New Toronto Store Now Open

Yesterday we officially opened our first Toronto location.
The address is 145 King St. W. Toronto.
James Laird is the store manager and is dealing with all the new store opening problems.
We also have hired a new employee, Bill, to help James out.
Come by to say hi to James and Bill if you get a chance.
Regards,
Dan Eisner

The Canadian Home Renovation Tax Credit

How Does It Work?

The 15-per-cent credit may be claimed on the portion of eligible expenditures exceeding $1,000, but not more than $10,000, meaning that the maximum tax credit that can be received is $1,350.

The credit can be claimed on eligible expenditures incurred on one or more of an individual’s eligible dwellings. Properties eligible for the HRTC include houses, cottages and condominium units that are owned for personal use.

Renovation costs for projects such as finishing a basement or re-modelling a kitchen will be eligible for the credit, along with associated expenses such as building permits, professional services, equipment rentals and incidental expenses.

Routine repairs and maintenance will not qualify for the credit. Nor will the cost of purchasing furniture, appliances, audio-visual electronics or construction equipment.

Who Can Claim the HRTC?
Taxpayers can claim the HRTC when filing their 2009 tax return.
Eligibility for the HRTC will be family-based. For the purpose of the credit, a family is
generally considered to consist of an individual, and where applicable, the individual’s
spouse or common-law partner. Family members will be able to share the credit.

More detail

How Government Bond Yields Relate To Mortgage Rates

Hello
Rates continue to fall:5 year fixed Quick Close is at 3.69% (3.85% regular)Close variable at P+0.5% (3.00%)

How Government Bond Yields Relate To Mortgage Rates
Many people don’t realize that there is a very strong correlation between mortgage rates and the Government of Canada bond yields. Bond yields change daily and so can fixed mortgage rates.

What's going on with mortgage rates?

Many things affect mortgage rates but the single biggest item is Government of Canada bond yields.Government bonds are 100% guaranteed to be repaid, but mortgages are not; therefore mortgages carry more risk of default or early repayment, which could potentially disturb the return on the investment. Therefore, mortgage rates must be priced higher to compensate for that risk.

But how much higher are mortgages priced? In a normal market, the average "spread" or markup above the 100% secured government bonds is about 120 basis points, or 1.2%. That markup -- the spread relationship -- widens and contracts with a range of market conditions, investor appetites and supply of available product -- as well as the presence of competing investment opportunities, like corporate bonds or domestic (or foreign) equity markets.

The relationship between government bonds and mortgage rates isn't a fixed one, but one that changes with market conditions. The recent financial crisis has greatly affected the spread.

There has been a tremendous move from "risky" assets, such as mortgages, into "safer" assets such as government bonds. In fact, there has been so much demand for safety -- so much money pouring in to them -- that the effective yield for many government bonds are less than 2%, while mortgage didn’t move.

This means that the difference between a "risk-free" 5-year government bond and "risky" 5-year fixed mortgage rates is extraordinarily high. These are the wide 'spreads' you may hear referenced in popular financial media.

This larger than normal spread will dissipate with time and will push fixed mortgage rates lower as we can already see happening.

--The Team at True North Mortgage

New Toronto Store

It's official. We have signed a lease for our first Toronto location.

145 King St. W. Toronto

To lock in or not to lock in (your mortgage rate)

Everyone has been asking us the same 2 questions:
Should I lock in my variable rate mortgage yet? (short answer - no)
Should I break my 5 year fixed mortgage to lock in a better rate? (short answer – maybe)

As many of you know, mortgage rates have been moving down swiftly in the last few weeks.
In fact, our best 5 year rate was 5.59% on November 20 and is now, 9 weeks later, 4.39%. That is more than just a subtle drop. That is actually an indication the world markets are falling apart.

The recent rate drops were preceded by a series of prime rate reductions, and, just as importantly, the willingness of the federal government to purchase Canadian mortgage pools. I am not referring to the junk mortgage pools available in the US. Just to be clear, these are well performing mortgage pools. In fact, it is well assumed that these are profitable transactions for the federal government.

By buying these mortgage pools from Canadian’s big banks, they are essentially freeing up a lot of Bank capital for lending. More lending means lower mortgage rates.
In the federal budget recently announced, the Government promised another $50 billion for mortgage pool purchases. That is a significant amount of dollars and will likely move interest rates further down.

We have come up with a few “rules of thumb” that should make your decision making easier.

If you have a rate of 5.2% or higher and want our 3 year rate at 3.75%, it will take less than 12 months to recoup the cost of your penalty.

If you have a rate of 5.9% or higher and want our 5 year rate of 4.39%, it will take less than 12 months to recoup the cost of your penalty.

If you would like to discuss your specific file with us, please give us a call.

Regards,

Take an interest in bonds to understand mortgage rates

Mortgages are the biggest loan in just about everyone's life. And they can be the hardest to understand.

Why do mortgage rates move the way they do? Why don't the rates march in lock step with other interest rates?

When the Bank of Canada lowers interest rates the big banks usually play chicken for several hours waiting to see who will drop rates first. At the last cut, the TD Bank was the first to lower prime. The others followed within the hour.

If you had a variable rate mortgage tied to prime, then your mortgage rate moved lower. But all other mortgage rates stayed put.

Why? One pat answer is mortgage rates don't move with prime because mortgages are financed in the bond market.

Not true. Interest rates in the bond market influence mortgage rates, but that isn't where the money for mortgages comes from.

Banks get their mortgage money the same way they get other money: they take in deposits from bank accounts, GICs, etc., and then loan out the money at a higher rate. The difference, or the spread, is how commercial banks make most of their money.

The banks then put thousands of those mortgages together and repackage them as "mortgage-backed securities." These are sold to other institutions as a unit.

Since Canadian first mortgages are typically backed by housing assets, mortgage-backed securities here are seen as pretty safe investments, though the subprime variety were a disaster in the United States.

Here's where bonds come in: The bond market is made up of traders sitting at terminals in the world's financial capitals. The market is much bigger than the stock market and in many ways more important since it affects day-today interest rates.

When then banks want to set mortgage rates, they look at the yield, or interest rate, the bond is paying.

"Say the interest rate yield on a five-year government of Canada bond is 3%. The banks then have to set a rate high enough to cover all their costs of origination, selling and servicing the mortgage. They still have to be competitive with other lenders, so they set the five-year mortgage rate at 7%, but then discount on a person-by-person basis to around 4.75%" says Brendan Calder, now an adjunct professor at the Rotman School of Management at the University of Toronto. Before his academic career he was president of CIBC mortgages and before that, one of the people who set up the mortgage-backed securities business in the 1980s.

"So, if you want to know where mortgage rates are heading, watch the yields on government of Canada bonds," says Mr. Calder. "That's what mortgage brokers do.

"Canadians have borrowed a total of $879-billion against their houses, according to the Bank of Canada.

"That includes residential mortgages and lines of credit secured against housing," says Jeremy Harrison, a spokesman for the Bank of Canada in Ottawa.

Just about half the mortgages, or $487-billion, are held by the chartered banks. The next biggest lenders are credit unions, which have $110-billion in mortgages outstanding. But the big banks set the trend.

Banks didn't always dominate the mortgage business. Until changes to the Bank Act in 1967, banks were not allowed to lend mortgages. Back then, trust companies dominated the business.

"The market dominance of the banks in the mortgage business has continued to grow," says Mr. Calder.

National Post

Ottawa revamps mortgage rules

The Government of Canada today announced adjustments to the rules for government guaranteed mortgages aimed at protecting and strengthening the Canadian housing market. The new measures include:

Fixing the maximum amortization period for new government-backed mortgages to 35 years;

Requiring a minimum down payment of five per cent for new government-backed mortgages;

Establishing a consistent minimum credit score requirement; and

Introducing new loan documentation standards.

Today’s announcement marks a responsible and measured approach by the Government to ensure Canada’s housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada.

The new limits are planned to take effect October 15, 2008. This would allow existing mortgage pre-approvals with the common 90-day duration to be used or expire. Certain exceptions would also be permitted after October 15. The Government will work closely with all stakeholders to ensure timely and effective implementation of these measures.

As these measures relate only to new, government-backed insured mortgages, Canadians who already hold mortgages will not be affected by this announcement.

The measures announced today will build on the strength of Canada’s housing market. According to the International Monetary Fund, the increase in house prices in Canada is based on sound economic factors such as low interest rates, rising incomes and a growing population. A recent Statistics Canada report concluded that home ownership is at record levels, with over two-thirds of Canadians owning their own home.

Mortgage arrears—overdue mortgage payments—have also remained low. In recent years, the percentage of mortgages in arrears for three months or more continues to be at low levels not seen since 1990.

Backgrounder Residential Mortgage Insurance

Strength of the Canadian Housing and Mortgage Markets
Canadian housing and mortgage markets are performing well:
Current Canadian house prices are in line with economic factors such as low interest rates, rising incomes and a growing population, a view supported by the International Monetary Fund.
Demand for residential housing continues to be strong. For example, housing starts are expected to remain above the 200,000 mark for the seventh consecutive year.

The percentage of bank mortgages in arrears1 is stable at 0.27 per cent, near the lowest levels experienced since 1990 and well below the highs of 0.65 per cent experienced in each of 1992 and 1997.

The historically prudent and cautious approach taken by Canadian financial institutions to mortgage lending, combined with a sound supervisory regime, has allowed Canada to maintain strong and secure housing and mortgage markets. Sub-prime2 mortgage origination has been low in Canada, comprising less than 5 per cent of the market in recent years. As a result of the conservative approach taken by domestic lenders, and the resulting relative strength of the domestic housing and mortgage markets, Canadians have benefited from broad access to world-class mortgage finance products at competitive prices.

Recent Developments in the Mortgage Market
Since the fall of 2006, the mortgage markets have experienced a period of accelerated financial innovation. The marketplace has been quick to adopt these innovations, which permit such features as:
Longer amortization periods (from 25 years up to 40 years).
Higher loan-to-value ratio loans (up to 100 per cent).
Niche products for near-prime3 borrowers.
Streamlined loan documentation requirements with respect to borrowers’ income and employment.

What is Mortgage Insurance?
Mortgage insurance (which is sometimes called mortgage default insurance) is a credit risk management tool that protects mortgage lenders from losses on mortgage loans. If a borrower defaults on a mortgage, and the proceeds from the foreclosure of the property are insufficient to cover the resulting loss, the lender will submit a claim to the mortgage insurer to recover its losses.

Role of Mortgage Insurance
The law requires federally regulated lenders to obtain mortgage insurance on loans where homebuyers make down payments of less than 20 per cent of the purchase price of the home (i.e., high loan-to-value ratio loans). Lenders generally require high-ratio borrowers to pay for the premium for the mortgage insurance, which can be added to the mortgage balance.
Mortgages are sometimes insured after origination through what is often called "portfolio insurance." High- and low-ratio4 mortgages are often combined to create a portfolio that is sold to investors (i.e., securitized).

How is the Government Involved in Mortgage Insurance?
Mortgage insurance is available to regulated and unregulated lenders in Canada from Canada Mortgage and Housing Corporation (CMHC) and from private mortgage insurers. Since CMHC is a Crown corporation, the Government is ultimately responsible for all of CMHC’s obligations including its mortgage insurance claims.

To make it possible for private insurers to compete effectively with CMHC, the Government also backs private mortgage insurers’ obligations to lenders through guarantee agreements that protect lenders in the event of default by the insurer. The Government’s backing of private insurers’ business that is eligible for the guarantee is subject to a deductible equal to 10 per cent of the original principal amount of the mortgage loan.

The New Mortgage Insurance Guarantee Framework
The new mortgage insurance guarantee framework will establish a boundary on the risk characteristics of the mortgage and of the borrower that are acceptable when the Government guarantees the mortgage insurance policy. These requirements will apply to all government-backed mortgage insurance policies (whether issued by CMHC or private insurers) for high-ratio mortgages5 on residential properties with up to four units.

The Key Amendments to the Mortgage Insurance Guarantee Framework
There are four mortgage and borrower characteristics that define the key parameters of the new mortgage insurance guarantee framework:
A) Loan-to-Value Ratio
Government-backed insurance is currently available on mortgages where the loan-to-value ratio is up to 100 per cent. This limit will be reduced to 95 per cent. Borrowers may borrow the 5 per cent down payment, but it will not be insured under the new guarantee framework.
B) Amortization Period
Amortization is the period or length of time it will take to pay off the entire mortgage loan. The amortization period should not be confused with the "term" of the mortgage, which sets out the period over which a fixed interest rate or variable rate option will apply. A typical mortgage has a term of five years but an amortization period that is usually much longer.
The maximum amortization period for mortgages insured with government backing will be reduced from 40 years to 35 years6.
C) Credit Score
A credit score is a numerical value that measures a borrower’s credit risk at a given point in time based on a statistical evaluation of information in the individual's credit file. It has been proven to be predictive of loan performance and is considered by some mortgage insurers and lenders to be the single best determinant of default risk. Credit scores are well-established industry tools and are generated in Canada by three private firms.
Canadian lenders have not originated many government-backed mortgages for borrowers with low credit scores. To ensure this practice continues, the new framework will establish a credit score floor of 620. There will also be a limited "basket" to provide for exceptions to this rule, recognizing that there are some borrowers with credit scores below 620 that otherwise represent low credit risks.
D) Loan Documentation
The initiative also includes minimum loan documentation standards to ensure that there is evidence of reasonableness of property value and of the borrower’s sources and level of income.
E) Other Parameters
The new guarantee framework also includes other parameters that are required to give full effect to the initiative. These include:
Excluding high-ratio mortgages where no amortization is required in the first few years from the government guarantee.7
Setting a maximum of 45 per cent on borrowers’ total debt service ratio.8

Moving to the New Framework
The new mortgage insurance guarantee framework is planned to take effect October 15, 2008. This would allow existing mortgage pre-approvals with the common 90-day duration to be used or expire. Exceptions would be allowed after October 15 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before October 15, 2008.

Consultations with the Mortgage Industry
During the transition period, the Department of Finance will consult with industry stakeholders about the implementation of the new mortgage insurance guarantee framework.
1 Most lenders generally consider a mortgage to be in arrears after three missed monthly payments. [Return]
2 A “sub-prime” borrower is one whose record of managing credit is weaker than the industry standard for mortgage lending. [Return]
3 The “near-prime” market is made up of borrowers whose record of managing credit is close to the industry standard for mortgage lending, but still below that standard. [Return]
4 “Low-ratio” mortgages are loans with a loan-to-value ratio of less than 80 per cent at the time of origination. [Return]
5 Less stringent requirements will also apply to low-ratio mortgages that are insured as portfolios. [Return]
6 Reducing amortization from 40 years to 35 years on a mortgage loan of $200,000 with a 6 per cent interest rate results in a $41 increase in a borrower’s monthly payment, but the borrower will save $49,000 in interest payments. [Return]
7 This includes high-ratio mortgages that begin with ”interest-only” payments and home equity lines of credit (HELOCs). [Return]
8 Total debt service ratio is the proportion of gross income that is spent on debt service and housing-related fixed or essential payments. [Return]