We’re getting a lot of questions lately about mortgages, so we thought we’d get an expert to answer some of them. Gord McCallum, the Broker at First Foundation Mortgages here in Edmonton has provided some answers below, and will be contributing to the blog periodically to update us on what’s going on with mortgages.
Is it harder to get a mortgage these days?
The short answer is yes! If your credit is beat up, you’re buying a beat up house, you’ve got too much debt, no down payment, or you can’t prove your income it’s tough to get a mortgage. Otherwise, it’s easy!
The nature of the current mortgage market is that credit is more difficult to come by for lenders – therefore, they’re stingier than they have been in the recent past because they can’t afford to take any more risk. The good news is that, for 80% of people out there, they’ll still qualify easily for a mortgage. There is always demand for qualified applicants and good homes. That is simply being accentuated because of the current economic environment. Don’t forget, lenders make money by lending money…so they want to lend it to you. You just have to be able to pay it back.
I heard that rates have shot up! Is this true?
Actually, not really. Without getting technical, rates have both decreased AND increased – at the same time. From a technical standpoint, rates have decreased…however, borrowing has gotten much more expensive, so the spreads between the true cost of borrowing and what lenders are paying have increased. The net result is a slight increase in some rates – but nothing serious. In fact, interest rates are still very low on a historic basis and we’re likely to continue to see rates that are affordable for Canadians who have good jobs and are not carrying too much debt.
What happens if a lender goes out of business?
We’ve heard this question a million times. The reality is that some banks, trust companies, and brokers have gone out of business in the US and the same could, theoretically, happen up here. The good news is that the possibility of that happening up here is small, and it doesn’t have to affect your decision making or prevent you from getting a mortgage. If you’re afraid of a bank or mortgage-specific lender going out of business then this should put your mind at ease:
- Most Canadian banks and mortgage lenders have very little exposure to the US sub-prime market
- Most of the lenders we deal with that aren’t banks are capitalized with money from large banks and or large institutional investors
- The Canadian banking / financial system is the strongest in the world
- Even in the US the failure of several banks represents only a small fraction of the entire banking system and has not caused the foreclosure of homes. (That was caused by people not making their payments)
- Most importantly these financial institutions are lending YOU the money – not the other way around. Best case scenario? You get a free house (not likely). Worst case scenario? Someone else buys the mortgage and you continue to make payments – just to another company. Same terms. Same contract. No risk.
What should I do going forward?
- This too shall pass. Always remember that we’ve been through tough times before and will probably go through them again some day.
- Stop reading the newspaper. It only makes things (seem) worse and it won’t make your payments for you.
- Live within your means. If you can afford to spend or invest, there are bargains to be had out there. If not, reduce your spending and consolidate your debt (you can refinance to do this, and it can drastically improve your cash-flow and/or reduce your interest rates).
- Most importantly, make your payments so your credit stays strong and don’t panic. If you want to buy a home, buy one. If you’re thinking of investing in real estate or the equity markets, this is your time machine – you can buy now for prices we haven’t seen in a long time.
The rate on closed variable rate mortgages has shot up in the past month by 1.5%. Mortgage prime is currently 4%. Anybody with a variable rate mortgage negotiated 3 months ago will have a locked in rate at prime -.5 or if they were lucky, prime -.8. If you visit the bank today, they’ll offer a rate no better than prime +1.00%!
I think for new buyers or people renewing, the best option is a 1 yr closed at around 5.1%. When the credit markets thaw, it should be again possible to negotiate a decent variable rate.
correction, I should have said the spread on a closed variable rate mortgage has shot up by 1.5%.
True with regards to variables / adjustables. The pricing makes them unattractive currently.
There are some lenders offering 4.8% on a 1 year right now which is a great deal. The 5 year offers aren’t bad for people who are concerned about rates going up or who want to be more conservative.
Where did he (Gord McCallum) get this?
“The Canadian banking / financial system is the strongest in the world”.
Although I agree we are in a better situation than some others, that’s a pretty bold/generic statement.
Also, he says that worst case scenario if your lender goes under is that another lender would buy your mortgage? Yeah, or not because your home is worth less than the mortgage. Then what?
The feds may have already bought your mortgage Jeff.
Jeff:
It is a bold statement, but there should have been a link associated with it. Here’s the link. If you Google it you’ll see I’m not making it up:
http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20081009/canadian_banks_081009/20081009?hub=TopStories
Hi Jeff:
Forgot to answer your second question. In Canada, at least, prices have not come down enough to put most people (any?) with conventional mortgages at risk of that happening.
For those who purchased at the peak with 5% or 0% down, they might be under water right now but the mortgages are insured through CMHC or Genworth (which is 90% covered by CMHC, incidentally). Because it’s insured there is a market for that paper.
In the extreme worst-case scenarios the precedent has been set – the government will purchase the paper and hold on until the asset value recovers.
Gord,
Fair enough, I’m glad to see we have the strongest banking system.
Given that there is still room for things(housing prices) to go down, someone would have to be a strong buyer, with a strong stomach to match.
Jeff:
You might be right in most markets. Thankfully here in Edmonton it’s officially a “buyer’s market” (at least, according to the economists). I’d be curious to know whether or not Sheldon agrees.
I also heard Benjamin Tal from CIBC a few weeks ago and he said the same thing. Essentially prices are below equilibrium in Edmonton and have room to move upwards. It’s the only market in the country in that position currently. Some are balanced, and some still have room to go down.
Have a good weekend!
Here’s the link: http://www.firstfoundation.ca/blog/mortgage-articles/edmonton-housing-market-october-2008-20081022234/
Gord,
I also like see the thoughts and studies from parties that don’t have a direct interest in mortgage and housing. Your link from First Foundation and their findings are well….
They are an Edmonton Mortgage Broker.
Hi Jeff….
Yeah – it’s my company. But the link cites independent research. It’s just a blog post at my site. The original source is the Sauder School of Business – not First Foundation. Hope that helps.
Gord, that source from Sauder was already discussed here and their flawed approach. The reason why they came up with the conclusion that Edmonton is undervalued is because they used absolutely an unrealistic figure of $2200 for the median monthly rent in Edmonton. We all know that it is just not the case here.
Hi R,
I guess I missed that…thanks for pointing it out.
If it helps, other sources are saying the same thing. Benjamin Tal from CIBC was in town recently and had a different set of criteria which came to the same conclusion. Sorry I don’t have a link but maybe there’s one out there.