Thinking Mortgage? Read my interview with Mortgage Marcus.

That’s the good news; the not so great news is that Mortgage insurers are tightening up their guidelines. As of October 15th, 40 year mortgages, interest only mortgages and 100% financing will no longer be offered. Although this decision takes some potential home buyers out of the market place, it was made to safeguard Canada’s financial system and avoid what has happened in the states.

Marcus, can you be more specific for those who are concerned, what is happening to the 40 yr mortgage and why?

In Canada, CMHC is the prominent mortgage insurer with about 80% of the market. CMHC is a crown corporation, which means that their loans are secured by the federal government. The Canadian government has decided not to cover the loss of any mortgage that is amortized over 40 years. This was most certainly in response to the credit problems that are transpiring in the United States. There are other mortgage insurers in the market place as well; these include General Electric and American International Group. It is widely expected that these companies will discontinue their 40 year mortgages as well, which will all take place on October 15th, so clients should get these applications in soon if they intend on buying with zero down.

Marcus, how is your company able to achieve better rates then the banks?

As mortgage brokers, we bring the client to the lender. Our lenders are typically the same banks that the client would normally go to, only instead of dealing with the bank’s retail department, the client deals with the bank’s investment banking division, which in turn uses us as an intermediary. This changes the motivation of the bank when lending to the borrower. Instead of being focused on gaining a client and cross selling products, they work on securitizing the loan that they are providing. By securitizing the loan, the bank never really keeps the loan on their balance sheet and instead packages it and sells it off to a mutual fund or a pension plan. The sale of this security (Commonly know as a Mortgage Backed Security) provides the bank with a fee premium based on the transaction. Since the Investment Banking department of these banks wish to profit from these fee premiums, they offer interest rates that are always much lower than those being offered by their own retail banking arms.

These banks that are selling the mortgages off are not concerned with increasing the client’s interest rate at maturity. In fact, when the mortgage matures, most of these lenders will have a rate guarantee upon renewal, guaranteeing the borrower the best rate.

By borrowing money from the investment banking division of the bank, like TD Securities, the client is doing business with an organization that shares the same goals and motivation. Think about like this; if I am packaging your mortgage into a bundle with $100 million worth of mortgages and I am making a commission every five years that it is renewed, I want you to stay with me for as long as possible, so I will do anything I can to have you stay, that means offering you the best rate and making sure you never get tempted to go elsewhere.

These lenders pay the broker directly. That amount is typically between 0.5% and 1% of the loan amount in comparison to the roughly 4% in administrative costs major Banks will pay to fund the same mortgage at bank branches.

Marcus, is it possible for young buyers to get a mortgage? Many believe they cannot afford a condo.

Of course. The age of a home buyer is no longer an issue with banks. There are also really affordable units available; you just need a great realtor like Yossi to help you find them! I would suggest talking to a mortgage broker to get pre-approved first because they will work with you to make sure you are in a mortgage product that caters to your needs, whether that be finding the optimal loan amount, the best insurance product or a strategy to lower your initial payments. A knowledgeable broker is a real asset.

Recently a client came in to our offices looking to buy a condo for $300,000, his income was not enough to qualify him with his bank but we had no problem issuing him an approval within hours. Very often clients are simply mistreated or misinformed when they look for advice from a bank employee. People don’t realize that bank employees are not required to have mortgage licenses in order to give mortgage advice. This is something that needs to be addressed, but will most likely go unresolved for some time.

Marcus, what are the options for young buyers these days?

As I mentioned before, age is no longer a limitation for first time home buyers. Young buyers today have full access to all of the mortgage products available to help them purchase their first home. A lot of the time down payment is an issue with young buyers; however working with a mortgage broker gives you access to a greater spectrum of mortgage products. For example, did you know that even though 100% mortgages will no longer be available, that you can make a down payment as low as 3%. There are also cash back mortgages available, which will provide you as much as $25,000, which you can use for whatever you please.

If someone was to come away with one thing from this interview what would it be?

It is very important to have a knowledgeable mortgage broker working with them to structure a product that suits their needs. From teaching the mortgage broker course at Seneca College I have learned that there are far too many brokers who simply do not work with the client’s best interests in mind. It is of paramount importance to find a broker who you trust and has knowledge of all the products available.