The U.S. subprime crisis developed over several years as borrowers with little or no income, little or no equity, and a history of not paying their bills were approved for subprime mortgages. To attract even more of these borrowers, Option ARMs (specialized Adjustable Rate Mortgages) were offered. These mortgages started with a very low “teaser” rate for the first few months or years, then the rate automatically “reset” to a much higher level for the rest of the term.
The popularity of these mortgages helped drive the U.S. housing market to very high levels. House prices rose rapidly and homeowners, thinking they could rely on this forever, started extracting equity from their homes to increase their disposable income.
A "perfect storm" in the U.S.
What happened in 2007 was a “perfect storm”. U.S. mortgage rates had been creeping up and were reaching levels that slowed demand for houses. House prices stopped rising as quickly and eventually began to fall. The teaser rate on Option ARMs began to reset in large numbers leaving many borrowers unable to afford the new payments. With house values on the decline, many borrowers discovered they owed more than their house was now worth. Their only option was to default, which happened on a massive scale.
The effect on the U.S. economy has been dramatic. The housing market is already in recession and the news will get even worse over the next few months. According to CIBC World Markets, by mid-2008 the likelihood is for home sales to decline by 40%, housing starts to drop by 55%, and house prices to fall by 12-13%, from their peak. Forecasters still expect the U.S. economy to avoid recession, but it will come very close in the next few months.
In Canada, the story is different.
In Canada, our Bank Act requires lenders to be more conservative than in the U.S. The percentage of subprime mortgages in Canada is substantially less. And, according to CIBC World Markets, the percentage of Canadian mortgages in arrears is still near record lows–in stark contrast to the U.S. where delinquency and foreclosure rates have risen notably in recent months.
The bottom line is, unlike the U.S., the Canadian housing market has not been artificially driven by poor lending practices. Our long-term fundamentals are solid. We have a growing population, energy and commodities are in high demand, personal incomes are increasing, job creation is strong, and consumer confidence remains high.
Of course, if the U.S. does go into recession, Canada will feel the pain too. This concern has kept the Bank of Canada from raising interest rates, which creates yet another benefit for Canadian homeowners. Not only do we still enjoy access to readily available mortgage funds with no major default problems—but due to the U.S. subprime crisis, our mortgage rates should remain low for the foreseeable future.
If you have any questions about the mortgage situation in Canada or about your own mortgage, please don’t hesitate to contact me. I’d be happy to sit down with you, provide any answers you’re looking for, and offer professional objective advice.
Monday, January 21, 2008
Monday, January 14, 2008
Tips for paying off your mortgage fasterTip
#1 Seek the advice of a financial advisor who works for a set fee. Finding an independent financial advisor who works on a set fee, to work with you on your specific financial goals, is the best way to ensure that you get the best and the most unbiased financial advice. Rather than talking to someone at your bank or lending institution, who makes money based on their recommendations to you, work with an independent advisor who has nothing to gain from your decisions that you make.
Tip #2 Opt for a closed term mortgage rather than an open one unless you will be paying it off in full during the term. An open mortgage at a fixed rate of interest will carry a higher interest rate than a closed term mortgage will. Unless you need to pay off your mortgage during the term, it is always advisable to go with the closed term and know that you can always pay off the mortgage when you are looking at renewing without penalty. And, while you are in the term you can generally pay up to 10-20% of the mortgage without a prepayment penalty.
Tip #2 Opt for a closed term mortgage rather than an open one unless you will be paying it off in full during the term. An open mortgage at a fixed rate of interest will carry a higher interest rate than a closed term mortgage will. Unless you need to pay off your mortgage during the term, it is always advisable to go with the closed term and know that you can always pay off the mortgage when you are looking at renewing without penalty. And, while you are in the term you can generally pay up to 10-20% of the mortgage without a prepayment penalty.
Monday, December 3, 2007
For the self employed person looking to hire?
When you know exactly what you want for yourself or your business, the opportunities to acquire those things are easily recognizable.
Start by knowing what you want in an employee so that you can attract the ideal one.
Before you can even decide who the perfect team member will be, you must have a very solid idea of which tasks you would like them to perform.
Then, you need to profile the personality traits that will work well in your business.
Hiring your neighbour or relative because you are overwhelmed is not the way to build a strong team.
Start by knowing what you want in an employee so that you can attract the ideal one.
Before you can even decide who the perfect team member will be, you must have a very solid idea of which tasks you would like them to perform.
Then, you need to profile the personality traits that will work well in your business.
Hiring your neighbour or relative because you are overwhelmed is not the way to build a strong team.
Wednesday, October 31, 2007
Couple highlites from the Federal Mini Budget
Personal Tax ChangesLowest personal income tax rate — The mini-budget proposes to reduce the lowest personal tax rate,which applies to taxable income up to $37,178 for 2007, to 15% (from 15.5%), retroactively toJanuary 1, 2007.Basic personal, spousal and wholly dependent relative amounts — The mini-budget proposes toincrease the amount used to compute the basic personal tax credit to $9,600 (from $8,929) for 2007and 2008, and to $10,100 in 2009 (indexed for later years). The mini-budget also proposes that theamounts used to compute the spousal and wholly dependent relative credits will be changed to matchthe basic personal amount for each of these years.For a single tax filer with income over about $38,000, the above personal tax changes will provideoverall tax savings of about $240 in 2007.
GST ChangesGST rate reduced — The government proposes to reduce the GST rate to 5% (from 6%) as of January 1,2008. The mini-budget sets out transitional rules that are similar to the rules that applied when the GSTrate was reduced to 6% as of July 1, 2006, including the following general transitional rules:o If GST becomes payable, or is paid without becoming payable, before January 1, 2008, the 6%rate applies.o If GST becomes payable on or after January 1, 2008, without having been paid before that day,the 5% rate applies.o If GST is paid on or after January 1, 2008, without having become payable before that day, the5% rate applies.Specific transitional rules are introduced for certain types of transactions, including sales of real property,deemed supplies, imported goods and taxable services and intangibles and taxable benefits.Excise tax — To ensure that the GST rate cut does not affect the overall price of cigarettes and othertobacco products, the federal excise duty on these products will increase accordingly as of January 1,2008.Provincial sales tax harmonization — The federal government notes that it is willing to work towardfederal-provincial sales tax harmonization with the five provinces that still impose retail sales taxes.However, the mini-budget does not appear to offer the provinces any concrete incentive for doing so.
GST ChangesGST rate reduced — The government proposes to reduce the GST rate to 5% (from 6%) as of January 1,2008. The mini-budget sets out transitional rules that are similar to the rules that applied when the GSTrate was reduced to 6% as of July 1, 2006, including the following general transitional rules:o If GST becomes payable, or is paid without becoming payable, before January 1, 2008, the 6%rate applies.o If GST becomes payable on or after January 1, 2008, without having been paid before that day,the 5% rate applies.o If GST is paid on or after January 1, 2008, without having become payable before that day, the5% rate applies.Specific transitional rules are introduced for certain types of transactions, including sales of real property,deemed supplies, imported goods and taxable services and intangibles and taxable benefits.Excise tax — To ensure that the GST rate cut does not affect the overall price of cigarettes and othertobacco products, the federal excise duty on these products will increase accordingly as of January 1,2008.Provincial sales tax harmonization — The federal government notes that it is willing to work towardfederal-provincial sales tax harmonization with the five provinces that still impose retail sales taxes.However, the mini-budget does not appear to offer the provinces any concrete incentive for doing so.
Monday, October 29, 2007
A little food for thought!
I receive weekly emails from Jim Rohn, whose a great motivational speaker and I thought today's was something worth showing as it can pertain to everyone. Have a read!
Miss a meal if you have to, but don't miss a book.Some people claim that it is okay to read trashy novels because sometimes you can find something valuable in them. You can also find a crust of bread in a garbage can, if you search long enough, but there is a better way.Most homes valued at over $250,000 have a library. That should tell us something.Everything you need for your better future and success has already been written. And guess what? It's all available. All you have to do is go to the library. And there's probably a library in every neighborhood.Some people read so little they have rickets of the mind.I now have one of the better libraries. I admit that I haven't read everything in my library, but I feel smarter just walking in it.Don't just read the easy stuff. You may entertained by it, but you will never grow from it.The book you don't read won't help.Books are easy to find and easy to buy. A paperback these days only costs six or seven dollars. You can borrow that from your kids!It isn't what the book costs; it's what it will cost if you don't read it.
Miss a meal if you have to, but don't miss a book.Some people claim that it is okay to read trashy novels because sometimes you can find something valuable in them. You can also find a crust of bread in a garbage can, if you search long enough, but there is a better way.Most homes valued at over $250,000 have a library. That should tell us something.Everything you need for your better future and success has already been written. And guess what? It's all available. All you have to do is go to the library. And there's probably a library in every neighborhood.Some people read so little they have rickets of the mind.I now have one of the better libraries. I admit that I haven't read everything in my library, but I feel smarter just walking in it.Don't just read the easy stuff. You may entertained by it, but you will never grow from it.The book you don't read won't help.Books are easy to find and easy to buy. A paperback these days only costs six or seven dollars. You can borrow that from your kids!It isn't what the book costs; it's what it will cost if you don't read it.
Tuesday, October 16, 2007
Overnight lending rate remains the same
The Bank of Canada chose not to raise interest rates this morning which is a positive.
They feel right now we're cruising along nicely. I've attached the article written by the Bank this morning. The next meeting is December 4th.
OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 4 1/2 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 4 3/4 per cent.
Against a backdrop of robust global economic expansion and strong commodity prices, information received since the July Monetary Policy Report Update (MPRU) indicates that the Canadian economy is now operating further above its production potential than had been previously expected. The core rate of inflation, which has been above 2 per cent for the past year, was 2.2 per cent in August. Total consumer price inflation fell temporarily in August to 1.7 per cent, having been above the 2 per cent inflation target since the spring.
Since the July MPRU, the outlook for the U.S. economy has weakened because of greater-than-expected slowing in the housing sector. The Bank has revised down its projection for U.S. growth to 1.9 per cent in 2007 and 2.1 per cent in 2008. U.S. growth is expected to pick up to 3 per cent in 2009.
The Canadian dollar traded in a range of 93 to 95.5 cents U.S. in July and August, but since then it has appreciated sharply to as high as 1.03 dollars U.S. In the Bank's new base-case projection, the Canadian dollar is assumed to average 98 cents, the mid-point of the range since the July MPRU. As well, there has been a tightening of credit conditions stemming from the financial market developments this summer. For Canada, the Bank assumes that the cost of credit for firms and households relative to the overnight rate will be 25 basis points higher over the projection period than it was prior to the summer developments.
Despite these tighter credit conditions, momentum in domestic demand in Canada is expected to remain strong. The combined effect of a weaker U.S. outlook and a higher assumed level of the Canadian dollar implies, however, that net exports will exert a more significant drag on the economy in 2008 and 2009 than previously expected. As a result, the Canadian economy is projected to grow by 2.6 per cent in 2007, 2.3 per cent in 2008, and 2.5 per cent in 2009. This growth profile implies that aggregate supply and demand will move back into balance in early 2009. Both core and total CPI inflation are projected to return to 2 per cent in the second half of 2008.
In line with this projection, the Bank judges, at this time, that the current level of the target for the overnight rate is consistent with achieving the inflation target over the medium term.
There are significant upside and downside risks to the Bank's inflation projection. On the upside, excess demand in the Canadian economy could persist longer than projected. This could come from two sources: higher growth in household spending than projected and lower growth in productivity than assumed. On the downside, if the Canadian dollar exchange rate were to persist above the 98 cent U.S. level assumed over the projection horizon for reasons not associated with stronger-than-projected demand for Canadian products, Canadian output and inflation would be lower. In addition, the effect of the past appreciation of the Canadian dollar on demand and inflation could be stronger than expected and the effect of the weakness in the U.S. housing sector could be greater than anticipated. All factors considered, the Bank judges that the risks to its inflation projection are roughly balanced, with perhaps a slight tilt to the downside.
They feel right now we're cruising along nicely. I've attached the article written by the Bank this morning. The next meeting is December 4th.
OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 4 1/2 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 4 3/4 per cent.
Against a backdrop of robust global economic expansion and strong commodity prices, information received since the July Monetary Policy Report Update (MPRU) indicates that the Canadian economy is now operating further above its production potential than had been previously expected. The core rate of inflation, which has been above 2 per cent for the past year, was 2.2 per cent in August. Total consumer price inflation fell temporarily in August to 1.7 per cent, having been above the 2 per cent inflation target since the spring.
Since the July MPRU, the outlook for the U.S. economy has weakened because of greater-than-expected slowing in the housing sector. The Bank has revised down its projection for U.S. growth to 1.9 per cent in 2007 and 2.1 per cent in 2008. U.S. growth is expected to pick up to 3 per cent in 2009.
The Canadian dollar traded in a range of 93 to 95.5 cents U.S. in July and August, but since then it has appreciated sharply to as high as 1.03 dollars U.S. In the Bank's new base-case projection, the Canadian dollar is assumed to average 98 cents, the mid-point of the range since the July MPRU. As well, there has been a tightening of credit conditions stemming from the financial market developments this summer. For Canada, the Bank assumes that the cost of credit for firms and households relative to the overnight rate will be 25 basis points higher over the projection period than it was prior to the summer developments.
Despite these tighter credit conditions, momentum in domestic demand in Canada is expected to remain strong. The combined effect of a weaker U.S. outlook and a higher assumed level of the Canadian dollar implies, however, that net exports will exert a more significant drag on the economy in 2008 and 2009 than previously expected. As a result, the Canadian economy is projected to grow by 2.6 per cent in 2007, 2.3 per cent in 2008, and 2.5 per cent in 2009. This growth profile implies that aggregate supply and demand will move back into balance in early 2009. Both core and total CPI inflation are projected to return to 2 per cent in the second half of 2008.
In line with this projection, the Bank judges, at this time, that the current level of the target for the overnight rate is consistent with achieving the inflation target over the medium term.
There are significant upside and downside risks to the Bank's inflation projection. On the upside, excess demand in the Canadian economy could persist longer than projected. This could come from two sources: higher growth in household spending than projected and lower growth in productivity than assumed. On the downside, if the Canadian dollar exchange rate were to persist above the 98 cent U.S. level assumed over the projection horizon for reasons not associated with stronger-than-projected demand for Canadian products, Canadian output and inflation would be lower. In addition, the effect of the past appreciation of the Canadian dollar on demand and inflation could be stronger than expected and the effect of the weakness in the U.S. housing sector could be greater than anticipated. All factors considered, the Bank judges that the risks to its inflation projection are roughly balanced, with perhaps a slight tilt to the downside.
Thursday, September 20, 2007
Discounts off of Prime. (Variable rate mortgages)
In layman’s terms, what is happening?
Adjustable Rate Mortgages are typically priced according to the current 30-day Banker Acceptances (BA), which are a very common short-term money market investment, guaranteed by the banks. A lender funding adjustable/variable rate mortgages would typically borrow money through a 30-day Banker’s Acceptance. The lender is then responsible for paying the yield (rate of return) to the investor who purchased the BA. This yield is the cost of funding mortgages (“Cost of Funds”) to the lender.
So, what’s happening to the BA yields?
This is where the story has become interesting over the past few months.
The failure of the U.S. subprime market worried money-market investors. In Canada, investors began to sell off investments creating a strain on the market. Those who remained demanded higher yields from the BA market as no one was sure as to how much of these BA’s were used to finance U.S. subprime mortgages, or subprime mortgages here in Canada or other risky ventures. Everyone was asking the same thing: What’s the risk exposure? A classic example of the market overreacting.
The resulting increase in BA yields increased the cost of funds for lenders who want to finance their Adjustable Rate Mortgages. Essentially it’s costing lenders much more money now to finance ARMs than it did 60 days ago.
The following is a comparison of 30-day Banker’s Acceptance yields over the past 60 days:
July 17, 2007: 4.54%
August 3, 2007: 4.60%
August 14, 2007: 4.75%
August 17, 2007: 4.92%
September 11, 2007: 4.98%
September 17, 2007: 5.04%
*Source: Bank of Canada (www.bank-banque-canada.ca)
So, in 60 days we’ve seen the yield on 30 day BA increase 50 bps.
Now consider the interest rate earned by the lenders on an ARM at Prime - .90%. Today that interest rate is 5.35%. When you compare this to the current Cost of Funds at 5.04%, which doesn’t include overhead, profit margin (or any origination fees paid to mortgage originators), one can see that it’s only a matter of time before prices for ARMs need to change.
How long will this continue?
Are we seeing the end of the days of Prime - .90%? Perhaps for a while, until the money markets settle down.
The silver lining in all this is that due to Canada’s continued economic expansion and the reality of an $80+ barrel of oil, our longer term bonds are in high demand. As a result, we might see some interest rate decreases on the fixed rate products.
Adjustable Rate Mortgages are typically priced according to the current 30-day Banker Acceptances (BA), which are a very common short-term money market investment, guaranteed by the banks. A lender funding adjustable/variable rate mortgages would typically borrow money through a 30-day Banker’s Acceptance. The lender is then responsible for paying the yield (rate of return) to the investor who purchased the BA. This yield is the cost of funding mortgages (“Cost of Funds”) to the lender.
So, what’s happening to the BA yields?
This is where the story has become interesting over the past few months.
The failure of the U.S. subprime market worried money-market investors. In Canada, investors began to sell off investments creating a strain on the market. Those who remained demanded higher yields from the BA market as no one was sure as to how much of these BA’s were used to finance U.S. subprime mortgages, or subprime mortgages here in Canada or other risky ventures. Everyone was asking the same thing: What’s the risk exposure? A classic example of the market overreacting.
The resulting increase in BA yields increased the cost of funds for lenders who want to finance their Adjustable Rate Mortgages. Essentially it’s costing lenders much more money now to finance ARMs than it did 60 days ago.
The following is a comparison of 30-day Banker’s Acceptance yields over the past 60 days:
July 17, 2007: 4.54%
August 3, 2007: 4.60%
August 14, 2007: 4.75%
August 17, 2007: 4.92%
September 11, 2007: 4.98%
September 17, 2007: 5.04%
*Source: Bank of Canada (www.bank-banque-canada.ca)
So, in 60 days we’ve seen the yield on 30 day BA increase 50 bps.
Now consider the interest rate earned by the lenders on an ARM at Prime - .90%. Today that interest rate is 5.35%. When you compare this to the current Cost of Funds at 5.04%, which doesn’t include overhead, profit margin (or any origination fees paid to mortgage originators), one can see that it’s only a matter of time before prices for ARMs need to change.
How long will this continue?
Are we seeing the end of the days of Prime - .90%? Perhaps for a while, until the money markets settle down.
The silver lining in all this is that due to Canada’s continued economic expansion and the reality of an $80+ barrel of oil, our longer term bonds are in high demand. As a result, we might see some interest rate decreases on the fixed rate products.
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