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Dear
Nitesh,
Here are some housing stats and mortgage information published by CMHC
and other housing agencies in Canada.
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U.S. sub-prime meltdown and its effects on Canada
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Sub prime lending refers to a variety of credit instruments such as
credit cards, mortgages, loans given to borrowers who would not qualify
for the best interest rates due to past credit issues. Sub-prime
mortgages usually carry an interest rate 3-4% higher than traditional
lending rates.
Since 2001, the sub prime mortgage market in the US has grown
drastically (Approx. 40-45% of all mortgages written in the US). In the
recent years, it has dropped to as low as 10% in the first half of
2007. However, in Canada this number is closer to 5% of all mortgages.
Due to several differences in both markets, Canada should not
experience fall-outs seen in the US. For starters, the Canadian
sub-prime market is substantially smaller than the US sub-prime market.
Also, the overall rate of mortgages in arrears in Canada remains at
record lows. According to the Canadian Bankers Association, 1 in 400
households fell three or more months behind their mortgage payments in
2006.
Mortgage products known as "exotic" loans are sold to
borrowers without a proven history of managing debt. An example of such
loan would include a "teaser" rate that tends to be below
market interest rates for the first couple of years and result in
"payment shock" when the interest rate on the loan resets
itself to the market rate. According to the Mortgage Banker's
Association in the US, more than one fifth of such loans approved in
2004/2005 are worth less than the debt that has accumulated on them.
Such products are not offered in Canada.
The sub-prime meltdown in the US did have an impact on the interest
rate decisions by the Bank of Canada. As a result of concerns with
liquidity in the financial market, the Bank of Canada decided to keep
its overnight target rate at 4.5%.
These fears have resulted in investors moving their funds from riskier
to safer investments. This has resulted in lower bond prices for the
Government of Canada. Typically, long term mortgage rates follow
changes in the yield on Government of Canada bonds very closely. So
far, the decrease in Government of Canada bond yields has not resulted
in a decrease in mortgage rates.
CMHC estimates that a decrease in mortgage rates could actually result
in a stronger housing market in 2007 and 2008. A decrease of 1% in the
5 yr mortgage rate can boost MLS sales by 14,000-22,000 over the 12
month period following the decrease.
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Hope you found
this edition of Housing Stats & Mortgage Market Information usefull
and informative. I look forward to providing you with more insider's
knowledge next month.
Nitesh Kumar, AMP
Mortgage Consultant
T 416.419.2566
F 905.671.9753
E info@niteshkumar.com
W www.NiteshKumar.com
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