The Impact of the Mortgage Rule Changes

Mortgage Rules Sean Humphries 17 Oct

The mortgage rule changes that were passed by the Ministry of Finance in October 2016 are still having their effect one year later. Higher qualification requirements and new bank capital requirements have split the industry into two segments – those who qualify for mortgage insurance and those who don’t.

Mortgages that qualify for mortgage insurance are basically new purchases for borrows that have less than 20% down and can debt-service at the Bank of Canada Benchmark rate (currently 4.89%). Those who don’t are basically everyone else – people with more than 20% down payment but need to qualify at the lower contract rate, and people who have built up more than 20% equity in their homes and are hoping to refinance to tap into that equity.

The biggest difference we are seeing is two levels of rate offerings. Those that qualify for a mortgage insurance by one of the three insurers in Canada (CMHC, Genworth and Canada Guaranty) are being offered the best rates on the market. Those who don’t qualify cost the banks more to offer mortgages due to the new capital requirements and so are offered a higher rate to off-set that cost.
Dominion Lending Centres’ President, Gary Mauris, wrote a letter to the Prime Minister and the Minister of Finance at the beginning of October 2017 outlining the negative impact of those changes on Canadians on year later. That letter was also published in the Globe and Mail. CLICK HERE to see that letter.

But even more alarming are the rumblings being heard about another round of qualification changes that will see those who have been disciplined in saving or building equity having to qualify at a rate 2.00% higher than what they will actually get from their lender.
Where the first round of changes in 2016 saw affordability cut by about 20% for insured mortgages, this new round of changes will have much the same impact on the rest of mortgage borrowers – regardless of how responsible we’ve proven to be.

The mortgage default rate in Canada is less than 1/3 of a percent. We Canadians simply make our mortgage payments. So where’s the risk?
The new qualification rules are intended to protect us from higher rates when our current terms come to an end. But when most Canadians are already being prudent, borrowing at well below their maximum debt-to-income levels the question now is why do we need to be protected from ourselves?

The latest round of rule changes are rumoured to be coming into effect by the end of October 2017 so my word of advice to at least those who have been contemplating a refinance to meet current goals? Contact your Mortgage Professional at Dominion Lending Centres to find out your options before your window of opportunity is closed.

 

Guest Blogger:

KRISTIN WOOLARD

Dominion Lending Centres – Accredited Mortgage Professional
Kristin is part of DLC National based in Port Coquitlam, BC.

The home that you can buy today, may be out of reach by the Fall 2017

Mortgage Tips Sean Humphries 27 Jul

A combination of a temporary turn in the market and upcoming mortgage regulation changes has created a great opportunity to buy a home, that may be gone by the Fall of 2017.

There is no question that the Toronto housing market is in the middle of a change.  Consider that February and March of 2017 was a seller’s market with prices increasing at a completely unsustainable and unhealthy +30%.  Compare that to a healthy market where prices growing at 5-7% year-over-year.  In April 2017, the Ontario government introduced a 16-point action plan to help to cool the housing market.  As a result, these actions quickly turned the market from a seller’s market into a buyer’s market.  This is temporary.  The Toronto economy is too strong, and the demand for housing is too high for this to be a long swoon. People want to be here, and they want to own a home here.  The demand for housing is waiting on the sidelines to see what happens.  Those potential home buyers will be back.

Opportunity knocks in the GTA

There is a huge opportunity in the next 30-days for savvy buyers to get a screaming deal on a house.  A number of homeowners bought a new property in March, with the intention of selling their existing property, only to have the market completely turn.  Some houses are available on the market today with extremely motivated sellers.  This is Boxing Day Sales in August for the GTA housing market.  It won’t last.  By the end of August, these properties will be sold.  The leftover sellers will not be quite as motivated to sell for anything less than their desired target price.

Current Regulations

Right now borrowers with a 20% or more down payment (conventional mortgages) are able to get larger mortgages than borrowers with 5%-19.99% down (high-ratio mortgages).  Conventional mortgage borrowers can qualify using their fixed interest rate.  Therefore, this allows them to borrow more money with the same income than those with high-ratio mortgages.  This is because high-ratio mortgage borrowers need to qualify for their mortgage using the Bank of Canada Benchmark Rate of 4.84%.

Recently interest rates have been edging up.  They are still close to historically low levels.  In terms of affordability to borrow money, we are in a very low interest rate era.  Compare this to previous generations when interest rates were between 12% and 18%.  There has never been a more affordable time to borrow money.

OSFI Proposal

OSFI is suggesting that conventional mortgages should also be qualified at a higher rate  (contract rate plus 2.0%). This will have a big impact on your ability to get more money from lenders.  As a result, Conventional Borrowers will qualify for 18% less mortgage after the rules are in place.

OSFI is proposing that this be a rule by Fall 2017.  The Bank of Canada is very likely to act on this suggestion in the very near future.  For more on the proposed changes, read this article from the Financial Post: OSFI tightens rules on uninsured mortgages

In conclusion, we may look back at the Summer of 2017 and consider this to be a golden opportunity to buy a home.  With less demand, motivated sellers and upcoming mortgage regulations, the home that you can buy today, may be out of reach by the Fall of 2017.

 

Why I’m not Locking-in my Variable Rate Mortgage

Mortgage Tips Sean Humphries 26 Jul

I’ve had a few conversations about locking-in a variable mortgage to a fixed mortgage this week.  Many variable rate mortgages have the option of converting to a fixed mortgage.

Lock it down?

My advice has been to stay in variable, and re-evaluate if there are any major shifts in policy.  I have two variable mortgages, and I’m not considering a switch at this point.

Furthermore, today is not the day to convert to a fixed mortgage.  Fixed rates have shot up considerably over the last couple of weeks, likely overshooting where they should be right now.  Please wait a couple of weeks if you’re hellbent on switching from variable to fixed.  Today is likely the most expensive time to do it in the short term.  Typically the fixed rates increase weeks in advance of a predicted increase in the prime lending rate. The fixed rate mortgage is already higher by the time the variable rate has gone up.  This makes it unattractive to switch to an even higher fixed rate payment.

“the typical five-year mortgage in Canada is broken after only about thirty-six months”

In the long term, a fixed rate mortgage can also have more costs than a variable.  Did you know that the typical five-year mortgage in Canada is broken after only about thirty-six months?  Also, a fixed rate mortgage with a big-bank has a penalty about nine-times larger to break the mortgage than a variable mortgage.  Over the term of your mortgage, switching to a fixed rate mortgage will likely be more expensive than just sticking it out in a variable rate mortgage.

Why did the Bank of Canada raise the rates?

The Bank of Canada made a strong move by raising the interest rates earlier than expected.  Many economists were predicting a rise in interest rates in 2018 at the earliest.  The Bank of Canada could no longer ignore the strength of the Canadian economy.  Canada had the fastest growing economy of the G7 countries in Q1 of 2017 (+3.7% GDP), making it an easy case to make that the previous emergency rate cuts in 2015 had done their job.  It was time to normalize rates upwards.

“Canada had the fastest growing economy of the G7 countries in Q1 of 2017”

The early rise in interest rates puts one more tool in the Bank of Canada’s toolbelt.  This helps Canada to counteract any sudden downturns in the economy.  The Feds in the US  tightened their monetary policy and raised their rates three times recently. 80% of the time, a tightening of monetary policy in the US has caused a recession.  Canada needed to follow suit, by raising the overnight lending rate.  The banks use the overnight rate to set their prime lending rate, which variable rates are based.  If Canada did not raise the rate, it would not have the ability to lower rates if the US economy starts to falter.  It was a good move to raise interest rates now, instead of later.

A slowdown of the economy (US or Canada), makes is also possible.  If that happens, the Bank of Canada could also lower the overnight lending rate as their next move.  A subsequent increase in the overnight rate is not a sure thing, as it is being predicted.

Downward Pressure?

Other downward pressure on interest rates includes Canada’s ability to pay its debt.  This is more costly with higher interest rates.  Canada is running a deficit with the Government of Canada trying to stoke the fire of the economy by pouring borrowed money into it.  More costly debt makes less money available for other important spending like building roads and bridges, as well as education.  Also, with an increase in overnight lending rate our dollar has increased in value.  Our exports  are more expensive compared to other countries like Mexico.  Canada’s aging population, ability to pay debt and less competitive exports are all putting downward pressure on interest rates.

Often rates increase, and then a few months later something unforeseen happens to change the perspective, and change the rates again.  This is not the time for a knee-jerk reaction.  Stay steady at the wheel of your finances.

If you’d like, reach out to me to talk about your personal situation.  It’s free and there is no obligation.  I’m happy to point you in the right direction.