Mortgage defaults after COVID 19 could look different than 2008, says economist

TORONTO _ A Bank of Canada economist says the current economic recovery could be different than the recovery from the financial crisis of 2008.

Bank of Canada Director of Financial Stability Mikael Khan said that while the employment rate has fallen due to the pandemic, house prices are recovering and keeping homeowners from filing for insolvency.

Khan said breaks from mortgage payments have bought home owners some time to get back to work amid the COVID-19 pandemic and economic downturn.

“The fact that these deferrals have been available is really, really important,” said Khan.  “Ultimately what matters most when it comes to defaults is people having a job, having their incomes. What the deferrals are doing is they’re essentially buying time for that process to unfold.”

Khan, who spoke at the Move Smartly Toronto Real Estate Summit on Monday, has been studying mortgage defaults. He compared the COVID-19 pandemic to a natural disaster, such as the 2016 wildfires in Fort McMurray, Alta., which also involved a mortgage deferral recovery plan.

Bank of Canada research found that while the wildfires caused a bigger spike in employment insurance filings than the 2008 recession, the EI trend reversed much faster after the fires than in 2008.

The 2008 conditions set off a lengthy recession due to “an underlying fragility in the global financial system,” the research suggested. But the wildfires, like the COVID-19 pandemic, were a sudden shock.

“One thing that’s always very important when you’re facing a large negative shock is the initial conditions,” said Khan.

“In Fort McMurray, when the wildfires hit, that’s an area that had already been struggling for some time with the decline in oil prices that had occurred about a year or so prior, so financial stress was quite high . . . Now, at the national level, what we’ve been concerned about for many, many years is the high level of household debt. That’s the number one pre-existing condition that was there when the pandemic struck.”

While there are some parallels, the rebuilding process from a pandemic remains more uncertain compared to a wildfire, the research said. Khan cited increased savings rates as an example of a fundamental shift with potential to affect how quickly the economy recovers from COVID-19.

Over the past few months, some have warned that it could lead to a deferral cliff once benefits such as Canada Emergency Response Benefit and mortgage deferrals _ run out.

“When it comes to bumpiness in the recovery . . . . this question that has been in the background of most of our discussions is, `To what extent will we see defaults or insolvencies?”’ said Khan. “I think it’s reasonable to expect some sort of increase. What we’d be concerned about, there, is a very large-scale increase.”

Khan said that when a mortgage is in default, it can be caused by a  “dual trigger” of both unemployment and a large decline in house prices. Home prices in many areas have recovered since the start of the pandemic, Khan said. The job market’s recovery will be key to determining the impact of mortgage deferrals, said Bank of Canada research cited by Khan.

Softening population growth from immigration could start to weaken house prices in the future. But for now, Khan said, it wouldn’t make sense for homeowners with healthy home equity to file for insolvency.

“Even in cases where a homeowner simply can’t make their mortgage payments anymore  as long as they have equity in their homes and the housing market is relatively stable _ there’s always the option to simply sell without kind of resorting to those sorts of measures,” said Khan.

Own Or Rent – The Life Insurance Choice

There are two ways to purchase life insurance. You can pay-as-you-go, like when you rent. Or you can pay in full and own the policy forever, like buying a home. Your Lawyers Financial Advisor can help you determine which type is right for you.

Term Life

Term Life is, as the name implies, insurance for a specified term. The term can be a fixed number of years or until a specific age. That means the policy has an expiry date. In that sense, it’s like renting an apartment. At the end of the term, you may be able to renew or you can simply walk away.

Term life
“RENTING”
Some people only want coverage for the period in life when their household debt is high and there may not be enough money in savings to take care of loved ones if their income was lost due to death.
How it works Select the amount of coverage you need and pay the premium for as long as you need it. Term Life 80 from Lawyers Financial provides protection up to age 80.
Major advantages
  • Relatively low premiums, compared to permanent insurance
  • Coverage to age 80
  • Your Lawyers Financial coverage automatically increases every year1

Non-Par Whole Life Insurance

Non-Par Whole Life insurance provides insurance protection for life. Unlike renting, it’s more like buying a home, paying it off, and living it in forever. And like a home, a portion of your policy can grow over time, creating a form of equity you can access if you cancel your policy (like selling your home). Your Lawyers Financial Advisor can demonstrate how it can work for you.

Permanent insurance
“BUYING”
Some people are willing to invest in the purchase of a lifetime plan as part of their family estate plan because permanent insurance has the potential to create additional wealth.
How it works Non-Par Whole Life Insurance

Select the amount of coverage you need and pay the premiums for 20 years or until age 100. The policy stays in effect for life, even if you live beyond age 100.

Major advantages
  • Coverage for life when premiums are paid in full
  • An excellent estate planning tool.
  • Source of inheritance for children and grandchildren.
  • Can be used to bequest a large donation to charity.

When to decide

Whether you choose to rent or own your life insurance policy, it typically makes good financial sense to apply while you are young and in reasonably good health. Premiums tend to be at their lowest when you apply early. Either way, all that matters is choosing the right type of coverage to meet your needs at a price you can afford, as part of your overall financial plan.

Footnote

1. When you take out new coverage through Lawyers Financial, eligible clients receive our unique Automatic Increase Benefit. (AIB) This benefit increases your coverage by an amount equal to 10% of your certificate’s original face amount every December 1st, following 12 consecutive months of initial ownership. Increases to your face amount are applied automatically and do not require any evidence of continued insurability. You may decline an AIB increase at any time. Some limitations apply.

Originally published 13 April 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Source: mondaq

Genworth Canada says it won’t follow CMHC in tightening mortgage insurance eligibility

TORONTO _ Genworth MI Canada Inc. says it’s holding steady on its credit score qualifications, despite a move by one of its main competitors to toughen mortgage lending standards.

The Oakville, Ont.-based company said Monday its insurance subsidiary, which is among the country’s largest insurers to residential mortgage lenders, “has no plans to change its underwriting policy, related to debt service ratio limits, minimum credit score and downpayment requirements.”

The announcement follows a move by the Canada Mortgage and Housing Corporation last week to raise the bar on its lending standards, making it more difficult for some to borrow money for a home purchase.

CMHC’s qualifying credit score for mortgage insurance was increased to 680 from 600, as part of changes that take effect on July 1. Limited gross and total debt servicing ratios were raised to standards of 35 per cent and 42 per cent, respectively.

Household debt service ratios measure how much income goes to paying interest and principal.

Stuart Levings, president and CEO of Genworth Canada, said the insurer believes its processes and monitoring of conditions and market developments “allow it to prudently adjudicate and manage its mortgage insurance exposure to this segment of borrowers with lower credit scores or higher debt service ratios.”

Companies in this story (TSX:MIC)

3 Must – Know Facts About Mortgage Insurance

3 Must – Know Facts About Mortgage Insurance

The excerpted article was written by Lawyers Financial

Lawyers Financial

Your hard work is paying off and your legal career is taking shape. The sacrifices you made are beginning to bloom and your personal goals might include buying your dream home, getting married, and starting a family. This is the time for imagining everything that’s possible. As you look forward, ask yourself what you want to build and how you will protect it so that your loved ones will enjoy security, comfort and peace of mind if anything happens to you.

Growth and protection go hand in hand as your assets grow, your income rises, and you begin to establish yourself in the legal community. Understanding your options is step one.

Mortgage insurance may be one answer

Your bank may have offered you insurance when you took out your mortgage. If you accepted it, you know that your entire outstanding balance will now be paid off in the tragic event of your death. You can take comfort in that decision but now may be the time to cross-examine the benefits of that coverage and consider the limitations and drawbacks:

  1. No money is paid to your family. The bank is the owner and beneficiary of the insurance policy. That means the proceeds go straight to the bank to pay off your mortgage, regardless of how little is owed.
  2. Coverage declines but your payments do not. Your insurance coverage pays off the outstanding balance on your mortgage so the less you owe, the smaller the payout.
  3. Little underwriting is done so healthy homeowners may be paying more than necessary for insurance.Worse still, your claim may be denied later based of your medical history. In the case of a large claim, there may be added incentive for the insurer to dig deeper into your health status.

Achieving greater peace of mind

Term life and permanent life insurance coverage such as Term 80 Life Insurance and Non-Par Whole Life Insurance are guaranteed to pay full benefits to your beneficiaries. The money is theirs to use as they see fit. They may choose to:

  • Pay off part of the mortgage to lower the monthly payment.
  • Top up education savings accounts.
  • Take some time off to plan their next steps.

With cash in hand, they have options. That’s why many people in the early stages of life and career choose the flexibility of life insurance over mortgage insurance.

What’s right for you?

We can help you decide. Contact your Lawyers Financial Advisor and explore your options for protecting your loved ones should anything happen to you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Source: Mondaq

5 Mistakes to Avoid When Paying Off Your Mortgage Early

5 Mistakes to Avoid When Paying Off Your Mortgage Early

The excerpted article was written by Rebecca Lake | SmartAssest

If you can afford to pay off your mortgage ahead of schedule, you’ll save some money on your loan’s interest. In fact, getting rid of your home loan just one or two years early could potentially save you hundreds or even thousands of dollars. But if you’re planning to take that approach, you’ll need to consider if there’s a prepayment penalty, among

Basics of Paying Off a Mortgage Early

Many homeowners would love to fast forward to when they own their houses outright and no longer have to worry about monthly mortgage payments. As a result, the idea of paying off their mortgage early could be worth exploring for some people. This will allow you to lessen the amount of interest you’ll pay over the term of your loan, all while giving you the ability to become the home’s full owner earlier than expected.

There are a few different methods by which you can go about paying early. The simplest method is just to make extra payments outside of your normal monthly payments. Provided this route doesn’t result in extra fees from your lender, you can send 13 checks each year instead of 12 (or the online equivalent of this). You can also increase your monthly payment. By paying more each month, you’ll pay off the entirety of the loan earlier than the scheduled time.

If you’re considering paying off your mortgage ahead of time, make sure you avoid these five critical mistakes.

Mistake #1: Not Considering All of Your Options

It can be very tempting if you come into some extra money to put that toward paying your mortgage off ahead of time. However, getting out of debt a little bit earlier may not be the most remunerative choice to make. To illustrate this, let’s look at an example.

Let’s say you’re considering making a one-time payment of $20,000 toward your mortgage principal. Your original loan amount was $200,000, you’re 20 years into a 30-year term, and your interest rate is 4%. Paying down $20,000 of the principal in one go could save you roughly $8,300 in interest and allow you to pay it off completely 2.5 years sooner.

That sounds great, but consider an alternative. If you invested that money in an index fund that represents the S&P 500, which averages a rate of return on 9.8%, you could earn $30,900 in interest over those same 10 years. Even a more conservative projection of your rate of return, say 4%, would net you $12,500 in interest.

Everyone’s financial situation is unique, and it’s very possible that the notion of being out of debt is so important to you that it’s worth a less than optimal use of your money. The important thing is to consider all of your options before concluding that paying off your mortgage earlier is the best path for you.

Mistake #2: Not Putting Extra Payments Towards the Loan Principal

Throwing in an extra $500 or $1,000 every month won’t necessarily help you pay off your mortgage more quickly. Unless you specify that the additional money you’re paying is meant to be applied to your principal balance, the lender may use it to pay down interest for the next scheduled payment.

If you’re writing separate checks for extra principal payments, you can make a note of that on the memo line. If you pay your mortgage bill online, you might want to find out whether the lender will let you include a note specifying how additional payments should be used.

Mistake #3: Not Asking If There’s a Prepayment Penalty

Mortgage lenders are in business to make money and one of the ways they do that is by charging you interest on your loan. When you prepay your mortgage, you’re essentially costing the lender money. That’s why some lenders try to make up for lost profits by charging a prepayment penalty.

Prepayment penalties can be equal to a percentage of a mortgage loan amount or the equivalent of a certain number of monthly interest payments. If you’re paying off your home loan well in advance, those fees can add up quickly. For example, a 3% prepayment penalty on a $250,000 mortgage would cost you $7,500.

In the process of trying to save money by paying off your mortgage early, you could actually lose money if you have to pay a hefty penalty.

Mistake #4: Leaving Yourself Cash-Poor

Throwing every extra penny you’ve got at your mortgage is an aggressive way to get out of debt. It could also backfire. If you don’t have anything set aside for emergencies, for example, you could end up in a tight spot if you get sick and can’t work for a few months. In that case, you may have to use your credit card to cover your bills or try to take out an additional loan.

If you don’t have an emergency fund, your best bet may be to put some of your extra mortgage payments in a rainy day fund. Once you have three to six months’ worth of expenses saved, you may be able to focus on paying down your mortgage debt.

Mistake #5: Extending Your Loan Term When Refinancing

Refinancing can save you money in multiple ways, as it allows you to convert to either a shorter or longer loan term, depending on what’s best for you. So if you’re 10 years into a 30-year mortgage term, you could potentially refinance to a 10-year term and shave off 10 years. On the flip side, you could go for another 30-year term to lower your monthly payments.

However, loans with shorter terms tend to have lower interest rates, allowing you to both save on interest and reach full ownership much sooner. In some cases, though, refinancing could cost you more in the long run, especially if you’re planning to extend your loan term. Before you refinance, it’s a good idea to crunch some numbers and figure out whether having a longer mortgage term really makes sense.

Don’t forget closing costs either. If your lender agrees to let you roll those costs into your loan, you could end up paying more money. After all, you’ll now be on the hook for interest on a larger loan amount.

Bottom Line

Whether you should pay off your mortgage early ultimately depends on how much money you have to spare, what your alternatives are and other factors that are unique to you. But if it’s something that’s legitimately on your radar, make sure to seriously consider all of your options.

Although often known for their expertise in investing and financial planning, many financial advisors are knowledgeable about mortgages and home purchases. So if you’re struggling to make a decision on your own, consider consulting with a local financial advisor.

Tips for Buying a Home

  • To guide you through a major financial decision like the purchase of a home, you may want to talk to a financial advisor. Luckily, SmartAsset’s advisor matching tool can help you find a suitable financial advisor in your area to work with. Get started now.
  • Securing a mortgage can be a stressful and confusing process. For starters, you need to figure out what term is best for you, whether you want a fixed or variable interest rate and where to get the best mortgage rates.

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