The Subprime Market in Canada
There have been talks about Canada’s subprime mortgage industry getting out of control as the banks turn more and more clients away who have less than perfect credit. Who are these so called less than perfect clients turning to? In some cases, sure they’re turning to Alt-A lenders (which stands for Alternative A-Paper lenders, also known as subprime or “B” lenders) who often price upwards of 100 basis points over posted rates.
A growing number of mortgages are being funded outside of The Big Five banks. Speculation suggests that this is due to the recent changes brought on by the CMHC including shortening amortization periods and increasing down payment amounts. Naturally, the banks do not want to lend to anyone that doesn’t qualify for CMHC insurance.
However, there are many qualified individuals who turn to lenders outside of The Big Five for other reasons. One example of this would be someone who is self-employed and whose taxable income after deductions makes it tough to gain approval through the conventional line up. It is important to understand that just because it isn’t a prime mortgage through one of The Big Five, does not necessarily mean that it is a sub-prime mortgage. There is a market out there that has been referred to as a “near prime” mortgage and is nothing close to the literal subprime market that was created in the states.
The NEAR (not sub) Prime Mortgage Market in Canada
There is a misconception that if you don’t qualify for a mortgage at a major bank you can easily just go through a mortgage broker instead. The decision to call on a mortgage broker and their lenders is different for everyone but the mortgages available through the broker channel are not by any means of a lower quality or riskier (heck, half of the time brokers fund mortgages with major banks).
But if you do find yourself in a tough situation (such as our self-employed friend above), a mortgage broker may have access to alternative lenders that specialize in arranging home loans for ‘near-prime’ borrowers.
It is important to note that loans for the NINJAs (no income, no job and no assets) and negative amortization loans etc. are NOT readily available through a mortgage broker. These are the true ‘subprime’ mortgages and are typically referred to as private mortgages funded by people with deep pockets who don’t use leveraging techniques to make the deal. These private mortgages will often help out a client who needs a second mortgage and their current lender will not surpass the 75-85 per cent loan to value level. This LTV rule of thumb ensures that the lender has a 15-25 per cent cushion on the value of the home before the lender is really at risk.
Is Canada Really Headed for a Meltdown?
I don’t see it that way! At first glance, the fact that more and more mortgages are being funded outside of RBC, TD, BNS, BMO and CIBC mixed with a decrease in the average price of a home could signal a cause for concern; but experts are saying that Canada has no true subprime market.
Yes monthly home sales are at an all-time high but year over year we are not seeing the same exponential growth in sales nationally. This is due to moderate gains in major centres (Toronto, Calgary, Montreal, Ottawa and Quebec City) which are offset by declines in Vancouver and the Fraser Valley. Last year Vancouver ran at unusually strong sales levels and things are just starting to get back to normal vs. the crash that some are suggesting. *A look at March 2012 versus February 2012 and March 2012 versus March 2011. Statistics taken from CREAstats
The other concern is the decrease in the average sale price of homes nationally. Again, last year Vancouver had record high-end home sales in their priciest of neighbourhoods. There definitely has been a decline in the average sale price of homes in Vancouver but this is due to the change in the sales mix, not due to housing deflation by any means. Overall Toronto is actually stronger than last spring. The tug of war between Toronto and Vancouver has made it seem that prices are decreasing but it’s really just an adjustment to the marketable properties available.
RateSupermarket.ca Week in Review
The biggest change this week on the Best Mortgage Rates page was for the better! The 5 year fixed rate and the 3 year variable rate both dropped by 10bps. Small movements were seen in the 3 year fixed rate (up 5bps) and the 7 and 10 year fixed rates (both up 1bps). Do you want to know when the best mortgage rates change? Be the first to know and sign up for RateAlert, RateSupermarket.ca will e-mail you a daily digest of the mortgage rates that have changed in your area!
The most popular searched rate remains, still in the lead is the 5 year fixed rate (47.4 per cent of visitors searched for this rate over the last week). Following the 5 year fixed are the 5 year variable rate (21.8 per cent), 10 year fixed rate (8.4 per cent) and the 3 year fixed (7.0 per cent).