Here is some great mortgage information that a local mortgage broker wrote. Cheers Dean Birks.
Mortgage Matters: The Basics
By Bob Quinlan
Sunday, April 29, 2007 03:49 AM
Welcome to the world of understanding mortgages according to Bob Quinlan.
For the benefit of those who may just be beginning to look for their first home and for even those who haven’t purchased in many years, let’s start with the basics.
Most of us think of only banks being the lender but in the modern world and with the help of the internet the lending institutions now include not only chartered banks, but credit unions, investment institutions, brokerage “A” lenders, “B” or sub-prime lenders, both on the branch or street level and through brokerage lending. Private or equity lenders are available through the branch or street level as well as through brokers. These are your options…legally.
The other ones, you know…da “wize gize” have their own rules. That is all I know and all I ever want to know. I will stick to the “legal lenders”.
For the sake of simplicity and respect to all I am going to refer to all the banks and lenders as “lenders”. If I think I need to be specific, I will.
The banks have the ability to lend up to 80% of the value of a home based on their own criteria. (The Canada Bank Act was just revised by our Federal Government as of Friday, April 20th, 2007). This is called the loan to value ratio or in bank language: LTV%. It is a standard that is generally adhered to no matter the level of lending. However, each lender can vary from this, higher or lower depending on the “amount of risk” they are willing to accept.
Approximately 60 years ago, the Canadian Government created the Canada Mortgage and Housing Corporation (CMHC) to help people purchase principal residences with less than the required 20% down payment (originally 25% until last Friday). Their main purpose is to get more people owning their own homes. This creates more demand in the market, increases the values and generates more jobs from the selling, transferring of titles, administration, construction of new homes and servicing and updating of existing homes. The more people who are buying homes, the healthier our economy is.
There is a downside to this though.
Rapid increase can result in sudden decreases from time to time. Nothing grows at a steady rate of increase. Three steps forward, two steps back and over time…we have growth and success.
This is where the rates pertaining to risk are levied by CMHC for their service. They know the economy ultimately experiences “corrections” like we did in the late 90’s here in Prince George. The majority of those who will lose their homes are the ones who started with the least amount of down payments.
Until recently, that was 5% down or the ones who had mortgages of 95% of the value or purchase price. Today if you have “AAA” credit you can borrow 100% of the value of the home.
So why do I mention all this? Less down payment means higher risk. Higher risk means that CMHC has to charge a higher premium to insure the mortgage to the lender. The borrower is charged the premium and it is added to the mortgage.
That means today if someone was to qualify to borrow 100% of the purchase price of $200,000 and amortize it over 40 years they would walk out of the lawyer’s office owing $207,400.00 on their home. CMHC (ultimately the government) is counting on the premise that your property value is going to continue to rise because at the end of five years of paying $1,025.44/month ($61,526.40 in total) you will still owe the bank $198, 550.12.
Yes that is correct, you have paid $52,676.52 in interest.
Now my point is not how much the banks are earning. Remember, you asked to borrow more than the purchase price of the home based on a good credit record and minimal employment security.
My point is that the higher the risk, the higher the cost. The basics of lending are: the value of the asset + the credit history of the borrower + the income of the borrower and the equity, risk or down payment of the borrower =what a lender is willing to risk in any given situation.
Remember, they have to answer to their shareholders.
In a couple of weeks I will get into how the banks or lenders qualify you and what you can do make your situation better.
Bob Quinlan is a Mortgage Broker with Meridian Mortgages of Prince George
www.pgmortgages.ca or send him an email email@example.com