Today, we are going to further elaborate on what are the implications of this new set of rules, and how they affect you, as the final customer.

Upcoming Change
INSURED MORTGAGES ONLY
The qualifying rate for any mortgage terms shorter than 5 years will now be the 5-year benchmark rate on the CMHC website.
Effective Date
April 19th, 2010
Reasoning
To protect borrowers from rising rates

Upcoming Change
Max 90% Loan-to-Value on Owner-Occupied refinances
Effective Date
April 19th, 2010
Reasoning
To prevent borrowers from losing their equity in the event their property value decreases. It also discourages borrowers from depending on their home equity to reduce personal debt.

Upcoming Change
INSURED MORTGAGES ONLY
Self-Employed borrowers with more than 3 years in the same business will be required to confirm their income and will not be eligible for “stated income” Self-Employed product.
Effective Date
April 9th, 2010
Reasoning
This product is intended for a small portion of borrowers who find it very difficult to document income- in particular, recently self-employed borrowers. It is assumed, individuals with longer time self-employed are able to confirm their income via a third party validation through financial statements, T4’s and other third party validations.

Upcoming Change
INSURED MORTGAGES ONLY
Maximum Loan-to-Value is 90% for purchase and 85% for refinances for Self-Employed borrowers unable to confirm their income via traditional third party sources
Effective Date
April 9th, 2010
Reasoning
As the associated risk is higher when the borrower cannot confirm income via a third party, a larger down-payment is required to mitigate the elevated risk.

Upcoming Change
Maximum 80% Loan-to-Value on Non-owner occupied rental properties
Effective Date
April 19th, 2010
Reasoning
To prevent investors from speculating about property values and to prevent a large influx of high-ratio financed non-owner occupied properties that may default if vacancy rates increase.

Upcoming Change
INSURED MORTGAGES ONLY
Where rental income is generated from the subject property, 50% of the gross rental income from the subject property may be added-back to the borrowers annual income
Effective Date
April 19th, 2010
Reasoning
To prevent investors from depending on rental income to qualify.

These new mortgage standards are primarily aimed at stopping housing speculators and ensuring homebuyers can adequately juggle their debts when interest rates inevitably rise.

The government has stressed that Canada’s real estate market is healthy, and that the new rules would only stop “negative trends” from development.

For more information, please contact our team of mortgage brokers which are at your complete disposal. We are here to offer you the best mortgage rates, lowest prime rates, debt consolidation and Canadian housing assistance, and all other facets to help you achieve your dream home.

Canada’s Budget 2010 aims to take advantage of  Canada’s economic recovery and prepare it for the future.
The budget plan has three main broad aims.

1. It confirms $19 billion in new federal stimulus under Year 2 of Canada’s Economic Action Plan, to create and maintain jobs complemented by $6 billion from provinces, territories, municipalities and other partners.
2. It invests in a limited number of new, targeted initiatives to build jobs and growth for the economy of tomorrow, strengthen Canadian innovation, and make Canada a destination of choice for new business investment.
3. Budget 2010 charts a course to bring Canada’s finances back to balance over the medium term and well before any other Group of Seven (G7) country.

The Canadian brand will be based on competitive taxes, renewed infrastructure and skills, a strong head start in clean energy, a tariff advantage, less red tape, and a more prominent voice as a global financial sector leader.

All of these measures will contribute to maintain and sustain Canada’s fiscal health, which according to the Department of Finance is the envy of the world.

As far as the mortgage industry us concerned the 2010 federal budget includes new regulations to standardize mortgage prepayment disclosure and the elimination of the Insured Mortgage Purchase Program (IMPP).

Under the Insured Mortgage Purchase Program, Canada Mortgage and Housing Corporation (CMHC) purchased securities comprised of pools of insured residential mortgages from Canadian financial institutions to provide long-term stable funding to lenders and help them continue lending to Canadian consumers and businesses.

Of the $125 billion available, as of September 21, 2009, $64.2 billion had been disbursed through 16 reverse auctions: $43.3 billion through 10 fixed-rate reverse auctions and $20.9 billion through six floating-rate reverse auctions. 19 different financial institutions participated directly in the program, including banks, non-bank deposit-taking institutions, and life insurance companies.

Some bankers argue that the program should remain in place as a safeguard. However, recent figures suggested that bank interest had dwindled with just $65.9 billion worth of mortgages having been disbursed. Just a few weeks ago the government offered to buy up to $4-billion of mortgages, but banks only sold it $1.4-billion worth. One last purchase is scheduled for March 24.

The government also says that it will introduce legislation setting out a framework for covered bonds, a type of bond that remains on a banks’ balance sheet and can be backed by assets such as mortgages. They are similar to Canada Mortgage Bonds, except for the fact that they remain on the banks’ balance sheets and that they do not carry the government’s guarantee. A number of Canadian banks have already begun issuing covered bonds during the last two years, and have been successful in selling them to investors.

• http://www.budget.gc.ca/2010/plan/chap1-eng.html
• http://canada-money-affairs.blogspot.com/2010/03/canadas-federal-budget-2010.html

Source: Bank of Canada
*Bank of Canada statement included reference to hold rate to end of second quarter 2010

Bank Prime Lending Rate

Source: Bank of Canada

US Federal Reserve Board Discount Rate

Source: US Federal Reserve

Exchange Rate $CDN($US)

Source: Bank of Canada

Government of Canada Bonds

Source: Bank of Canada

Total New Housing Starts (Seasonable adjusted and annualized)

Source: CMHC Housing Now – December 2009 and December 2008.
This seasonally adjusted data goes through stages of revision at different times of the year.

Average MLS resale price for local markets

Source: Canadian Real Estate Association

Source: TD Economics February 2010

While the average single-family house price was $369,573 for February, up 1.4 per cent from January, or 5.6 per cent from a year ago, condominium prices actually dropped 3.8 per cent in February to $231,530 from $240,686 and duplex and row house prices rose 3.3 per cent to $315,390.

Sales figures for February showed even more extreme monthly and yearly increases.

“While prices remained stable through February, the increase in sales activity indicates that there is a demand for housing in the Edmonton area,”

said Larry Westergard, president of the Realtors Association of Edmonton.

There were 1,184 housing sales in February — up 33.9 per cent compared to January. This number was up 7.6 per cent from a year earlier.

“The upcoming changes to mortgage qualification rules and impending mortgage rate increases may prompt some buyers to enter the market earlier and cause some additional slowdown in the third quarter,”

Westergard said.

Concerns about inventory falling short were also allayed by 2,505 residential listings added during the month for a total inventory of 5,449 homes, while the average number of days on market was 10 days down to 47.

The sales-to-listings ratio, a key indicator of market conditions, was 47 per cent, which suggests a balanced market.

Source:

Edmonton Journal

That was the one significant change in its scheduled interest-rate announcement, and analysts might interpret this as a first step by the central bank to ready markets for an interest-rate hike.

“The Bank of Canada is now walking not crawling towards the exit,” said Kathy Lien, director of currency research at fx.360.com, following the release of the statement.

“Change is afoot. Evolutionary change, but change nonetheless,” added Stewart Hall, economist at HSBC Securities Canada.

For nearly a year, the central bank has pledged to keep its benchmark rate at 0.25 per cent until July in an effort to pump up economic growth, on the condition that inflation would not hit its preferred two per cent target until mid-2011. The central bank’s mandate is to set its key policy rate at a level to achieve two per cent inflation.

In previous statements, the central bank had suggested inflation risks were titled downward because of the possible need to engage in quantitative easing, in which the Bank of Canada would flood financial markets with cash in an effort to spur lending and combat deflation.

But through the statement, the central bank might be indicating deflation is no longer a concern.

“The bank judges that the main macroeconomic risks to the inflation projection are roughly balanced,” it said, with upside risks being stronger-than-projected growth, while a protracted recovery and strong Canadian dollar flagged as downside risks.

Hall said this shift in nuance was “indicative of the need for a policy change at some point.”

The change in the inflation outlook emerged after Statistics Canada reported that the economy grew at a five per cent annualized rate in the fourth quarter of last year – blowing past market expectations for a four per cent gain and the central bank’s original 3.3 per cent forecast. Economists say the fourth-quarter performance has set the stage for another robust gain, of perhaps four per cent or more, for the first three months of 2010.

Recent data indicate that both the headline and core inflation rates have moved much closer to the two per cent level than the central bank had expected. Under the bank’s forecast, the two per cent level would not be reached until the third quarter of next year.

“Core inflation has been slightly firmer than projected, the result of both transitory factors and the higher level of economic activity,” the central bank said in its one-page statement. “The outlook for inflation should continue to reflect the combined influences of stronger domestic demand, slowing wage growth, and overall excess (economic slack).”

In its economic outlook in January, the central bank said stubborn unit labour costs along with increases in property taxes and other administered prices accounted for the recent “stickiness” of core inflation.

The longer inflation stays “sticky,” analysts say, the more likely that the output gap, or the measure of excess economic capacity, is narrowing at a faster pace than previous central bank expectations.

The bank has said it anticipated the output gap to close in the third quarter of 2011. A large amount of excess production capacity suggests a lack of consumer demand, and gives producers little to no pricing power.

Meanwhile, the central bank also acknowledged that economic activity has been “slightly higher” than its own projections, with the five per cent gain in the fourth quarter powered by “vigorous domestic demand” and a recovery in exports.

“The underlying factors supporting Canada’s recovery are largely unchanged – policy stimulus, increased confidence, improved financial conditions, global growth and higher terms of trade,” the bank statement said.

It added that “persistent strength” in the Canadian currency and the “low absolute level” of U.S. demand would continue to act as “significant drags” on economic activity.

“The Bank of Canada has walked a fine line with its latest decision, though overall it is undeniable that the risks to Canadian monetary policy are starting to tilt upwards,” said Eric Lascelles, chief economics and rates strategist at TD Securities. He added the firm’s view was that the central bank would not begin raising rates until the fourth quarter, “but it is hardly inconceivable that this could now come a touch sooner, in September or possibly even July.”

The central bank’s next statement on interest rates is April 20, and two days later it will release its updated economic forecast. Meanwhile, the governor, Mark Carney, has scheduled two speeches this month in which he may provide further guidance as to how the bank would behave as its conditional pledge comes to an end.

Source:
Edmonton Journal

Singleton deducted the mortgage interest on his 1988 and 1989 tax returns but the government disallowed the deduction. After Singleton sued, he lost in the Tax Court of Canada but won the appeal in the Federal Court of Appeals and in October 2001 the Supreme Court of Canada ruled that,

“It is an error to treat this as one transaction – the transactions must be viewed independently.”

As Singleton recalls,

“The Court said the act said I can do what I did, and [Revenue Canada] had no right to look behind what I did to see whether or not it was a sham, which is what they kept calling it. If the act says you can do it, then you can do it and deduct it. End of story, nice and simple, which was our position throughout.”

The implications of that resolution are that structuring your affairs to shrink your tax burden is 100% legal, since the Courts have ruled that Singleton could write off his mortgage interest and that has paved the way for homeowners, who apply the same principles, to make non-deductible principal mortgage interest tax deductible.

What Singleton did was actually a variation of the so-called Smith Manoeuvre, a strategy also known as “leveraging” that Fraser Smith developed after years of watching wealthy Canadians get away with the trick while the vast majority laboured for years to pay off their mortgage and wound up entering retirement with empty pockets.
As he said,

“This is for all those people who would like to be wealthy but who are getting killed both by their mortgages and by income taxes.”

Most people do not write off the interest on their mortgage.  Although many homeowners write off a portion of their mortgage payment as it relates to a home office space, that is not the same as writing off the interest on their mortgage.

Your principal homes mortgage interest is deductible, when the borrowed money is used to earn income from a business or investment that has an expectation of making a profit, even if your home is the pledged security. How the funds are spent determines interest deductibility of your mortgage, not the collateral.  If a direct link can be established between the loan and its business use, it is irrelevant that the security for the loan is a mortgage against your principal residence.

And, what’s more, as long as you pay the tax-deductible interest to the institution that loaned you the money to invest, you never have to pay back the principal. It’s a debt you can die with if you want, at which point the money will be paid back out of your estate.

So, is the Smith Manoeuvre right for you?
According to Fraser Smith, it is if:

a) you own more than 25 per cent of your home,
b) you’re capable of living within your means and using your tax savings to pay down your original mortgage.

Obviously, if you’re close to retirement and the house is paid off, it’s not for you. But, if you’ve got some idle equity in your home and you’d like to free up some cash up to do some investing, the time might be right to do a little manoeuvring.

Worth noting that the previous record high in November for the province of Alberta has been surpassed , and is now sitting at 0.75% (up from 0.72% in November, and 0.40% a year prior).

For the whole of Canada the rate was up just slightly, now sitting at 0.45% (up from 0.33% a year ago).

Most of the other provinces fluctuated within a mere 0.01%, except Saskatchewan, where it climbed 0.02%, but is still a national low, 0.29% (up from 0.23% a year prior).

The Atlantic provinces continue to have the second highest rate (a distant second behind Alberta), sitting at 0.51% (up from 0.42% a year prior).

British Columbia continues their slow but steady climb, and sit at 0.40% as of December, up from 0.23% a year ago.

However,  when viewed in perspective, it appears that the absolute number of arrears in Canada is still very low when compared to other countries, with less than 5 out of 1,000 Canadian mortgagors being late on payments.

Also, it must be taken into account that although there are 5,699 more borrowers in arrears than a year ago, 91,986 more mortgages have been processed during that same period, out of four million active mortgages in total. These numbers show that on an absolute basis, arrears have not been excessively high in Canada.

The single factor that has always most influenced the rate of mortgage arrears is employment,  more even than rising interest rates.
The chart below from Will Dunning Economic Research illustrates the relationship between Canadian employment rate and the percentage of mortgage arrears:

As it can easily be seen, when employment goes up, arrears go down, and when employment goes down, arrears go up, which makes perfect sense.  It isn’t very surprising that when mortgage takers are employed they have no difficulties honoring their debts and when there are more people employed there is a larger pool of people who qualify for mortgages.

Canada is no different from the rest of the world in this sense. Two-thirds of the world’s economic growth is today generated by emerging market economies in the Middle East and East Asia that have expanded about 7 percent, due to sharp increases in energy, commodities, metals and minerals prices worldwide. By contrast, the traditional global powerhouses, such as the economies of the United States, Japan and Europe, expanded a mere 2 percent.

One of the most controversial manifestations of the increasing financial power of emerging economies is the astounding growth of Sovereign Wealth Funds (SWFs) that already control up to an estimated $3 trillion (USD). They are now larger than hedge funds and private equity combined. One of the newest SWFs is China Investment Corporation, established in 2007 to help manage the nation’s US$2-trillion of foreign-exchange reserves, which now has over $200 billion in assets, and is expected to grow sharply.

China has reserves of trillions, of U.S. dollars, accumulated by its massive exports of manufactured goods to the West. It also has a growing need for raw materials to feed those factories. On Sep1, 2009PetroChina Co. agreed to pay C$1.9 billion ($1.7 billion) for a stake in a Canadian oil sands project in its biggest North American acquisition, widening the search for energy resources overseas.

Unsurprisingly, a survey by the Asia Pacific Foundation of Canada revealed that Canada is near the top of the list of overseas investment targets for Chinese companies and among the industries being surveyed, real estate is on top of the list. Some Chinese entrepreneurs are even offering tours to the United States and Canada so investors can see properties in person. One of those entrepreneurs,  Zhou Dewen, head of a Wenzhou business association, explained that,

“Most of us have realized that traditional manufacturing industries no longer bring us more profits, so many who used to run factories are switching to stock markets or real estate,”

Although Chinese nationals have long looked to Canada as a site for their capital, and while they have been buying steadily in the Vancouver and Toronto real estate markets for years, the combination of a clampdown at home and a blazing hot market in this country is spurring even more interest.

This trend has been confirmed by Don Lawby, president of Century 21 Canada Ltd., who said

“There’s investment coming from all over the world, but especially from countries that have any sort of restriction on ownership.”

To tap into the demand, Century 21 has created a new Chinese version of its website, the first major real estate company to do so in Canada. The site is the cornerstone of a strategy that will see the company increasingly marketing properties directly to consumers in mainland China.

“Right now, our focus is on serving Chinese clients in Canada,”

said Mr. Lawby, who is also president of Century 21 Asia Pacific.

“However, a byproduct is that Canadian listings will be more visible to buyers from around the world … there’s always a need for a safe haven to place money and invest.”

The real estate market pulled back slightly in January after its record run, although both sales and prices were up sharply from the depressed levels of a year ago.

Economists believe, however, that home buyers will push to beat new regulations, unveiled this week by Finance Minister Jim Flaherty, which come into effect April 19.

They also think that there will be a rush to beat the new harmonized sales tax in Ontario and British Columbia later this year.

That could lead to a spike in sales in the spring, followed by a sharp pullback and lower prices in the second half the year, but nothing that would crater the market.

An increase in supply as owners were enticed to list their homes by high prices, and a slight ebbing of demand as consumers realized things were getting a little too pricey, led to a decrease in month-over-month sales in January for the first time since December, 2008.

The 2.8-per-cent decline was small, but comes as market watchers anxiously track the market in search of an asset bubble.

As reported earlier, the federal government moved this week to curtail speculation in what has been a red-hot market.

1.      Variable mortgages qualified at five year fixed rate;

2.      Refinancing limited to 90% instead of 95%;

3.      Non owner occupied residences require 20% down payment;

These changes will take effect April 19th. See article below: