Dave's E-mail: 05/14/09 A Reason why the Canadian Real Estate market may not drop as much as the US

There is such an abundance of information out there, trying to predict if the recession is coming to an end, or has it even begun yet??…

Yes housing prices are showing signs of a reduction, but the question that I have been finding the toughest to answer is, “will we follow the US housing market, with substantial drops in housing prices?”

Previously my slant on this has been that the Canadian economy is not big enough to stand on its own, to not follow the US. However I recently came across this Youtube video which gives an opinion as to why prices are still falling in the US, and whether or not President Obama’s recent housing bail out will work.

This in itself may explain a part of why we are not dropping as fast as the US.

http://www.youtube.com/watch?v=wC315YLcbSw

We do not have the same surplus of new houses sitting vacant pulling down housing prices here in Canada.

However with this being said, there is still a downward pressure on the real estate market.

Last week, the most popular question my clients are asking is still the Fixed vs Variable rate question.

There are many clients basking in the glory of their Prime Minus… Variable rate mortgages. Some of my clients are actually currently at 1.25%, yes this is correct, WAIT before anyone responds asking for that same rate, No I can not get PRIME minus mortgages anymore. MY BEST VARAIBLE RATE IS PRIME + (plus) .55% or 2.80% APR for a 4 year term.

It has been real easy staying in a variable rate as the government has been taking drastic measures, dropping the Bank Rate on an almost monthly basis. With the Bank of Canada rate sitting at .25% there really is only one way for prime to go. UP…. At some point. No I don’t think it is going to go up next week or even the next couple of months, but one thing that is certain is that IT WILL INCREASE.

In a normal market, that would be when we leave the variable rate mortgage, and seek our Long Term Fixed rate mortgage. But when we are dealing with 75 year historical situations, it is difficult to count on anything being predictable.

My concern for the sit and wait position for the Variable rate mortgage clients is that once Prime starts to rise, the fixed rates we have available today may not necessarily be there..

The Bank of Canada Rate has dropped from 4.75% on Nov 2007 to .25% today………………… that is a staggering 4.50% drop.

But when you look at mortgage rates, they have not matched this drop. In fact they only reduced by less then half of the drop of the Bank of Canada.

Back in Nov 2007 we were offering a best 5 year fixed rate was 5.35%, today it sits at 3.57%..............only a drop of 1.78%.

This should be sending a very important message to the consumers.

One has to ask the question “WHY ????”

We can blame it on the losses the Canadian Banks had in the US, funding ninja mortgages….. I am sure that is part of it.

Another could be to cover the losses the Banks are having with the many clients sitting in the Prime minus mortgage portfolios.

But one of the latest developments has been the fact that the Bank’s are now actually “Securitizing” their entire mortgage portfolios with CMHC.


What does Securitizing a Mortgage Portfolio mean?

Up until recently, the only mortgages that were insured by CMHC were “High Ratio Mortgages”, meaning for those clients who want to put a mortgage on a property greater then 80% of the current value, then the consumer would have to pay for the insurance premium.

However in these volatile times the Bank’s are now insuring their entire mortgage portfolios. So even if your mortgage is at 50% of the current value, that mortgage will now be insured with CMHC. Now the Bank’s ideally would like the consumer to pay for this insurance premium on Conventional mortgages, but due to competitive purposes, they have chosen not to have the consumer pay for this cost. These premiums can be significant. If the new mortgage is currently at 80% of the current value of the property, and the client wants a 35 amortization, the premium the Bank is actually paying is 1.40% of the mortgage amount. This is having a significant cost on the over all profit of these new mortgages.

For a brief period of time we actually had lenders who were offering a lower mortgage rate for high ratio mortgages, because the consumer was paying for the insurance premium, not the Bank… Does this make sense, if your mortgage was at 50% of current value, your rate was higher then if it was at 95%. This eventually disappeared because not all Banks followed this same pricing strategy.

Bottom line I truly believe we are either at Rock Bottom on the 5 year rate, or are getting real close to the bottom…

Staying Variable is still getting you the lowest of the low….. But knowing you could have had 3.57% for the nest 5 years, waiting 2 - 6 months for prime to go up, could result in you now having to settle for a higher fixed rate. We are seeing increases in the Bond markets that will soon start to affect fixed mortgage rates.

So now you know why fixed rates have only dropped 1.78% instead of the full 4.50%

So please do not wait too long to call me.

Good news is because your actual rates are so low, being able to shop the open mortgage market is absolutely a possibility for most variable rate clients,, especially the ones in the Prime minus mortgages.

Yes, there would be a small penalty to get out of your current variable rate mortgage if you are not up for renewal… The clients in the current 1.25% mortgages would pay $312.50 per $100,000 of mortgage, but getting the lowest of the low 5 year fixed rate will more than offset that cost. A 0.25% lower 5 year fixed rate will save you almost $1250 over the next 5 years, and get you a lower monthly payment as well.

Please give me a call if you want to discuss your current mortgage options.

Thanks,

David Kendall

Mortgage Agent
License # M08004045

211 York Road, Unit 3, Dundas, Ont. L9H 1M9
OAC Mortgages Brokerage License # 10928
An independently owned and operated franchise of the Mortgage Alliance Network