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 May 17, 2008 Resilient Canada safe from US-like crisis It's difficult to imagine what lenders and brokers were thinking when they dreamed up the shaky mortgage products that set off the U.S. housing meltdown. Take the "ninja" mortgage, for example. That's the catchy phrase one lender used for the "no income, no job, no assets" home loan for which just about anyone could qualify. Other lenders offered "liar loans" that let borrowers merely state their incomes without producing backup documentation. And then you had teaser loans with reset bombs. Those buyers got ultra-low interest rates to start, but were hit with huge increases later on. In Canada, lending standards never deteriorated to the same extent, thanks to a less fragmented and more conservative banking sector and different regulatory environment. But regulators have recently cut lenders in Canada some slack. Combine those changes with the entrance of new players on the mortgage scene and you have more choices for Canadian consumers, but perhaps some hidden risks for the housing market. "Canada was kind of an anomaly compared to international mortgage markets," said Derek Holt, vice-president of Scotia Capital Economics, part of Scotiabank. "We didn't have as much mortgage product innovation. "Until recently, it was the 25-year, conventional cookie-cutter mortgage with a fixed or variable rate and a few options." That changed in 2006, when the federal government liberalized the mortgage insurance market in Canada, Holt explained. Until then, only Canada Mortgage and Housing Corp. (CMHC), the government-owned housing agency, and one other company offered the mortgage insurance typically required as a guarantee against default when homebuyers put down less than 20 per cent of the purchase price. The 2006 changes allowed more foreign mortgage insurers to come to Canada. The arrival of AIG United Guaranty and imminent arrival of other insurers stimulated competition. New products emerged, including 40-year amortizations, 100 per cent financing and interest-only mortgages. But the proliferation of options has some homebuyers confused. "There are so many variables in the mortgage market that you really need a road map," said Jim Rawson, a regional manager in Toronto with Invis, which claims to be Canada's largest independent mortgage brokerage. So how do some of the new products work and how risky are they for borrowers and the housing market generally? With interest rates dropping, consumers might consider a front-loaded variable rate mortgage. This option gives you a larger-than-normal discount from the prime interest rate for an initial period, say six months, before you have to decide whether to lock into a fixed rate. "This can be a terrific product for people considering playing the (interest) rate game . . . if you think rates will come down again," Rawson said. The only trick is to make sure you are, indeed, allowed to convert to a fixed rate and that when you do you'll get the best discounted rate available, Rawson added. Longer amortization periods, now up to 40 years, also are new. This option can suit early-career borrowers with high income-earning potential, people with other major short-term expenses, buyers in higher-priced urban markets and income property investors. Holt estimates longer-term mortgages now account for three-quarters of monthly insured purchase applications in Canada, with 40-year products accounting for half of that. The upside of this change, according to Holt, is it will bring more buyers into the market. A longer period to repay also means less risk to credit markets in the short term because it eases cash flow difficulties for borrowers, he said. But over the long haul, 40-year mortgages raise a new set of risks for housing and credit markets. "The shock risks from interest rate changes and changes in employment become accentuated if you are using higher-leveraged products," Holt said. And, of course, there is no free lunch: 40-year terms come with tougher qualifying criteria, higher interest rates and higher mortgage insurance premiums. Then there are interest-only mortgages. These loans let borrowers pay only interest and no principal for the first five or 10 years. This option can be attractive for young buyers with high income-earning potential or borrowers expecting a large inflow of money, from an inheritance, for example. Given all these innovations, this is "no longer your grandfather's mortgage market," as Holt put it. But that doesn't mean Canada is headed down the same treacherous path as the U.S. The Canadian market is more resilient, according to Holt. Subprime or low-quality mortgages make up only a small portion of Canadian mortgages, unlike the U.S. peak of one-in-four in 2006. (prepared by Sarah Dougherty/Calgary Herald) FOR YOUR REFERENCE local financing professionals for Salmon Arm, Shuswap area include: Corine Hild Tekemar 250.832.8766 1.800.658.2345 child@sunwave.net Vic Hamilton Bayfield Mortgage 250.833.9183 1.866.252.4526 vic@sunwave.net Sue Foubert TD Canada Trust 250.833.8790 MAKING A MOVE to the Shuswap, Salmon Arm area contact local real estate professional june@juneconway.com Go Back To The Market Updates Page Questions? No problem! For more information, please feel free to contact June Conway toll free at +1.888.657.7123. Of course, you could always just email June Here . |
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