Posted in Canadian Mortgage News

Who pays your mortgage broker?

Who pays your mortgage broker?

Financial advisers do not work for free, and neither do mortgage brokers. Bruce Sellery explains how their compensation actually works.

Question

I saw your post about mortgage brokers and am considering this option. But I want to know how they get paid?

Answer

Once upon a time, everyone believed that financial advisers worked for free. A benevolent unicorn from Middle Earth paid the bills as an act of love for the universe.

Yeah, right.

Financial advisers do not work for free, and neither do mortgage brokers. Before you choose to work with one it is a good idea to understand how their compensation actually works.

Mortgage brokers paid on commission

In most cases, a mortgage broker earns a one-time commission from the lender. The amount can vary from 0.50% to about 1.20%, depending on the type of mortgage they sell and what the lender is offering. For example, a lender would pay a higher commission on a 10-year mortgage than a 5-year because it is more profitable for them, and because it means the broker would be selling one mortgage in a decade, instead of two, five-year mortgages.

If you sign a $300,000 mortgage, your broker would earn about $2,250 on the deal, based on a commission of 0.75%. This amount comes from the lender so you never actually see the bill.

Hitching on the trailer fees

Trailer fees are very common for financial advisers, but are only starting to catch on for mortgage brokers. Basically with trailers, the broker collects a lower commission when the mortgage is signed, but then earns a trailer fee of say 0.15% from the lender every year for the life of the mortgage. The advantage for brokers is two-fold: first it gives them greater financial stability, and second it gives them an ongoing revenue stream that they can sell if they decide to leave the business.

Holding on to objectivity

One of the advantages of working with a mortgage broker is that they can work with many different lenders, whereas a mortgage specialist at a bank can only offer products from their employer. But that doesn’t mean the broker’s objectivity is sacred. In addition to trailer fees, which might influence a broker’s judgment, lenders often offer other incentives like bonuses to do more deals with the firm.

Bonuses can be based on volume, or on the number of deals that avoid going into arrears. (It’s no surprise lenders value good quality borrowers.) Lenders can also offer travel, gifts and other perks, like conferences.

Ask a lot of questions

As you would do when interviewing financial advisers, ask prospective mortgage brokers how they are compensated in terms of commissions, trailer fees, bonuses and other perks. Then ask what the risks are that these would affect their ability to place your needs above the lenders.

Mortgage brokers, like mortgage specialists at a bank, deserve to get paid. But the onus falls on you, the client, to ensure that you are getting value for the services they provide.

Posted in Canadian Mortgage News

Top 5 takeaways from the Bank of Canada

The Bank of Canada turned slightly more dovish Tuesday as it trimmed its growth outlook for Canada and warned that the global economy has weakened.

In an expected move, Governor Mark Carney and his team left the bank’s overnight lending rate unchanged at 1%. It has remained at the near-historic low since September 2010.

But the bank continued to retreat from some of the more hawkish language it hinted at in previous statements in April and June.

 

“This is a substantially more dovish statement,” said Derek Holt, economist with Scotia Capital.

 

Below, we outline the top five takeaways from the bank’s July 17 statement.

Global growth prospects have weakened

In its April outlook, the Bank of Canada said that it was seeing signs of improvement in the global economy. That is no longer the case.

“Global growth prospects have weakened since the Bank’s April Monetary Policy Report,” the bank said.

It said that developments in Europe point to a renewed contraction, while emerging market countries such as China have seen their economies slow more than expected.

The bank also warned that global financial conditions have deteriorated since its April report.

Despite the gloomy outlook, however, the bank said it still assumes the eurozone crisis will be contained.

Canada’s economic outlook cut this year and next

Canada won’t be spared from a slowing global economy. The Bank of Canada trimmed its forecast for economic growth in 2012 to 2.1% from its earlier 2.4% target.

It also sees slightly weaker growth in 2013, lowering its outlook to 2.3% from 2.4%.

“While global headwinds are restraining Canadian economic activity, domestic factors are expected to support moderate growth in Canada,” the bank said.

There are risks, however. The bank expects consumption and business investment to be the main growth drivers, but record household debt and slowing housing activity could negatively impact that growth.

 

On the upside, the bank does view a rebound in growth occurring in 2014, saying GDP will increase by 2.5% for that year.

Housing to cool

This marks the first interest rate announcement since Finance Minister Jim Flaherty announced new mortgage rules in Canada on June 21. The new rules ushered in a number of changes, including lowering the maximum amortization period of a mortgage to 25 years.

“Housing activity is expected to slow from record levels,” the Bank of Canada said.

Recent data already showed some cooling in home sales following the introduction of the new mortgage rules. Existing home sales dropped 1.3% in June from the previous month, and were down 4.4% from the year before.

“The Bank of Canada will likely want to see the impact these new rules have on domestic spending before lifting rates,” said Diana Petramala, economist with TD Economics.

Output gap to close in latter half of 2013

In another sign that the bank sees global headwinds slowing Canada’s economy, it said that it now expects the country’s output gap to remain until 2013. The output gap is the spare economic capacity of a country (e.g. the difference between the actual capacity and what it could achieve at its most efficient, productive level).

The bank had previously expected the output gap to close in the first half of 2013.

“This is consistent with guidance we’ve been consistently providing on how the Bank of Canada has been underestimating spare capacity in the Canadian economy partly via over-estimating 2012 growth prospects,” Mr. Holt of Scotia Capital said.

Bank eyeing lower commodity prices

Concerns over lower commodity prices have crept into the bank’s latest statement.

In April, the bank warned about the effects of high commodity prices on economic momentum. Now the bank expects the recent pullback in prices to keep inflation below its 2% target until mid-2013.

“Given the recent drop in gasoline prices and with futures prices suggesting persistently lower oil prices, the bank expects total CPI inflation to remain noticeably below the 2 per cent target over the coming year,” the bank said.

Posted in Bank of Canada, Bank of canada rates, BC Mortgages, Canadian Housing Market - Lisa Alentejano, Canadian Mortgage News, Debt, Home Loans, Interior Mortgage Expert - Lisa Alentejano, Jim Flaherty, jim flaherty mortgage rules, mark carney, Mortgage Affordability, Mortgage Broker Kamloops, Mortgage Language, Mortgage Rates, new mortgage rules canada, Protecting your biggest investment your mortgage, Refinance Your Mortgage, Renewing your mortgage

New Mortgage Rules Coming Effective July 9, 2012

Some changes that will come into effect on July 9, 2012.   How will this affect homebuyers or home owners in terms of dollar amounts… Heres a quick snapshot below;

Payments based on a 25 year amortization vs a 30 year amortization would cost the borrower  a difference of $52.48 per month per 100K in mortgage.   In terms of borrowing power the homeowner that could buy a home for $300k would now only be able to afford a $266K home, a difference of approximately $34k based on the above changes from 30 year amortization to 25 year.  If your in the market for a mortgage or a refinance, I would consider firming those details up before July 9, 2012 to take advantage of our current options.

READ ON; After speaking in Halifax just hours after Finance Minister Jim Flaherty announced a series of changes that come into effect next month, Mr. Carney reiterated his concerns about the effects that his ultra-low interest rates have had on the behaviour of both borrowers and lenders, warning the economy cannot “depend indefinitely” on debt-fuelled spending, especially as incomes stagnate.

At the same time, Europe’s growing crisis is expected to keep the central bank on hold for a long time yet, leaving regulation as the only real avenue for reining in housing-related investment, which Mr. Carney said now makes up “an unusually elevated share” of the economy.

“In this context, Canadian authorities are co-operating closely to monitor the financial situation of the household sector, and are responding appropriately,” Mr. Carney, who was almost certainly involved in Mr. Flaherty’s decision, said in a speech to the Atlantic Institute for Market Studies.

“Today, federal authorities have taken additional prudent and timely measures to support the long-term stability of the Canadian housing market, and mitigate the risk of financial excesses.”

Last week, Mr. Carney and his policy team warned that Europe’s worsening drama could slam Canada with a “major shock” if it is allowed to spread out of control and further infect healthier regions, particularly the still-fragile U.S. economy. They also warned that more Canadian households could find themselves under water with their debt payments if a big unemployment shock were to result, and sharpened their warnings about Toronto’s booming condo market.

Some investors are betting that the situation in Europe and the failure of the U.S. economy to gain more traction could force the central bank to cut interest rates from the current 1-per cent level sometime later this year. However, in his speech, Mr. Carney strongly hinted that he is not even considering a reduction in rates, echoing much of the language on the economy from his last interest-rate statement on June 5, indicating his domestic outlook hasn’t shifted much since then.

“Despite these ongoing global headwinds, the Canadian economy continues to grow with an underlying momentum consistent with the gradual absorption of the remaining small degree of economic slack,” said Mr. Carney, whose next decision is scheduled for mid-July. “To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”

Still, Mr. Carney left himself the same wiggle room from recent statements, saying that the “timing and degree” of any rate hikes would depend on how things play out.

There’s good reason for him to be cagey, and not just outside of Canada’s borders. Despite the worries about consumers over-borrowing, recent economic data suggest the housing market is already slowing down, and a report from Statistics Canada today showed that in April, retail sales fell – both in terms of prices and volumes.

Some analysts have already warned that the mortgage moves could be too effective and spark a slowdown in a key area of strength before the economy is ready for it.

Earlier Thursday, Mr. Flaherty confirmed that Ottawa will reduce the maximum amortization period to 25 years from 30 years, and will cut the maximum amount of equity homeowners can take out of their homes in a refinancing to 80 per cent from 85 per cent. Also, the availability of government-backed mortgages will be limited to homes with a purchase price of less than $1-million, and the maximum gross debt service ratio will be fixed at 39 per cent, and the maximum total debt service ratio at 44 per cent. All the changes will take effect on July 9.

Mr. Carney’s speech, meanwhile, was largely a re-hash of his views on what is needed to foster the more balanced and sustainable global economy on which export-heavy Canada’s fortunes largely depend, including an “open, resilient” financial system. The central banker, who is also chairman of the Group of 20-linked Financial Stability Board, again warned against delaying the implementation of reforms designed to make international finance safer for the global economy.

“The current intensification of the euro crisis has only sharpened our resolve,” he said, adding that a system that restores confidence will need to “rebalance” the relationship between government regulation and financial markets, and in which policy makers realize they must help do what’s good for the world rather than taking a simply national approach.

Posted in Canadian Mortgage News

Banks go on appraisal alert in a volatile housing market

Lenders use a variety of techniques, including full appraisals, so-called “drive-by” appraisals based on the exterior of the home, and databases of market prices, to evaluate homes. The values they arrive at help determine how much money they should lend to mortgage borrowers. They are also key for measures such as the loan-to-value ratio that are used to track the health of loan portfolios and borrowers’ debt loads.

Banks are emphasizing on-site visits to value properties, especially those above a certain price or in rural areas. They are also paying closer attention to who does the appraisal. The higher level of diligence aims to get more accurate values amid fears of an overheated housing market. If standards tighten or appraisals become more conservative, it could result in a decrease of the amount of mortgages that banks lend.

Appraisal values become most important to banks when a borrower defaults, and the bank has to sell the property to recoup money. Their accuracy is especially important in the current environment, in which home prices are believed to be inflated and borrowers are taking on record debt levels, increasing the risk of defaults.

There has been no suggestion of widespread or serious problems in Canada’s appraisal system, and bankers say they are comfortable with the values on their books. But lenders and regulators have recently been scrutinizing appraisal systems in an effort to ensure that these values are as accurate as possible.

“We have tightened our process, and make sure that we are getting an accurate read,” David McKay, the head of Canadian banking at Royal Bank of Canada, the country’s largest mortgage lender, told analysts on a recent conference call. “When you think you have an 80 per cent loan-to-value ratio, you want to make sure you have an 80 per cent loan-to-value ratio.”

Mark Chauvin, Toronto-Dominion Bank’s chief risk officer, told analysts that in some of the hotter markets such as Vancouver and Toronto, appraisal values are coming in slightly above purchase prices.

“We’re really not seeing a lot of it,” he said. “But we feel our existing policies will protect us against that.”

TD lends 80 per cent loan-to-value up to $900,000, but after that only lends 50 per cent, to protect itself against inflated values on expensive homes. “So if you take a $2-million house, you get a loan-to-value of 56 per cent under the sliding scale,” he said.

Some banks began to focus more on this last year, after an American insurance company reported a significant charge in connection with insurance it was selling to them. That insurance was covering risks associated with the possibility that appraisal values were off.

California-based First American Financial Corp. had been selling Canadian banks a “guaranteed valuation” product that guaranteed the valuation of a property was accurate on the day a mortgage was issued. If it turned out later that it wasn’t, the bank could make a claim.

But First American posted a first-quarter loss in 2011 as it took a $45-million reserve strengthening charge relating to this obscure Canadian product.

Policies that were experiencing claims had been written mostly in 2007 and 2008. Sources say the issue stemmed mainly from Alberta, where the housing market underwent a correction starting in 2007, and problems became apparent as default rates increased, leading banks to seize more homes as collateral.

“This is just a case where we mispriced the risk,” First American CEO Dennis Gilmore told analysts. (The firm declined to comment).

The company is no longer offering that insurance in the same form, bankers said. “It’s a big change in the industry; we’ve all kind of morphed our property valuation strategies as a result of this occurring,” said a senior banker.

Spokespeople at Bank of Montreal and Bank of Nova Scotia said Monday that their institutions were already focused on in-person appraisals.

The Office of the Superintendent of Financial Institutions is ushering in new mortgage underwriting rules that require banks to have clear policies outlining how they value properties. It is urging them to use a combination of tools, and to include a comprehensive on-site appraisal unless there’s an appropriate reason to use an alternative method.

Banks “should not use title insurance or valuation insurance as a substitute for a sound appraisal or valuation process,” OSFI stated.

Financial post

Posted in Canadian Mortgage News

Bank of Canada Leaves Key Rate Unchanged “for Now”

The Bank of Canada has left the key overnight interest rate unchanged at 1%, but has also signaled the days of super-low borrowing costs will soon come to an end. The Bank Rate is correspondingly 1.25% and the deposit rate is 0.75%.

Overall, the profile for global economic growth has improved since the Bank released its January Monetary Policy Report (MPR), with Europe expected to emerge slowly from recession in late 2012. U.S. growth is slightly stronger, reflecting the balance of improved labour markets, financial conditions and confidence, as well as emerging fiscal consolidation.

Economic activity in emerging-market economies is expected to moderate to a still-robust pace over the projection horizon, supported by an easing of macroeconomic policies. Commodity prices are elevated due to positive economic prospects. However, the international price of oil has risen further and if sustained, could dampen the improvement in economic momentum.

Economic momentum in Canada is slightly firmer than the Bank had expected in January. The Bank expects economic growth of 2.4% this year, which is well above their January forecast of 2%, and expects next year’s expansion to be more moderate at 2.2%. The external headwinds facing Canada have abated, allowing for stronger growth prospects, and business and household confidence are improving.

The Bank projects that private domestic demand will account for almost all of Canada’s economic growth over the projection horizon. Household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk. Business investment is projected to remain robust, reflecting solid balance sheets, very favourable credit conditions, continuing strong terms of trade and heightened competitive pressures.

The contribution of government spending to growth is expected to be quite modest over the projection horizon, in line with recent federal and provincial budgets. In addition, the recovery in net exports is likely to remain weak in light of modest external demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

For the first time since the onset of the recession, the Bank forsees the global economy returning to full capacity in the first half of next year—one or two quarters ahead of its expected pace. In light of this reduced slack, the Bank says modest withdrawal of very stimulative interest rates is possible in the near future.

The next policy setting is June 5 but no hint has been given as to whether moves will occur so early. The bank has kept interest rates at the current level since September 2010. The Federal Reserve, as well as the banks in Australia, Europe, England, Mexico and Sweden will also be meeting in June to discuss economic issues and key rates.

In the opinion of Desjardins economists, many economic uncertainties will likely persist and force Canada’s monetary authorities to stay on the sidelines for several quarters. They have stated, “In a context where U.S. key rates will likely stay the same until at least 2014, it is hard to picture an early rise in Canada’s key rates,” with the possibility that the loonie and international merchandise trade will be negatively effected.

Posted in Canadian Mortgage News

Canada expects moderate growth in 2012: Flaherty

NEW YORK (Reuters) – Canadian Finance Minister Jim Flaherty said on Tuesday he expected Canada to post moderate growth this year, noting that the country’s recovery remained fragile and Europe’s sovereign debt crisis continued to pose risks to the global economy.

Flaherty also reiterated he had no plans to take further steps to rein in Canada’s housing market, which some analysts say is overheating.

“I have no present plans to intervene in the housing market in Canada,” Flaherty told reporters in New York.

“There has been some moderation in the market of late. I would prefer the market itself to correct to the extent a correction is necessary.”

The government and central bank have been cautioning Canadians of the risks of taking on too much debt, particularly through mortgages, with interest rates low and home prices high.

Flaherty has tightened rules three times since 2008 in the mortgage insurance market but left them untouched in the federal budget released at the end of March.

The budget did propose enhanced supervision of the federal housing agency that issues mortgage insurance. Asked about that change, Flaherty said the Office of the Superintendent for Financial Institutions – Canada’s banking regulator – as well as his Department of Finance was looking at the issue.

Flaherty said he expected Canada to see moderate growth this year, which was the basis for the government’s recent budget.

The economy added a surprising 82,300 new jobs last month, the most since September 2008, while the unemployment rate fell to a six-month low of 7.2 percent.

“If we get stronger growth, that’s terrific, but remember the economic recovery is fragile,” said Flaherty.

“There are serious issues that persist in Europe, particularly with respect to Spain.”

A weak auction of Spanish bonds last week rekindled investor fears over the extent of Europe’s debt crisis.

 

 

Posted in Bank of Canada, jim flaherty mortgage rules, Low Interest Rates, Mortgage Affordability, Mortgage by Lisa Alentejano, mortgage financing kamloops, mortgage rules, Pre Approval Mortgage, Protecting your biggest investment your mortgage, Why use a mortgage broker

No changes to mortgage rules as of yet… Jim Flaherty left the current regime in place

Investors hoping for a spike in rental demand will be disappointed with the government’s decision to keep mortgage insurance rules as they are — the Finance minister offering a budget that does nothing to tighten qualifying terms for potential homebuyers.

While moving to cut 19,200 bureaucratic jobs over the next three years with an eye toward slashing $5 billion a year from the federal budget, Jim Flaherty left the current regime of mortgage rules in place.

The reprieve, at least for now, was anticipated by mortgage industry leaders from one end of the country to the next, but effectively denies landlords any increase in demand for their units resulting from stricter qualifying standards for homebuyers.

It means rent increases are also unlikely.

With today’s budget announcement, Flaherty effectively rejected a chorus of banker calls for a 25-year amortization cap, down from the 30 years the government now allows. Some economists also wanted the government to increase down payment requires to a minimum 7- or 10-per cent.

Both suggestions were billed as a way of cutting record levels of household debt and slow down the consumer rush to buy homes.

Exactly a week prior to Thursday’s communiqué, Flaherty used a media scrum to suggest he would resist calls for stricter rules.

“I find it a bit off that some of the bank executives are taking the position that the Minister of Finance or the government somehow should tell them how to run their business,” Jim Flaherty told reporters just outside Ottawa Thursday. “They decide what they want to charge in interest rates.

“The new housing market produces a lot of jobs in Canada so there’s a balance that needs to be addressed.”

Still, The government did move to shore up some areas of mortgage industry oversight: it will bring in legislation to provide increased oversight of CMHC commercial activities; and legislation for covered bonds, which will be administered by CMHC.\