Real Estate Information: Pickering, Ajax, Pickering Village, and Durham Region

Frank Steinhausen, Broker
FSteinhausen@REMAX.net
RE/MAX Rouge River Realty Ltd., Brokerage
Phone 905-428-6533
Fax 905-668-1850

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The 4 C’s of Mortgage Underwriting

April 5th, 2012 Categories: Real Estate News

With Spring upon us, and new buyers out looking for houses, I thought today might be a good time to review the basics of what lenders look for as they decide to approve (or deny) mortgage applications. For at least 25 years, I have heard them called “The 4 C’s of Underwriting”- Capacity, Credit, Cash, and Collateral. Guidelines and risk tolerances change, but the core criteria do not.
CAPACITY
CAPACITY is the analysis of comparing a borrower’s income to their proposed debt. It considers the borrower’s ability to repay the mortgage. Lenders look at two calculations (we call ratios). The first is your Housing Ratio. It simply is the percentage of your proposed total mortgage payment (principal & interest, real estate taxes, homeowner’s insurance and, if applicable, flood insurance and mortgage insurance – like PMI or the FHA MIP) divided by your monthly, pre-tax income. A solid Housing Ratio (often called the front end ratio) would be 28% or less; although, at times loans are approved at a significantly higher number. That’s because your front end ratio is looked at in conjunction with your back end ratio.
The back end ratio (referred to as your Debt Ratio) starts with that mortgage payment calculation from the Housing Ratio and adds to it your recurring debts that would show up on your credit report (auto loans, student loans, minimum credit card payments, etc.) without taking into consideration some other debts (phone bills, utility bills, cable TV). A good back ratio would be 40% or less. However, loans sometimes are granted with higher debt ratios. Understand that every application is different. Income can be impacted by overtime, night differential, bonuses, job history, unreimbursed expenses, commission, as well as other factors. Similarly, how your debts are considered can vary. Consult an experienced loan officer to determine how the underwriter will calculate your numbers.
CREDIT
CREDIT is the statistical prediction of a borrower’s future payment likelihood. By reviewing the past factors (payment history, total debt compared to total available debt, the types of monies: revolving credit vs. installment debt outstanding) a credit score is assigned each borrower which reflects the anticipated repayment. The higher your score, the lower the risk to the lender which usually results in better loan terms for the borrower. Your loan officer will look to run your credit early on to see what challenges may (or may not) present themselves.
CASH
CASH is a review of your asset picture after you close. There are really two components – cash in the deal and cash in reserves. Simply put, the bigger your down payment (the more of your own money at risk) the stronger the loan application. At the same time, the more money you have in reserve after closing the less likely you are to default. Two borrowers with the same profile as far as income ratios and credit scores have different risk levels if one has $50,000 in the bank after closing and the other has $50. There is logic here. The source of your assets will be examined. Is it savings? Was it a gift? Was it a one-time settlement/lottery victory/bonus? Discuss how much money you have and its origins with your loan officer.
COLLATERAL
COLLATERAL refers to the appraisal of your home. It considers many factors – sales of comparable homes, location of the home, size of the home, condition of the home, cost to rebuild the home, and even rental income options. Understand the lender does not want to foreclose (they aren’t in the real estate business), but they do need to have something to secure the loan against, in case of default. In today’s market, appraisers tend to be conservative in their evaluations. Appraisals are really the only one of the 4 C’s that can’t be determined ahead of time in most cases.
Now, each of the 4 C’s are important, but it’s really the combination of them that is key. Strong income ratios and a large down payment with strong reserves can offset some credit issues. Similarly, long and strong credit histories help higher ratios….and good credit and income can overcome lesser down payments. Talk openly and freely with your loan officer. They are on your side, advocating for you and looking to structure your file as favorably as possible.

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The 10-year versus 5-year mortgage: Which is better?

April 3rd, 2012 Categories: Real Estate News

Mortgage debates used to centre around whether to go fixed or variable but the discussion these days is not whether to lock in a rate but for how long?

Variable rate mortgages have slumped in popularity over the last few months as discounts off of the 3% prime rate are either shrinking or disappearing. At the same time, financial institutions have dropped rates to as low as 2.99% for terms as long as four or five years.

But there is a new entrant to the marketplace — the 10-year mortgage. The Canadian Association of Accredited Mortgage Professionals says 10-year mortgages are about 1% of the marketplace but that may change as rates for the decade-long term have dropped to an all-time low with some lenders said to be offering an interest rate of 3.84%.

The choice is ultimately a personal decision and highly dependent on your risk tolerance. While variable represents the most risk, given its floating rate nature, the 10-year represents the ultimate in security coming with the heaviest insurance premium — albeit with a much lower cost these days.

One key factor about the 10-year that people forget is that under Canadian law you can only be forced to pay three months interest, after five years, to break a mortgage. That’s a much lower penalty than the interest rate differential which can be in the tens of thousands of dollars.

Household debt fears grow as rates appear set to rise

Personally, I’m going to go with the five-year model. I like the 2.99% rate offered these days and even if it comes with restrictions like a 25-year amortization, you’ll end up paying your mortgage down faster.

You could face limits on prepayment terms of 10% of the mortgage per year but if you have say a $500,000 mortgage what are the odds you’ll have more than $50,000 kicking around? You only increase monthly payments by 10% but odds are that will be enough for most people.

If you do choose a 10-year mortgage, one issue to consider is how portable that mortgage is should you want to sell or move. You might also ask if it’s assumable by the buyer because if rates do go up, and you want to sell your home, a cheap mortgage could become a marketable commodity

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Home prices up in February but gains slowing

March 26th, 2012 Categories: Real Estate News

The MLS® Home Price Index1, the leading measure of Canadian home prices, continued rising in February 2012, according to statistics released today by The Canadian Real Estate Association (CREA). Year-over-year comparisons continued shrinking, providing further evidence that Canadian home price growth may be topping out.

Highlights:

The Aggregate Composite MLS® Home Price Index in February 2012 was up 5.1% from its year-ago level, the smallest increase since June 2011.
Toronto posted the largest increase (7.3%), but momentum continued fading. Price increases also moderated further in Calgary (2.5%) and Montreal (1.6%).
Gains decelerated in all housing categories tracked except 2-storey single family homes.
The Aggregate Composite MLS® Home Price Index rose 1.1% on a month-over-month basis in February 2012.
Prices were up most for 2-storey single family homes (1.6%), while townhouse/row and apartment units saw smaller gains (0.4% & 0.5% respectively).
The MLS® Home Price Index in February 2012 was up 5.1 per cent from levels in February 2011. The increase was the smallest since last June, and marked the fourth consecutive month in which gains slowed.

“MLS® HPI trends for February show that home price growth is generally slowing,” said Gary Morse, CREA President. “At the same time, price gains and trends differ among housing markets tracked by the index. Since all real estate is local, buyers and sellers should talk to their local REALTOR® to best understand how home price trends are shaping up where they live.”

The MLS® HPI remained above its year-ago level in all five of the markets tracked, led by Toronto (7.3 per cent). It also remains above year-ago levels in all housing categories tracked, led by two-storey single family homes (6.9%).

The MLS® Home Price Index rose 1.1 per cent in February 2012 as compared to January.

“The index typically rises in February from the previous month as demand ramps up leading into the spring housing market,” said Gregory Klump, CREA’s Chief Economist. “The monthly price increase in February this year was less than what we saw in either of the past two years, which is more evidence that the trend for Canadian home prices is slowing.”

Among housing categories tracked by the index, single family homes posted the biggest month-over-month gains in most markets, particularly in Toronto where they are in short supply relative to strong demand.

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Re/Max predicts heated Spring Market

March 23rd, 2012 Categories: Real Estate News

Canada’s housing market won’t be cooling down just yet, with a new report by Re/Max pointing to a growing number of bidding wars in markets across the country.

The report found 12 of 15 of Canada’s major metropolitan centres reported year-over-year increases in sales activity in the first two months of 2012, and more than half had double-digit increases. Low interest rates and consumer confidence, along with the recent mild weather, will push an early start to an expected strong spring market, said RE/Max. Average price climbed in 14 of the 15 markets.
“Major Canadian real estate markets continued to show exceptional resiliency throughout the first quarter of the year, with strong demand and diminished supply setting the stage for a heated spring 2012,” according to the Re/Max report.

The tight conditions have recently sparked bidding wars, said Re/Max, noting such trends in Winnipeg, Toronto, Saskatoon, Regina, London-St. Thomas, Hamilton-Burlington, Ottawa, St. John’s, and Halifax-Dartmouth.

In Halifax-Dartmouth, sales activity has been up 35% since the same time last year, bolstered by the announcement of a $25 billion shipbuilding contract late last year.

Sales activity was also up 21% in Saskatoon and 20% in Saint John. Sales were down 16% in Vancouver, however, which has an average price of $786,695 – well more than $300,000 higher than any other Canadian major city.

Victoria was the only one of the 15 markets to see a price decline in the first two months of this year compared to the same time in 2011, down 1% to reach $469,399. St. John’s, the Greater Toronto Area and Winnipeg all saw 10% average price increases over last year. Kitchener-Waterloo wasn’t far behind at 9%.

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Buying a Home? The COST Is More Important Than the PRICE

March 19th, 2012 Categories: Real Estate News

We have often advised buyers to look at the COST of purchasing a house more than the PRICE of the home. Obviously, price is part of the cost equation. The other piece, assuming you are not an all cash buyer, is the mortgage rate. The mortgage rate to finance a purchase can have a dramatic impact on the overall cost. Recently, there are more people talking about the possibility that mortgage rates could begin to increase.

We do not attempt to predict future interest rates. We leave that up to the experts in the field. However, we want our readers to understand the potential impact on the cost of purchasing a home if they do rise. Here is a simple table that shows, even if the PRICE of a home softens, the COST of a home could increase.

Cost vs Price

Bottom Line

Many purchasers think they should wait until they are sure that prices have hit bottom. Deciding whether or not to wait should be determined by where the COST of a home is headed.

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Weekly Sales Report – March 8, 2012

March 12th, 2012 Categories: Real Estate News

Market Statistics

Region	Area Sales	Average Price
Halton	130	$564,861
Peel	456	$432,492
Toronto	876	$566,984
York	441	$594,868
Durham	257	$331,179
Dufferin	14	$351,879
Simcoe	49	$329,495
Total	2,223	$510,953

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Tight Market Pushes the Average Price above $500K

March 12th, 2012 Categories: Real Estate News

Greater Toronto REALTORS® reported 7,032 sales in February 2012 up 16 per cent compared to February 2011. New listings were also up over the same period, but by a lesser 11 per cent to 12,684. It is important to note that 2012 is a leap year, with one more day in February. Over the first 28 days of February, sales and new listings were up by ten per cent and six per cent respectively. With slightly more than two months of inventory in the Toronto Real Estate Board (TREB) market area, on average, it is not surprising that competition between buyers has exerted very strong upward pressure on the average selling price. Price growth will continue to be very strong until the market becomes better supplied,’ said Toronto Real Estate Board President Richard Silver.

It is important to note that both buyers and sellers are aware of current market conditions. This is evidenced by the fact that homes sold, on average, for 99 per cent of the asking price in February,’ continued Silver.

The average selling price in the TREB market area was $502,508 in February up 11 per cent compared to February 2011. The Composite MLS® Home Price Index for TREB, which provides a less volatile measure of price growth compared to the average price, was up by 7.3 per cent compared February 2011.

If tight market conditions continue to result in higher than expected price growth as we move into the spring, expectations for 2012 as a whole will have to be revised upwards,’ said Jason Mercer, TREB’s Senior Manager of Market Analysis. While price growth remains strong, the average selling price remains affordable from a mortgage lending perspective for a household earning the average income in the GTA.’

For a more accurate Evaluation of your specific area and Prices, please call me to set up a time.

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Low-rate Mortgage Wars are on

March 9th, 2012 Categories: Real Estate News

After a string of warnings from policymakers about the perilous state of household debt in this country, it hardly seemed like a good idea.

But this week the big banks launched the latest round in the mortgage war, with Bank of Montreal rolling out its rock-bottom 2.99% five-year home loan, one of the lowest rates on such a product. BMO’s peers quickly followed suit, breathlessly unveiling their cut-price mortgages, available for a limited time.

In public comments the banks wrapped themselves in the maple leaf, claiming the special rates are aimed at bolstering the finances of consumers, since the new products come with fixed rates and shorter amortizations designed to allow borrowers to pay down debt faster. We think this is totally consistent with the debate about stability of [household finances],’ said Frank Techar, head of BMO’s domestic retail bank.

Canadians have identified effective debt management as their primary focus this year, and these special offers will help new homebuyers and existing mortgage holders reduce interest costs and pay down their mortgage sooner,’ said Colette Delaney, executive vice-president at Canadian Imperial Bank of Commerce’s retail bank.

But here’s the thing. Canadian household debt has been steadily rising for more than a decade and it’s now sitting about same the level it was in the United States just before the housing collapse, precursor to one of the biggest waves of consumer defaults since the Depression.

Thanks to low interest rates and a stable economy, Canadians are managing their burden. But Bank of Canada Governor Mark Carney has warned repeatedly that elevated borrowing is the biggest domestic threat to health of the financial system.

But don’t special offer’ mortgage deals encourage people to borrow more, and doesn’t that exacerbate the problem?

Or maybe problem is the wrong word, because from the banks’ perspective it’s not so much a problem as a potential earnings headwind, according Peter Routledge, an analyst at National Bank Financial.

Residential mortgages are hugely important for the banks, a key business in domestic retail lending which is traditionally one of the most important earnings drivers. At a time of heightened competition, profit margins are razor thin but players are making up for that by hiking the volume of loans they write.

Canadians have about $1.1-trillion of mortgages outstanding, by far the lion’s share of total consumer debt, according to the Bank of Canada.

But the bank’s are mostly protected from risk of default through insurance provided by the Canada Mortgage and Housing Corp.

On average, at least 50% of mortgages held by the banks are covered by insurance, all but the safest, low ratio loans to highly credit-worthy customers.

So in a worst-case scenario a collapse in the housing market the banks would have minimal direct exposure to loan losses.

But they would experience a drop in profits since a housing correction would almost certainly result in a consumer pull-back in loan demand, not just for mortgages but across the board, and the banks are very cognizant of that.

I think banks recognize that scenario would be very bad for earnings, and why would they want to hurt their franchise?’ said Mr. Routledge.

When the U.S. market started to turn, lenders responded by bringing out ever more risky products that enabled people to lever up even more because their role in the economy had become distorted.

But that’s very unlikely to happen here because of the [more healthy] structure of the mortgage market,’ he said.

Another reason for Canadian banks to be cautious is that CMHC has been fundamental not just to their business models but also to their funding. Last year the big six issued more than $25-billion of covered bonds, mostly backed by CMHC insured mortgages. Thanks to the CMHC, the interest rate on the bonds is only marginally above Canadian government bonds, and significantly lower than the funding costs of even the strongest foreign banks.

The last thing the banks want to do is anything that might cause the federal government to change the rules around CMHC insurance.

With this in mind, we can ask the question again: Are the banks increasing risk in the system with their special low-rate mortgage offers?

Bank officials suggest the main target is customers of other banks along with new customers with solid jobs and a genuine need to own homes.

Rob Mclister, editor of industry newsletter Canadian Mortgage Trends, says such offers typically result in only a small amount of business from new borrowers, partly because few potential customers qualify for the loans. Instead what they do is raise the level of market interest in mortgages and home buying generally, he said.

Not surprisingly, the banks continue to grow home loan volumes at mid single digits, a healthy clip given the weak economy.

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Canadian Home Ownership gets more affordable…

March 8th, 2012 Categories: Real Estate News

Housing affordability improved in Canada during the last three months of 2011, Royal Bank of Canada said in a quarterly report Wednesday.

RBC said the financial burden of owning a home declined for the second straight quarter in last year’s fourth quarter, thanks to softer’ home prices and higher incomes.

That countered the deterioration of home affordability seen in the first half of last year, largely because of a rapid run-up in prices in the Vancouver area.

As a result, the cost of owning a home at market price represented slightly less of a pinch on household budgets in the fourth quarter,’ RBC chief economist Craig Wright said in a statement. Continued low interest rates in 2012 will help keep housing costs at bay in the near term.’

The average proportion of pre-tax household income needed to own a standard two-storey home was down 0.8 of a percentage point to 48.1% nationally in the fourth quarter, RBC said. For detached bungalows, it was down 0.6 point to 42.2%, and for condominiums down half a percentage point to 28.5%.

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