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Will the subprime mortgage effect St. John’s real estate?
Last week both the United States and Canada dropped their interest rates, 0.75% and 0.25% respectively. With the recent subprime mortgage fiasco in the U.S, people have been asking was the rate reduction due to this? Will Canada follow the same fate? And most importantly….what exactly is a subprime mortgage?
Here is my interpretation of the subprime mortgage:
The Bank of Canada has it’s prime rate. Banks and lenders then offer a mortgage at competing rates to potential pre-approved home buyers.
A subprime mortgage refers to a mortgage offered to a borrower that is higher risk than the normal home buyer. They do not receive a lower interest rate. It’s actually the complete opposite. Potential home buyers who have poor credit scores make them candidates for a subprime mortgage and they typically pay much higher mortgage rates.
The problem was that the lenders offered an introductory rate which was comparable and at times lower than the prime mortgage rate to attract clients. You can begin to see the bigger picture forming.
The introductory rates were only temporary and after a year or two they expired and the interest rate on a subprime mortgage increases. This resulted in many, now home owners, who once had a low introductory mortgage rate paying interest rates in the double digits.
Remember, they were high risk from the start with “special” introductory offers. When the rates jumped to double digits, the subprime meltdown began.
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Mortgage Rates
I had an interesting conversation yesterday with a commercial Broker in Toronto who commented that the sub-prime situation has caused more of an impact in the commercial market in Canada then in the residential market. He said because “cheap money” is what drives investors looking for attractive cap rates and ROI’s and now, that “cheap miney” has dried up for the time being. I thought that was an interesting perspective.