MORTGAGE INDUSTRY HAS NEW RULES
Last month, (April 2007) the federal government decided to lower the minimum down payment requirement for mortgage default insurance from 25% to 20%.
Under the existing regulations, which have been in place since the 1960s, banks are prohibited from making mortgage loans for more than 75% of the property without having you purchase mortgage insurance, which generally costs about 2 to 3% of the home's purchase price.
Good news? Since buyers typically add this insurance cost to their loan principal, some of them could save more than a few bucks in interest charges down the road.
With five-year mortgages at major institutions sneaking up to 6% right now (2007), a $5,000 insurance premium would add approximately $3,400 in extra interest to a mortgage over the next 25 years. Those who could already come up with a 25% down payment, however, can now just go with 20%, using the other 5% to offset fees and closing costs.
To calculate your likely premium, multiply the mortgage amount by the premium rate. For example, if the cost of the home you're buying is $200,000 and you are using a 10% down payment, the mortgage amount is $180,000. In this case, the premium would be: $180,000 x 2%, which equals $3,600.
There are certainly more vendors than there once were. Until last fall, for instance, the government's Canada Mortgage and Housing Corporation and smaller rival Genworth Financial Canada were the only mortgage default insurers of any size in Canada. More recently though, big international players like AIG United Guaranty have moved in, the first of many American insurers and lenders anxious to keep billions of dollars flowing into the residential housing market.
While only the real doomsayers are predicting that this incursion will lead Canada down the same path that has left the U.S. mortgage market so badly bruised, it's hard to ignore billions in defaulted mortgages across the border. The problem, of course, has been the number of mortgages offered to "sub-prime" borrowers who were high credit risks.
To fuel the engine, some lenders structured these loans in ways that would only work if housing prices kept increasing dramatically – which they haven't. Add to that artificially low "teaser" interest rates early in the mortgage term, low or even no down payment deals, and bonuses to offset closing costs, and you've got too many borrowers moving into new houses they really can't afford.
Even staid CMHC now offers mortgage insurance on "interest-only" mortgages. After the interest-only period, the balance is amortized in the same way as traditional mortgage loans, driving payments up.
And while the 25-year mortgage has been the standard maximum term, the rapid escalation of housing prices has made that old school. Last summer, Genworth started insuring 35-year mortgages, trumping a similar move by CMHC. That extension can add tens of thousands of dollars in interest to the cost of even a small mortgage, but it certainly lowers the monthly payment enough to get more marginal buyers in the door.
How much? Well, with a traditional 25-year, $300,000 mortgage and a 6% interest rate, you'd be looking at $1,919 a month in payments. Extend that to a 35-year term and the monthly payment drops to $1,695. At the same time though, the total mortgage costs jumps by $136,387 to $712,213.
Of course, the level of jeopardy is relative. In Canada, sub-prime lending represents only about 5% of new loans, compared to 20% in the United States, according to data from the Canadian Association of Accredited Mortgage Professionals.
And keep in mind that U.S. household debt is approximately 26% higher per capita than in Canada in the first place, largely due to the different tax policies between the two countries. Unlike here, U.S. homebuyers can deduct mortgage interest payments from their taxes, a big incentive to spend as much as possible on that castle.
Today, mortgage brokers place about 30% of all residential mortgages, up from 8 per cent in 1998, according to CAAMP. They're particularly popular among younger Canadians, with one-third of homeowners under 35 using them instead of traditional financial institutions, according to a recent report by CIBC World Markets.
