Risk is being abnormally underpriced in the Canadian mortgage market. Despite the Bank of Canada’s call for prudence, there remains an apparent open invitation for buyers to overextend themselves. This from German Guy at robchipman.net 19 Nov 2009 at 12:44 pm
“I hear a lot of talk about how CHMC is the Canadian version of American sub-prime so, since I don’t have much to do in this never ending rainy place, I decided to go and apply for a mortgage to find out what is it all about.
I asked for a 5 /35 year fixed rate with minimum 5% down payment and 5/35 with 300k down as well as a VMR and wanted to know how much money I would qualify for. Here are the figures I gave the banker (the figures are imaginary and have no relation to my real revenue):
Gross annual income: 95k, estimated purchase price 800k
Expenses estimated by banker: Monthly heating costs $67; annual taxes $2500, loan/credit card monthly: $360
In the case of 5/35 with 40k down he qualified me for loan of $538,842, with $2,404 monthly payment and 4.20% interest rate. In the case of 5/35 with 300k down he qualified me for a loan of $798,842 with $2,534 monthly payment and 4.20% interest rates.
I asked to get a lower interest rate in the second case where I put a bigger down payment since the bank was not taking as much risk as with the first one.
Answer: We take more risk when you put a bigger down payment because your loan does not have to be insured by CMHC, so if anything your interest rate could be higher because the bank is taking more risk. We are not in the business of foreclosing homes and selling to get paid, we prefer when you have a CHMC insurance as our risk is much lower than when you have a pig [that's 'big' -ed.] down payment above 20% of purchase price.
I asked for a VMR then, he quoted me a 2.25% interest rate for 35 years and qualified for $665,000 loan with 5% down payment.
I asked could put a bigger down payment ?
Answer: No. We will not give you a VMR loan if it is not CHMC insured!
I pointed out the absurdity of the situation in his reasoning, with taxpayer taking all the risk and the banks making risk free profit. All he said was don’t try to fight the government.”