From April 18, 2011 The Government of Canada Will No Longer Guarantee Home Equity Lines of Credit (HELOC)

In January 2011, Canada’s Department of Finance announced a series of changes to mortgage and property financing rules. These new mortgage rule changes are intended to cool Canada’s real estate market and slow Canadians per capita debt growth in the short term and support the long term stability of the Canadian property market.

Jessi Johnson a Mortgage Broker in Vancouver was kind enough to come and explain the changes.

In part 1 of 3 we talked about how the Department of Finance rule changes are shortening the amortization for high ratio mortgages. In part 2 of 3, we discussed how under the new mortgage rules it will only be possible to pull out 80%  loan to value when refinancing a property in Canada from March 18, 2011.

Today we are talking how the Government of Canada will no longer insure or guarantee Home Equity Lines of Credit offered by Canadian Banks and lending institutions from April 18, 2011.

What is a Home Equity Line of Credit?

Wikipedia defines a Home Equity Line of Credit as follows:

A home equity line of credit (often called HELOC and pronounced HEE-lock) is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower’s equity in his/her house. Because a home often is a consumer’s most valuable asset, many homeowners use home equity credit lines only for major items, such as education, home improvements, or medical bills (US), and choose not to use them for day-to-day expenses. ^[1]

HELOC abuse is often cited as one cause of the subprime mortgage crisis (In the US)

In Canada, the Federal Government will no longer guarantee Home Equity Lines of Credit from April 18, 2011.

Why are the Feds doing this?

Canada’s Federal Government does not want Canadians to use their homes as ATM’s as Jessi mentions by spending the money they can get from a HELOC when their property prices go up.

Why Does it Matter if Canada’s Federal Government Stops Backing HELOCS?

Canada Guarantees HELOCS?

Prior to April 18, 2011, the Federal Government gave a guarantee to banks and other lenders offering HELOCS, that the Federal Government will cover any losses that these lenders suffer when a borrower does not pay back a Home Equity Line of Credit (HELOC). This guarantee made these loans a risk free investment for the Banks and lenders offering HELOCS because the Feds would cover any losses.

Risk + Demand – Supply  = Higher Costs

Risk costs money. When the banks and lenders who offered HELOCS had no risk of default on these loans, they had no reason to charge a risk premium in the form of higher interest rates. From April 18, 2011, if a borrower with a HELOC defaults the lender is on the hook for the loss rather than the Canadian Government.

The Bottom Line

To hedge against these anticipated losses, lenders will require a risk premium in the form of a higher interest rate on HELOCS. Some lenders may completely pull out of the HELOC market all together. Less supply of these HELOC loans coupled with stable or increasing demand means higher prices. Increased risk for lenders also means higher prices.

If you’re looking to get a HELOC after April 18, 2011 expect it to be more expensive and harder to find and qualify for.

Buying a Home in Vancouver? Check out these Videos with First Time Buyer Advice for Vancouver!

Thinking of Selling Your Condo in Vancouver? Questions? Contact Mike Stewart or Check out out these Videos How to Sell a Condo in Vancouver!

I STRONGLY ENCOURAGE QUESTIONS & THOUGHTS IN THE FORM OF A COMMENT BELOW!

Canada’s Department of Finance, which oversees and regulates Canada’s mortgage market which has a huge impact on Real Estate in Vancouver has enacted a new series of measures to cool the property market across Canada. The changes announced on January 17, 2011 are designed to allow the government to cool the Real Estate Market without affecting the overall economy by raising the Bank of Canada’s Prime Rate.

Call in the Expert!

As I am Realtor and not a Mortgage Broker, so I called in the expert to answer my questions on the new rules. Jessi Johnson, a Vancouver Mortgage Broker was kind enough to meet with me and explain the changes in detail.

Since there was sooo much detail, we broke up the discussion on the New 2011 Department of Finance Mortgage Rules and its effects on Vancouver Real Estate into a three part series.  In part one of the series we are going to talk about the changes to maximum amortization.

Shortened Amortization for High Ratio Mortgages?

Yes! For mortgages were a Buyer is putting less than 20% down (ie High Ratio Mortgage, high mortgage value compared to property value), the new rules shorten the maximum amortization from 35 years to 30 years. But keep in mind! This is only for high ratio mortgages that are insured by CMHC! Please note!

If you are putting more than 20% down you can still get a 35 or 40 year amortization!

How can this effect Real Estate in Vancouver?

Shortened amortizations may effect Vancouver’s real estate market by making it more difficult for first time home buyers and others with a low downpayment relying on the lower payments that come with the longer amortizations to get their first mortgage. The shortened amortizations effectively reduce the amount that Buyers can borrow because they have to pay more money back faster with the shortened amortization. This will make the Vancouver real estate market more stable, but it could make real estate less affordable in Vancouver.

This could cause a reduction in demand in the real estate market in Vancouver that. Will this cause prices to go down? I’d love to hear your thoughts!

Check out Episode 2 of 3 of the 2011 Canadian Mortgage Rule Changes Refinancing!

First Time Home Buyer? *** You NEED to check out these VIDEOS with Lots of Advice for First Time Home Buyers! ***

I’d love to hear your thoughts on this in the form of a comment down below!

Share I recently had the pleasure of interviewing Jessi Johnson of the Jessi Johnson Mortgage Team and he was kind enough to explain a term that I hear regularly as a Vancouver Realtor and that is Amortization.

Amortization – What is it? Investopedia defines Amortization as follows: “The paying off of debt in regular installments over a period of time.”

Basically amortization is how long a mortgage loan takes to pay off.

Most Buyers in the Vancouver Real Estate Market start out with a 25 year amortization which will take 25 years to pay off.

At the start of the mortgage the property owner will be paying mostly interest and very little principal and at the end of the amortization the opposite is true. With a mortgage with a longer amortization (ie 35 years), the monthly payment will be lower, but the amount of interest paid per month is higher and the principal repayment is lower. Over 35 years this could result in a huge (double the amount borrowed or more) amount of interest for a property owner to pay.

Reduce the amortization and the monthly payments increase, but the principal repayment also increases while the interest paid declines and the debt is paid off in a shorter period of time.

I have embedded an amortization calculator set up for Canada to play with to help you better understand how amortization works.

I STRONGLY WELCOME COMMENTS AND WOULD LOVE TO HEAR FROM YOU!

*** PLEASE NOTE *** YOU CAN CHANGE THE INTEREST RATE ON THE Canadian Mortgage Calculator BELOW 6% IS ONLY AN EXAMPLE AND CURRENT MARKET RATES MAY BE MUCH LOWER!!

This is the first post in a series of videos with tips for First Time Home Buyers in Vancouver’s property market.

So you’re thinking of taking the plunge and buying your first home in beautiful Vancouver!

How much can I spend? Get Pre-Approved!

If you have several hundred thousand dollars in your bank account, great!

If not, you should speak to your bank or a mortgage broker to find out how large of a mortgage you can get. The bank or broker will give you a mortgage pre-approval which is a rough estimation of what you can borrow. This mortgage pre-approval is based on the information you provide the bank or mortgage broker. Remember, the more accurate and detailed the information you provide, the more accurate the pre-approval amount!

Here’s a list of mortgage brokers who can help you with a mortgage pre-approval:

Chad Watts 7787736631 cwatts@mortgagegrp.com

Rino Revel 604) 816-1976 rinorev@telus.net

Karli Shih karlishih@gmail.com 604-992-9891

Jessi Johnson (604) 716-6474 jessi@jessijohnson.com

Want to learn more about mortgages and real estate financing? Check out the videos on Vancouver Real Estate and Mortgages!

Now that you know what you can spend, its time to figure what that money can buy. Be sure to Check out Episode 2 of the Vancouver First Time Home Buyers Guide – Where to Buy!

If you have any questions, feel free to contact me at any time!

Mortgage Pre-Approvals are NOT Guarantees of a Mortgage!

I recently had the pleasure of interviewing Chad Watts of The Mortgage Group about mortgage pre-approvals. He brought up a very important point for Buyers, particularly First Time Home Buyers. And that is a mortgage pre-approval is NOT a guarantee that you will get a mortgage at the amount the Lender originally mentions or get a mortgage at all.

What is a Mortage Pre-Approval?

This is a preliminary estimation by a Lender of how much the Lender will loan you based on very basic information. This number is subject to change based on what property you get an accepted offer on and the details of your financial situation.

Why Your Mortgage Pre-Approval may not match the Mortgage You Get!

A mortgage pre-approval is a basic guideline of generally how much a Lender thinks they can give loan the Buyer. Once the Buyer finds their dream home and have an accepted offer subject to financing on the property they need to forward the offer onto the Lender. The Lender then begins to go over all the details of the property and the Buyers financial situation with a fine tooth comb. This is often where the disparities between the Mortgage Pre-Approval and the actual mortgage pop up.

Too Much Debt, Inaccurate Financial Information, Unpaid Taxes,  and Leaky Condos

There are certain buildings that Lenders will not lend money on for various reasons (Its a leaky condo, its not worth what the accepted offer says its worth, there are issues with title). Sometimes the information the Buyer originally provided the Lender is not accurate or out of date (Buyer is behind on their taxes, or doesn’t have as much money as they thought, or may have too much debt). Both of these variables can result in the Buyer either not getting a mortgage at all or not getting as large a mortgage as they had anticipated.

The CHMC has a cool tool that you can use to test your financial situation to see if you are ready for home ownership that you might find useful.

Totally off topic – Check out the Tightrope Walker in the background of the video!

I REALLY APPRECIATE COMMENTS AND I’D LOVE TO HEAR YOUR THOUGHTS!

Last week I had the pleasure of meeting up with Jessi Johnson of the Jessi Johnson Mortgage Team to discuss the merits of a Variable Rate Mortgage versus a Fixed Rate Mortgage.

What is a variable rate mortgage?

This is a mortgage that has an interest rate that changes in line with the Bank of Canada’s prime rate.Variable rate mortgages tend to have a lower interest rate than a fixed rate mortgage, but the interest rate on a variable mortgage can change at any time.

What is a fixed rate mortgage?

A fixed rate mortgage has a set interest rate that does not change over the life of the mortgage. The interest rates for these mortgages are set by the international bond market. The interest rate (and the amount of interest paid) on a fixed rate mortgage tend to be higher than a variable rate mortgage.

Should I got for a Fixed or Variable rate mortgage?

That depends on what you value personally. If the possibility that your mortgage payments could increase drastically keep you up at night, then the certainty of a fixed rate mortgage might be the best option for you. If you’re comfortable with some changes in your mortgage payment and like the lower interest costs that are sometimes associated with a variable, then this mortgage might be the right product for you.

PLEASE NOTE ** I’d love to hear your thoughts and questions in the form of a comment below! **