Financial Imbalance

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The federal government said Wednesday that it is tightening the rules relating to government-guaranteed mortgages, even though there is no evidence that the Canadian market is facing the kind of turmoil that has disrupted the United States.

The new rules, set to take effect Oct. 15, are a “responsible and measured approach … to reduce the risk of a U.S.-style housing bubble developing in Canada,” the Department of Finance said in a news release.

However, it also said that Canadian creditors’ “prudent and cautious approach” to mortgage lending, as well as sound supervision, have “allowed Canada to maintain strong and secure housing and mortgage markets.”

The government said the measures will apply to new, government-backed, insured mortgages. “Canadians who already hold mortgages will not be affected,” it said.

The changes include:

• Cutting the maximum amortization period to 35 years from 40.
• Requiring a minimum down payment of five per cent, whereas loans for 100 per cent of the price are possible now.
• Establishing a requirement for a consistent minimum credit score.
• Introducing new loan-documentation standards.

The government acknowledged that the proportion of bank mortgages in arrears is stable at 0.27 per cent, “near the lowest levels experienced since 1990 and well below the highs of 0.65 per cent experienced in each of 1992 and 1997.”

And housing prices don’t show evidence of speculation, the Finance Department said, because they are “in line with economic factors such as low interest rates, rising incomes and a growing population.”

Mortgage insurance protects lenders when a borrower defaults by making up any shortfall needed to repay the loan if the sale of the property doesn’t cover the debt.

Federally regulated lenders must have mortgage insurance on loans where the buyer’s down payment is less than 20 per cent of the price.

The Canada Mortgage and Housing Corp. (CMHC), a Crown corporation, as well as private insurers provide mortgage insurance.

The government backs CMHC and also private mortgage insurers so the private insurers can compete with CMHC.

Just over a year ago, Parliament passed a bill changing mortgage insurance to make home buying easier, and in 2006, CMHC eased the insurance rules.

4 tricks you can use to improve your credit score and keep it there.

From buying insurance to getting a mortgage, your credit score is your financial DNA.

1. Don’t close credit card accounts

If you are trying to improve credit scores, don’t close credit card accounts. That’s because your score takes into account the difference between what credit you have available to you and what you’re using.

If you shut down a credit card account, the total amount of your available credit is lowered, and your balances look much larger in comparison. This ratio then hurts your score.

Keep your debt to utilization ratio to 30% of your credit card limit. Your FICO score also looks at how long you’ve been managing credit. The longer you’ve been managing credit, the better it will be for your score.

2. Forget Retail Cards

Forget those retail store credit cards.

Every time you open an account with a store to get that 10% discount, you are giving the retail lender the ability to pull your credit score. And that can lower your credit score. This is especially damaging if you’ve only handled credit for a limited time.

For example, the credit score of a 20 year old with only 1 or 2 credit cards will see their score drop more substantially than someone who is managing credit for 25 years.

3. Pay more than the minimum

Paying your bills on time is about one-third of your FICO score. However, you should concentrate not only on paying on time, but paying more than the minimum payments.

The amount of debt you have is also vital to your credit score.

“You can be in a crushing amount of credit card debt, but if you’re only making minimum payments, you’re losing points because your balances are slowly creeping toward your credit limit,” says John Ulzheimer, of Credit.com.

To really improve your credit score, you should only spend within 10% of your credit limit. So, if you’re credit limit is $6,000, don’t charge over $600.

4. Don’t lose hope

Most debts, except for bankruptcies, are erased after seven years. If you’ve had a foreclosure or have a few delinquent payments, you can still raise your credit score to above average.

The older this negative information is, the less important it is to your credit score. And just think, if you raise your credit score from 670 to 715 – and that’s only 45 points, you’ll save over $82,000 in total interest charges on a $200,000 30 year-fixed loan.

Just one day after the Bank of Canada said it would not deliver on a widely expected interest rate cut, Canadian banks have begun to raise fixed mortgage rates.

CIBC was the first to move. Late Wednesday, it announced across-the-board rate hikes for all of its fixed mortgage terms, effective Thursday. TD Canada Trust soon followed and other banks are expected to join them.

The posted rate on a five-year closed mortgage jumps half a percentage point to 7.15 per cent at TD. The increase at CIBC is 3/10ths of a percentage point to 6.95 per cent.

Two- and three-year mortgages jump 0.85 of a percentage point to 7.00 per cent at TD, while a one-year closed mortgage rises 8/10ths of a percentage point to 6.95 per cent.

These are posted rates. Banks will frequently discount those rates by more than a full percentage point. Virtual banks, like ING Direct and President’s Choice Financial, usually offer rates that beat the traditional brick-and-mortar banks.

On Tuesday, the Bank of Canada surprised markets by leaving its key overnight lending rate unchanged, citing concern about inflation risks.

Many analysts said the central bank effectively signalled an end to its recent rate-cutting campaign. Some observers said the next rate move by the Bank of Canada would likely be a hike next year.

Right after the central bank’s announcement, yields in the bond market jumped on the expectation of higher inflation down the road. Fixed-rate mortgage rates tend to move higher when long-term bond yields rise.

The booming condo market in part helped drive up home ownership rates in 2006 to its highest level since 1971, according to a Statistics Canada report released Wednesday.

Census data from 2006 showed that of the 12.4 million households in Canada, about 8.5 million reported living in their own home. The federal agency noted that 913,000 homeowners lived in condos in 2006, an increase of 36.5 per cent from 2001.

“The increase in condominium owners during this period accounted for one-quarter of the increase in the number of Canadian households that owned their dwelling,” Statistics Canada said.

More single consumers also become homeowners, the federal agency said, with 47.8 per cent reporting they owned their own home — an increase of 11.8 per cent from 2001.

The census data also revealed that more Canadians were having difficulty budgeting their housing costs, with an estimated three million households spending more than 30 per cent of their income — deemed the affordability benchmark — on shelter costs.

“The increase in the number of homeowners with mortgages spending 30 per cent or more on shelter accounted for almost 90 per cent of the total rise in the number of households spending above this threshold during the five-year period,” Statistics Canada said.

Newfoundland and Labrador led the country with the greatest number of homeowners at 78.7 per cent, while Quebec had the lowest rate at 60.1 per cent.

Meanwhile, rental rates have dipped from 33.8 per cent in 2001 to 31.2 per cent in 2006.