In an effort to keep our clients informed and provide some guidance in these economically turbulent times, we sent the following letter out to our client list in the fall of 2008.
Minister Changes Government-Guaranteed Mortgages --- how will this affect you?
To help keep our market strong, the Minister of Finance recently made changes to the program for Government-Guaranteed Mortgages. There has been much buzz about these changes, and I'd like to take a few minutes to update you.
By now, most Canadians have heard that Canadian banks are the best in the world. Canadians have a mortgage system that is quite different from the U.S.A. and much safer for all concerned. In Canada, high-ratio mortgages, those taken out with less than 20% down payment, are insured and guaranteed. The insurance, provided by insurers such as CMHC, Genworth, or AIG protects the lender should the home-owner default on the mortgage. The Government Guarantee further protects the lender should the insurer be unable to pay out claims. This double protection encourages lenders to continue offering mortgages to Canadians on a large scale and it allows the Canadian system to function as smoothly as it does.
In response to the global credit crisis, the Canadian Government recently put in place a plan to buy 75 billion dollars of insured mortgages from banks, credit unions, and other mortgage lenders. They did this in order to improve the cash flow available to Canadian mortgage lenders. This should be viewed as a positive move and much different than the 700 billion dollar bailout package in the U.S.A. In Canada, the Government has purchased mortgages that they had already guaranteed and, as the Government is able to borrow money at a lower rate than that charged on the mortgages; the Government may actually show a profit on the transaction.
After observing the mortgage crisis in the U.S.A., the Canadian Government made changes to prevent the same type of problem from arising here. In the last few years, the Government-Guarantee was allowed on mortgages with 100% financing and 40 year amortizations. As of October 15, 2008, there will be no guarantees on mortgages over 95% of the property value, or those with amortizations longer than 35 years. As such, these products won't be available from lenders.
That said, these changes significantly effect only a small population of homeowners. If you already own a home and were not planning on moving or refinancing in the near future, relax; these changes will not affect your current mortgage. For those who are buying a new home, and do not have the 5% down, do not worry. You will still be able to arrange up to 100% of the purchase price by using a cash-back down payment option that is offered by some lenders. I will be happy to explain how this great option could work for you.
These recent changes will benefit the mortgage market as a whole, and the effect on the individual homeowner will be minimal. Please do not hesitate to contact me. I am always here to answer your questions and provide you with guidance – I am your mortgage man.