test and types of properties like raw land, development land, gas stations, 2nd or 3rd mortgages on hotels, restaurants, etc. Their term is usually shorter say up to 1 year, and the rates can vary greatly. Lender fess of 1 to 2% are very common.
To keep this article short, we will not discuss the Spectrum of properties in this article.
In my opinion the mort important element in borrowing is the interview itself.
A good, experienced mortgage broker will help you see where you are in the mortgage spectrum and which lender would be the best match for you. Also, if there are any shortfalls in your application this can be identified and explained in a manner that helps your case. No sense going from lender to lender for the lenders can see your history. Do it once, properly!
Bank of Canada maintains policy rate, continues forward guidance and current pace of quantitative easing
The Bank of Canada on September 8th held 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 on the path for the overnight rate. This is reinforced and supplemented by the Banks quantitative easing (QE) program, which is being maintained at a target pace of $2 billion per week.
The global economic recovery continued through the second quarter, led by strong US growth, and had solid momentum heading into the third quarter. However, supply chain disruptions are restraining activity in some sectors and rising cases of COVID-19 in many regions pose a risk to the strength of the global recovery. Financial conditions remain highly accommodative.
In Canada, GDP contracted by about 1 percent in the second quarter, weaker than anticipated in the Banks July Monetary Policy Report (MPR). This largely reflects a contraction in exports, due in part to supply chain disruptions, especially in the auto sector. Housing market activity pulled back from recent high levels, largely as expected. Consumption, business investment and government spending all contributed positively to growth, with domestic demand growing at more than 3 percent. Employment rebounded through June and July, with hard-to-distance sectors hiring as public health restrictions eased. This is reducing unevenness in the labour market, although considerable slack remains and some groups particularly low-wage workers are still disproportionately affected. The Bank continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery.
CPI inflation remains above 3 percent as expected, boosted by base-year effects, gasoline prices, and pandemic-related supply bottlenecks. These factors pushing up inflation are expected to be transitory, but their persistence and magnitude are uncertain and will be monitored closely. Wage increases have been moderate to date, and medium-term inflation expectations remain well-anchored. Core measures of inflation have risen, but by less than the CPI.
The Governing Council judges that the Canadian economy still has considerable excess capacity, and that the recovery continues to require extraordinary monetary policy support. [The Bank of Canada] remains committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Banks July projection, this happens in the second half of 2022. The Banks QE program continues to reinforce this commitment and keep interest rates low across the yield curve. Decisions regarding future adjustments to the pace of net bond purchases will be guided by Governing Councils ongoing assessment of the strength and durability of the recovery. [The Bank of Canada] will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.
Information note
The next scheduled date for announcing the overnight rate target is October 27, 2021. The next full update of the Banks outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.
Source: Bank of Canada
Ontario weighs down residential permits nationally
The total value of building permits in Canada decreased 3.9% to $9.9 billion in July. All provinces except British Columbia and Newfoundland and Labrador posted lower values, with the majority of the national decline reported in Alberta (-23.4%). Building permits fell 3.1% in the residential sector and 5.6% in the non-residential sector.
On a constant dollar basis (2012=100), building permits fell 3.8% to $7.0 billion.
Seven provinces reported declines in the residential sector, led by Ontario (-10.5%).
Single-family permits fell 9.6% in July, with two provinces showing growth. Ontario (-9.1%) contributed the most to the decrease.
Construction intentions for multi-family units rose 2.7% in July. British Columbia posted an increase of 55.1%, which was driven by high-valued condo projects in the city of Surrey. In contrast, Ontario reversed strong growth in June (+67.6%) and fell 11.7% in July due to fewer high-valued condo permits reported for the census metropolitan areas (CMA) of Hamilton and Guelph.
