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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!
Budget 2019
To help make homeownership more affordable for first-time home buyers, Budget 2019 introduces theFirst-Time Home Buyer Incentive.
The Incentive would allow eligible first-time home buyers who have the minimum down payment for an insured mortgage to apply to finance a portion of their home purchase through a shared equity mortgage with Canada Mortgage and Housing Corporation (CMHC).
It is expected that approximately 100,000 first-time home buyers would be able to benefit from the Incentive over the next three years.
Since no ongoing payments would be required with the Incentive, Canadian families would have lower monthly mortgage payments. For example, if a borrower purchases a new $400,000 home with a 5 per cent down payment and a 10 per cent CMHC shared equity mortgage ($40,000), the borrowers total mortgage size would be reduced from $380,000 to $340,000, reducing the borrowers monthly mortgage costs by as much as $228 per month. Terms and conditions for the First-Time Home Buyer Incentive would be released by CMHC.
CMHC would offer qualified first-time home buyers a 10 per cent shared equity mortgage for a newly constructed home or a 5 per cent shared equity mortgage for an existing home. This larger shared equity mortgage for newly constructed homes could help encourage the home construction needed to address some of the housing supply shortages in Canada, particularly in our largest cities.
The First-Time Home Buyer Incentive would include eligibility criteria to ensure that the program helps those with legitimate needs while ensuring that participants are able to afford the homes they purchase. The Incentive would be available to first-time home buyers with household incomes under $120,000 per year. At the same time, participants insured mortgage and the Incentive amount cannot be greater than four times the participants annual household incomes.
Budget 2019 also proposes to increase the Home Buyers Plan withdrawal limit from $25,000 to $35,000, providing first-time home buyers with greater access to their Registered Retirement Savings Plan savings to buy a home.
Bank of Canada maintains overnight rate target at 1 ¾ per cent
The Bank of Canada today maintained its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 per cent.
Recent data suggest that the slowdown in the global economy has been more pronounced and widespread than the Bank had forecast in its January Monetary Policy Report (MPR). While the sources of moderation appear to be multiple, trade tensions and uncertainty are weighing heavily on confidence and economic activity. It is difficult to disentangle these confidence effects from other adverse factors, but it is clear that global economic prospects would be buoyed by the resolution of trade conflicts.
Many central banks have acknowledged the building headwinds to growth, and financial conditions have eased as a result. Meanwhile, progress in US-China trade talks and policy stimulus in China have improved market sentiment and contributed to firmer commodity prices.
For Canada, the Bank was projecting a temporary slowdown in late 2018 and early 2019, mainly because of last years drop in oil prices. The Bank had forecast weak exports and investment in the energy sector and a decline in household spending in oil-producing provinces. However, the slowdown in the fourth quarter was sharper and more broadly based. Consumer spending and the housing market were soft, despite strong growth in employment and labour income. Both exports and business investment also fell short of expectations. After growing at a pace of 1.8 per cent in 2018, it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January.
Core inflation measures remain close to 2 per cent. CPI inflation eased to 1.4 per cent in January, largely because of lower gasoline prices. The Bank expects CPI inflation to be slightly below the 2 per cent target through most of 2019, reflecting the impact of temporary factors, including the drag from lower energy prices and a wider output gap.
Governing Council judges that the outlook continues to warrant a policy interest rate that is below its neutral range. Given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook. With increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets, and global trade policy.
Information note
The next scheduled date for announcing the overnight rate target is April 24, 2019. 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.
https://www.bankofcanada.ca/2019/03/fad-press-release-2019-03-06/
