Mortgage Marketplace: Primary and Secondary Markets

• Mortgages are primarily used to finance property purchases.
• The property serves as security for the loan.
• The mortgage is a registered charge against the property, released upon debt repayment.
• Second mortgages can be granted with sufficient equity and are paid after the first mortgage.
• Second mortgages usually have higher interest rates.

The Mortgage Marketplace

• Mortgages are available through banks, trusts, credit unions, brokers, and government agencies like CMHC.
• The market is divided into primary (fund origination from lenders) and secondary (debt instrument trading) markets.
• Key regulatory institutions include OSFI and CDIC.

Primary Mortgage Marketplace

• This refers to the main source of funds
• In includes Chartered banks, trust companies, credit unions, life insurance companies
• Also included are pension funds, Canadian Mortgage Investment Companies, & CMHC

Chartered Banks

• These are authorized by the Canadian government and regulated under the Bank Act which is monitored by OSFI
• The CDIC insures deposits in member institutions.
• The Bank Act restricts mortgage loans to an 80% loan-to-value ratio unless insured.
• Banks raise funds via Guaranteed Investment Certificates (GICs) through subsidiaries.
• Investments are focused on single-family loans, capturing a significant market share.

Trust Companies

• Unlike banks, they can conduct fiduciary business and administer portfolios, they are regulated by provincial Loan and Trust Corporations Acts, with compliance monitored by OSFI and CDIC.
• Mortgage investments are restricted to an 80% loan-to-value ratio unless insured.

Credit Unions

• This Includes caisses populaires, co-operatives, share the second-place spot in the mortgage market.
• Additionally they offer a competitive alternative to banks due to greater consumer education.

Life Insurance Companies

• These are regulated under the Insurance Companies Act and monitored by OSFI
• Individual loans are limited to 80% of the appraised value unless the loan is insured. Insurance companies have become involved in residential mortgages, real estate development.

Pension Fund Mortgages

• These represent a low percentage of the mortgage market.
• The regulatory act for pension funds is the Canadian and British Insurance Companies Act
• Mortgages offer security and comparatively high returns. Some Ontario Teachers' Pension fund, invest large amounts in commercial real estate.

Canadian Mortgage Investment Companies (MICs)

• These operate under the Trust and Loan Companies Act.
• They can be provincially or federally incorporated, federally incorporated MICs can attract depositors from the retail market due to CDIC deposit insurance

Canada Mortgage and Housing Corporation (CMHC)

• This Crown corporation, owned by the Canadian government, insures lenders against losses from mortgage defaults under the National Housing Act (NHA).
• The primary program is Mortgage Loan Insurance for homeowners.
• CMHC insures loans up to 95% of the property value, with a maximum loan amount varying by region.
• Various initiatives are in place to provide insured loans for health, safety, and accessibility improvements.

Secondary Mortgage Market

• The holders sell to other institutions, this helps manage capital investments, cash flows, they seek income streams/investments.
• NHA-insured mortgages are considered obligations of the federal government.
• Loans tend to trade near the level of government bond interest rates and are often managed by the sellers for a fee.
• Mortgages lack liquidity and have an unpredictable repayment stream, limiting the secondary market.

Conventional and High-Ratio Mortgages differ

• Conventional Mortgages have a maximum of 80% of a home's purchase price or appraised value
• High-Ratio Mortgages mean clients can borrow up to 95% of a home's purchase price up to $500,000 (must be insured)
• The minimum down payment on the first $500,000 is 5%

Mortgage Down Payment Rules. ( As of Feb 2016 )

• From $1 - $500,000 the minimum downpayment is 5%
• Form $500,001 - $999,999 it is 10%
• Over $1 million the downpayment is 20%

High-Ratio Residential Mortgages entail

• The borrower pays between 2.8% and 4.0% of the amount borrowed which is added to the mortgage loan
• Premiums in Ontario, Manitoba, and Quebec are subject to provincial sales tax, this cannot be added to the loan. Mortgage insurance is available through CMHC, or private insurers.

The Mortgage Stress Test

• This was effective October 17, 2016 and states all high-ratio mortgages must be qualified using the Bank of Canada posted five year mortgage rate.
• As of January 1, 2018, conventional mortgages also require stress testing using the Bank of Canada five-year rate.

Fixed-Rate Mortgages

• These provide a borrower with a fixed interest rate over the term which allows the client to have the security of knowing what the mortgage payments will be in advance.

Variable-Rate Mortgages

• They provide the borrower with a rate that fluctuates with the prime rate. Clients should consider borrowing less than their maximum monthly limit.
• Those who are more risk tolerant may prefer variable rates, people who are risk-averse will probably prefer fixed-rates.

Mortgage Options - Open Mortgages

• These have terms from six months to 12 months.
• They allow prepayment of the loan at any time, without penalty but have higher interest rates.

Mortgage Options - Closed Mortgage

• Terms normally range for six months to 10 years
• The terms don’t allow prepayment beyond prescribed limits and as such have a lower interest rate.

Level Payment Mortgages

• The payments are a blend of interest and principal but remain level over the term of the loan.

Convertible Fixed Rate Mortgages

• A mortgage where the borrower can convert from a short-term fixed-rate mortgage (up to 1 Year) into a long-term one.

Capped Variable Rate Mortgage

• A mortgage where The interest rate fluctuates with a benchmark rate but will not increase beyond a prescribed limit.

Convertible Variable Rate

• A mortgage in which borrowers can convert from a variable-rate to a fixed-rate mortgage at any time (usually only after the first year).

Split-Term Mortgage

• A mortgage in which the lender can split the mortgage terms into three to five parts to minimize the borrower's interest rate risk at renewal.

Varying Payments

• A mortgage in which The borrower may double a payment or skip a payment to reduce the amortization.

Term and Amortization

• The AMortization is the period of time over which the borrower pays off a mortgage loan and broken down into Terms
• The standard repayment term in Canada tends to be five years, and the standard amortization period is 25 years

Payment Plans

• Methods of payment on a mortgage
• Interest-Only Loan - It has no amortization period and also known as a straight-line mortgage primarily used in bridge financing, not permanent mortgages.
• Mortgages with constant principal portion and a declining interest component is called a declining payment plan, and not a popular option.
• Balloon Payment - The payment due at the end of the term of a mortgage; the outstanding principal balance can be renewed or paid off.

Prepating A mortgage

• Prepayment means early payment of a mortgage loan
• Open Mortgage has no restriction on prepayment of principal
• Closed Mortgage doesn’t allow prepayment of the entire principal during the term

Canada Interest Act details

• Some prepayment rights guaranteed by law.
• It permits prepaying a conventional mortgage where the borrower is individual after the fifth anniversary of the mortgage
• Prepayment penalty equivalent maximum to three months interest
• The act does not apply to mortgages with corporate borrowers where the terms are wholly determined by the contract.

Prepayment Options

• Lump-Sum Prepayments - permitted annually on the anniversary of the mortgage
• Annual double-up payments are where two mortgage payments are made at once
• Regular increased monthly, bi-monthly, bi-weekly or weekly payments

Selecting an Appropriate Payment Schedule

• Mortgagors can save money on a mortgage loan by shortening the amortization period or increasing the frequency of payment.
• Mortgages are quoted as an annual rate with semi-annual compounding. It has an effective annual rate (EAR).

Accelerated Payments

• These can have the same effect as making one extra monthly payment each year!

RRSP Home Buyers’ Plan (HBP)

• The RRSP Home Buyers’ Plan (HBP) allows qualified home buyers to withdraw up to $35,000 to buy or build a home (Max of $70,000) from their RRSP
• This is not considered income and is an intrest-free loan from the RRSP
• Complete payments must be made within 15 years, the minimum annual payment is $2,333
• A missed payment is taxed as part of a client's income.

CMHC First-Time Home Buyers Incentive (FTHBI)

• It allows buyers to finance a portion of their home purchase through a shared equity mortgage
• September 2019, is when the program is expected to effective
• The maximum shared equity on existing properties = 5%
• The maximum shared equity on newly constructed homes = 10%
• No ongoing payments are required
• Household income must be under $120,000/year

Determining the Mortgage Payment

• Few clients can afford to pay cash for a home; this depends on how much they can afford and the mortgage that they obtain from a financial institution.
• Things to consider for financial Affordability include:
• The down payment amount
• Monthly installment debts
• Gross Income

Home Affordability Analysis

• It is based on determining the client's existing capital as well as projected monthly and annual savings for down payment and Start-Up costs:
• The initial start-up costs.
• Also deductions to this amount to determine the down payment
• Ongoning home expenses are also determined, excluding mortgage payments
• Also, what the test results from GDSR and TDSR are

Mortgage Insurance Fees details

• The lender also will have a Government of Canada guarantee that the loan will be repaid as agreed.
• The one-time fee, either paid in full when the loan is disbursed or amortized over the life of the loan
• Amortizing increases the cost over the loan
• Short-term debt instead of increasing the costs for the borrower

Appraisal fees

• It is required to be sure the property value is sufficient
• A Home's market value must be estimated by an appraisal
• This is defined as the highest price a buyer will for the house if it's properly available with time for finding a buyer

Methods To Value A Home

• The methods are the direct market comparison approach & the cost approach.
• Direct Market Comparison is the the method in which properties are valued based on the prices of others of a similar size and location
• The location is usually recently sold
• Adjustments are made to account for differences between comparable properties.

The Cost Approach method

• The method in which when there is little data on the sales of comparible homes data what is instead used is the cost of rebuilding
• Estimate land value and add the cost of rebuilding.
• The value should not exceed this figure unless improvements exist
• Subtracting the home’s accrued depreciation can be the method

Mortgage Brokers detail

• Brokers are provincially licensed to provide assistance to the public in finding mortgages.
• They are compensated by the lending institution.

Land Transfer Tax details

• It is a provincial tax on when the transfer of the deed happens
• The purchase and registration of the mortgage happen at the same time

Variable closing Costs

• Condominium Estoppel Certificate fees
• Home Insperction fees
• Leagal feed and disbertments

CMHC Client Support

• Clients should be encourages to develop a savings plan or consider borrowing to get money
• Also use this to determine mortgage payment and maximum house price
• There is taxes fees and debt services

Creditor Insurance is a tool on lending that

• Provides money or insurance for those receiving money from an
• Can Provide insurance on life, disability, possible job failure
• The person that loans money is the benificary

Critical Things to know what that creditor insurance provides

• What you have including application
• History including medical
• That you know the rights that you have to go after others
• Limitation of liability
• If Suicide or a other means of action is something that you want to consider to think amount before selling action

You may need to provide a reason for the loan

You may need to show or give a clear way to pay for loan

• You must give them a way to give to take to change the policy
• All signatures need to provided with the correct papers

Explore the mortgage marketplace, focusing on primary and secondary markets. Understand how mortgages finance property purchases and the roles of various financial institutions. Learn about regulatory bodies like OSFI and CDIC.