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Why is Canada Different?

December 20, 2012

 

The U.S. mortgage interest rate deduction tax benefit played a limited role in stoking the U.S. housing bubble. This rule is absent in Canada and not a major saviour.

Lender recourse – Canada’s recourse system (which keeps people on the hook after foreclosure) does not provide a shield against a drop in house prices. If you are having difficulty with your mortgage payments please see us BEFORE you miss payments. There are programs that may assist you provided by CMHC and Genworth. Job loss, sickness, accidents all sorts of situations will be reviewed.

Canada’s low interest rates have kept our arrears for the most part in check. Back in 2007-08 the serious mortgage arrears rate in U.S. surged by more than 300%. This spike was largely caused by mortgage underwriting and granting of mortgages that was near-criminal. Canada’s arrears has always been lower thanks to our conservative lending practices. I am somewhat gritting my teeth when I say that but our way has always been common sense lending and then you do not get into trouble. 

Canadians are more vulnerable to rate hikes than the average American because our terms are far shorter. (5 years versus 15-30 years)

Sub Prime.. remember when our newsletters were going on about sub-prime? The U.S. crash was a subprime story. Subprime mortgages were 1/3 of all originations in the year before the crash and 20% of outstanding mortgages. 80% of U.S. mortgages had really, really low teaser rates that were risky floating rates and people could not afford the mortgage when the teaser rate expired. In Canada it is estimated that just 7% of our mortgages are subprime.

Skin in the game – 1/3 of U.S. mortgages in 2005 and 2006 were already in negative equity. More than half had less than 5% equity making Americans highly exposed to even a slight house price decline. In Canada approximately 20% of new originations have less than 15% equity in the property. In Canada negative equity is virtually non-existent.

No teasers—Canada qualifies variable rate or any term less than 5 year now at 5.24%, previously rate qualifying was at a 3 year posted rate. This was to allow for rate increases not to affect the borrower cash flow.

Better credit. Reports say that Canadian credit scores have improved over the past 4 years. I tend to largely disagree on this point. For example: Cellular bills, miss a payment and the credit score is negatively impacted, make a payment and the on time, payments do not show on your credit. Long and short of it is ..make your payments on time, even if it has to be a minimum. Late payments affect your credit negatively and stay on your credit for the next 7 years.****

40% of our net worth is in housing assets which creates significant employment in Canada Housing activities employs 890,000 people, created 425,000 net new jobs in the past decade and 18% of job creation from 2006 to 2011.

The Bank of Canada warnings to pay down our debt or face higher rates seem somewhat mute. But at the same time, yes we need to be wise with our debt load, and make a savings account possible for when the tough times of those unexpected arise. At this point normalizing interest rates or adding significant new housing restrictions could be economic suicide. That makes low rates probability well into next year, possibly beyond