Tuesday, October 18, 2016

Are the New Mortgage Changes Good or Bad for Canadians?

On October 3rd ,Finance Minister Bill Morneau announced changes to the rules for mortgages insured by CMHC.  Everyone expected that these changes would address the problems with runaway prices and predatory practices in the Vancouver housing market. What came as a big surprise to many was the other changes announced for October 17th.
  The biggest and most profound change was the use of the Bank of Canada benchmark rate to qualify for a 5 year fixed rate mortgage. The 1- 4 year fixed rate and the variable rate mortgage are already qualified at this rate. 5 year fixed and great terms were exempt.
     My first thought was why would anyone do this? This will devastate out housing market.  First time home buyers would not be able to qualify. I looked at a preapproval I had for a client who is presently looking for his first home. In August, I was able to qualify him for $330,000 . This would allow him to buy a small starter home.  When I tried to re-qualify him using the benchmark rate at 4.64% I found the most he could afford would be a $270,000 purchase. This would put starter homes out of range and leave him with a townhome or an apartment. Both of these options tend to be condos so I put the $300 average condo fee into the equation and now all he could afford was a $245,000 condo apartment.  This is frustrating considering we are using a fictional rate and not the rate we could lock him into for 5 years.

    I thought about this and then I realized that while I know interest rates will go up . When I purchased my first home in 1986 my mortgage interest rate was 9.98%. I was so happy to be paying less than double digits..  I’ve been in this business for over 11 years and I remember in 2010 the best rate I could get clients was 5.79%.  While I don’t expect rates to jump into the double digits, 2010 was only 6 years ago and rates could go up to 5.79% within the next 5 years.
I realized that I wasn’t asking myself an important question. Will my client be able to continue making payments in 5 years if mortgage interest rates go up to historical normal levels?  I was betting on my clients income going up quite a bit in the next 5 years.  As the focus of my business is helping people I started to think that I may be putting people in a bad situation. Perhaps this higher qualification rate is the prudent thing to do.
      Another item that did not make headlines was the fact that CMHC would no longer insure mortgages over $1 Million dollars.  While there had been a scaling back on insurance over $1 Million, now this is completely gone. As a result, lenders who back end insure such as monoline mortgage companies will now not be able to offer mortgages to these clients. The only place to get a mortgage will be the big banks.  I know that from previous experience that when banks do not have to compete they use their bank posted rates. We have seen this with mortgages for mobile homes.  I expect the same thing will happen with Million dollar plus mortgages in the future.
     As you can see, the changes are a mixed bag, there’s some prudence but also the possibility of higher interest rates in the future.  The jury is still out as to whether these are good changes or bad. 
Contact me or visit my website for more information on mortgages in Canada. 


Monday, October 3, 2016

More Mortgage Rule Changes

 My associate Pam Pikkart from our Red Deer office wrote this article. It helps to explain the changes revealed by the Canadian government this morning. 
If you have any questions contact me at 403-836-1201 or visit my website.  

More Mortgage Rule Changes!
Over the past few years we have seen a large number of mortgage rule changes.
• Maximum amortizations decreased from 40 to 25 years
• Terms less than 5 years required a borrower to qualify at a higher interest rate
• Refinances capped at 80% of a property’s value
• Income for self-employed individuals had to be more verifiable
• Increased down payment for homes over $500,000
And the list can go on and on. We have heard rumors since March of this year that another round of rule changes were coming through but we were not 100% on exactly what they would entail.
The hot real estate markets and ever escalating prices in Vancouver and Toronto have been a great concern to the government. Couple that with the lousy economy in Alberta and arrears rates which are rising and the federal government has deemed it prudent to add additional mortgage lending rules.
Why are they even worried about it you may ask? The reason is simple, they are heavily invested in our real estate market. CMHC stands for the Canadian Housing and Mortgage Corporation which is owned by the federal government. They are issuing insurance policies that they are potentially going to have to cover losses on from tax payer’s money if/when people stop paying.
Say your neighbor bought their house with 5% down and has lost their job and can no longer make the payments so the bank steps in and forecloses. CMHC, and the other mortgage insurers, have guaranteed that they will step in and cover any monetary losses incurred by the bank. This means that the government and therefore all of us are literally heavily invested in the real estate market and at risk if it crashes.
On Monday October the 3rd the Ministry of Finance announced 3 more things.
1. Mortgage Stress Test
As of October 17th, 2016 all insured mortgages, regardless of term or type, will be required to qualify at the bank of Canada posted rate.
To put that in perspective.
Family Income $80,000
Monthly Debts $500
Property Taxes $3,500
25 year term
(Qualification rate today is 2.39% and after will be 4.64%)
Today that family can buy a home worth approx. $393,000 but after the 17th that drops to $310,000. That is a large decrease to say the least.
The rate you pay will not change, just the interest rate we have to use to qualify you for the loan.
Safer Lending
Mortgages with a loan to value of less than 80% were not subject to the same stringent rules as those with less than 20% equity. As of November 30th, 2016 that will change and mortgages will all be subject to the same lending criteria.
2. Closing Loopholes and Managing Tax Fairness
There is a proposed change to the tax laws on the table as well. They want to make sure that the Capital Gains tax exemption on a primary residence is not abused by either residents or non-residents buying and selling a primary residence within the same year. This is in all likelihood an attempt to cool Toronto and Vancouver markets.
3. Managing Risk and Protecting Tax Payers
The final piece in the announcement is a little bit unclear as to exact ramifications. Currently CMHC and the other mortgage insurers take on all the risk associated with mortgage default. They are planning to implement a consultation process on a policy option where mortgage lenders would have to manage a portion of their loss. We will have to wait and see what exactly happens from here.
So there you have it. Getting a mortgage just got even harder and it doesn’t matter if you walk into your trusted branch or go through a mortgage broker. The rules have changed for us all.
I cannot stress enough the necessity of making sure you speak to a well-qualified mortgage professional before you make any decisions about buying or selling in case you are one of the folks affected by these changes. I will keep you up to date on any changes which come down the road.