As you all know, the last few weeks have been quite
challenging in the financial markets. As with the stock markets the credit markets
have been quite volatile. This volatility has steadily driven up the cost of
borrowing for financial institutions resulting in higher interest rates.
Here are some of the changes that have taken place:
- Some lines of credit are now at prime plus 1%
- Variable rate mortgages, on average, are at prime plus 1%
• The longer term rates have increased from about 5.45% to 5.85% (this is a 5 year rate)
For those of you with variable rate mortgages, don't worry, your discount will remain, as is, throughout the remainder of your term. The above changes are for new mortgages only.
Also, it has been suggested that the Canadian housing market might fall into a downward spiral like the one currently underway in the United States. Most Canadian economists, point to very substantial differences between the Canadian and US situations, which mean that the risks in Canada are considerably lower than they have been in the US.
Some of the differences are as follows:
• Our equity positions are much stronger than in the US. On average mortgage debt is about 30% of the total value of Canadian homes
• Total debt service burden in Canada (as a percentage of after-tax income) has not worsened during the past decade, with the burden staying close to 8%
• The most recent data from the Canadian Bankers Association - which covers 7 major banks - shows that just 0.27% of residential mortgages were in arrears (three months or more, as of June 2008).
• The key reason that the Canadian housing market did not follow the US is that our lending industry and practices are structurally different. Most Canadian mortgages remain on the lenders' books therefore requiring an incentive to maintain high credit standards. In the US, many mortgages are held by third parties. This caused a breakdown in the incentive to control risk. Because the mortgage originator didn't have ultimate accountability for credit quality, credit quality was abandoned.
I hope this email has shed some light on some of the recent
changes in the mortgage market. If any of you have any specific questions or
concerns please do not hesitate to call me.
PS........the bank of Canada has its next official meeting on Oct 21st. It is likely that the prime lending rate will drop another 0.5%.
Mortgage Specialist (604) 454-0843