OSFI announces strictest mortgage rules ever… what you need to know.

HARDER TO QUALIFY WITH 50% DOWN THAN WITH 5% DOWN.. DOES THIS MAKE SENSE?

October 2016, our Federal govt announced a number of new mortgage rules including the infamous new ‘stress test’ for all insured mortgages.  Mortgage default insurance is required for all mortgages greater than 80% loan to value.  You have to qualify at the bank posted 5 yr fixed rate, which is usually around 1.75% to 2.00% higher than your actual rate, and with a maximum amortization of 25 yrs max.

These ‘rules’ were brought in last year to protect us from ourselves.   To ensure we could handle any large interest rate hikes at renewal time.  Sort of like big brother watching over us to make sure we don’t borrow more than we can afford. (btw, we already had lending rules in Canada.  Our mortgage arrears were and still are at record low levels.   Seems like our Banks, credit unions and other lenders are doing a pretty good job of lending.  Is more govt intervention necessary?  Most experts say no.)

Today, Jeremy Rudin, OSFI Superintendent, joined the party…. well, more like rained all over ever Canadian homeowner’s party (current and future).   OSFI, not wanting to be left out, announced they would impose more mortgage rule tightening for all mortgages that were UNDER 80% loan to value.    Again, to protect us from ourselves just in case interest rates should sky rocket at your renewal time.   Here’s a summary of the changes and how they will impact consumers, homeowners, and the real estate market:

  • A new minimum qualifying rate for uninsured mortgages.  The ‘stress test rate’ will be your contract rate + 2.00% or the 5 yr posted fixed rate, whichever is greater.(that’s right, your may have to qualify at a higher rate than those with insured mortgages above 80% loan to value.. how does that make sense?)
  • Federally regulated financial institutions must establish and adhere to appropriate Loan to value limits that are reflective of risk and updated as housing markets and the economic environment evolve (yeah, I’m not quite sure what this one means either.. stay tuned)
  • Federally regulated financial institutions are prohibited from arranging with another lender a mortgage, or combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum Loan to value ratio or other limits in its residential mortgage underwriting policy. (this has dire consequences for those that won’t meet this historic new ‘stress test’.. effectively, the govt is telling you to not buy a home if you don’t fit in this new shrinking qualifying box…. or sell your home if you need to access the equity..)

 

HOW THIS AFFECTS YOU

  • buying with less than 20% down payment, no effect.  You already have a ‘stress test’.
  • buying with more than 20% down and you’ll have to pass a tougher test, that’s right, a tougher test than those with less than 20% down.  (Make any sense to you?  me neither.)
  • around another 15% of homeowners will NO longer qualify for a mortgage regardless of it being a purchase or if you wanted to refinance.
  • expect rental, condos or houses to become way more expensive as demand will spike.
  • we’ll see a spike in real estate sales from now until Jan 1st as homebuyers will scramble to get in prior to the new rules taking effect.
  • most credit unions are provincially regulated and for now, won’t be affected..  (that could change if the provinces amend their rules)

 

POSSIBLE SOLUTION TO DISCOURAGE HOME SPECULATORS BUT ENCOURAGE HOME OWNERSHIP

If you want to discourage speculators, make them hold the property for 5 or 7 years.  Bring in a declining speculation tax for anyone that sells a non-owner occupied home in less  than 5 years.  Reward those that hold real estate for longer periods.  You’ll have less transactions.  Encouraging longer holding times, more rental units on the market and higher vacancies.  More rental supply will also resolve high rents.  Bring back more realistic mortgage qualifying guidelines.  Encourage and promote buying investment properties.

A year ago, the Federal govt made several rule changes that effectively made it more expensive and difficult for consumers to borrow.  The list of changes was so long that most Canadians didn’t bother to react because it didn’t affect them that day.  But as we are seeing now, more consumers are experiencing reduced access to mortgage money.   They can’t refinance their mortgage.  They can’t draw on their built up equity in their homes.  It’s only when you need to borrow do you realize the extent of the changes.  Each and every one of us will be impacted.   These new policies will only make home ownership more difficult.  It will also slow our economy.

Perhaps the credit unions can pick up the slack and help …  stay tuned.. there will be more to share on these changes.     One thing is for certain.  You need to speak with an experienced Mortgage broker to understand what your options are.  It’s almost impossible to go it alone.. and you don’t have to.  Mortgage Brokers work for you, not the Bank.  They have access to dozens of competing lenders.

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

A 2nd Bank of Canada rate hike surprises many.. what’s it mean?

 The Bank of Canada Governor, Stephen Poloz, has been full of surprises since he took on his current role.  With a second 0.25% rate hike today in consecutive BoC meetings, he’s pushed the rate to 1.00%.  This should result in a Bank Prime rate of 3.20%.   The move has surprised many experts as the economic indicators don’t justify a rate hike.

The move comes following last week’s surprising positive stats showing the Canadian economy grew by 4.5% in the 2nd quarter, according to stats Canada.   Could this be a knee jerk reaction?

Usually, the Bank of Canada increases rates when inflation rises above the Target level of between 1% and 3%.  A quick search on the BankofCanada.ca website and we see the inflation level is just 1.2%.   So, why raise the rate now?   According to the BoC press release, it’s all about that recent positive economic data. Hmmm, you have to wonder is they jumped the gun on this one?

WHAT’S THIS MEAN FOR MORTGAGE BORROWERS IN CANADA?

Standing back, we need to look at where current interest rates are in relation to historical rates.  With an expected Bank Prime rate set to increase by 0.25% (Banks usually follow and match the BoC rate movement except 2 yrs ago when the Boc cut the Target rate by 0.50% in 6 months, but the BIG SIX BANKS only cut their Prime rate by 0.30%, pocketing the difference and stumbling to explain why they would profit off the backs of Canadian consumers and businesses during an economic recovery…nice, huh?) This means the new Bank Prime rate will be 3.20%.

REALITY CHECK.

Are rates high? Are they low?  Historically, we are still in record low territory.   Fixed Mortgage rates are still just over 3.00% today.  Variable rate mortgages are 2.45% to 2.55%.    Hey, that’s not bad at all. In fact, it’s still great!  Too much emphasis has been put on these rate hikes, as though they would paralyze consumers from being able to spend or make their mortgage payments.   This is just untrue.

Canadians have had to qualify at Bank Posted 5 yr fixed rates for years, if you chose and Variable rate mortgage.  That means you had to pass the stress test using a rate that was 2.00% higher than your actual mortgage.   And what’s not talked about enough is that Canadians don’t just pay their minimum required payment.  They accelerate and increase their payments.  They pay more to pay the debt off faster!.  Canadians pay their mortgages off in around 17 yrs on average….with many paying them off in 12 years.

Bet ya didn’t know that?!

FUTURE RATE HIKES

Not likely.. at least not for a while.  These 2 consecutive rate hikes will be closely monitored to see how the consumer and the economy can absorb them.   If we start to see negative economic stats, we could see rate cuts.  It’s not out of the question and it wouldn’t be the first time the Bank of Canada had to reverse their increases.

Remember, we have seen major mortgage rule changes that have made it harder than EVER to qualify for a mortgage.  This lack of access to mortgage money is having a negative effect on the housing market.  Sales are down.  Prices have fallen (price decrease isn’t bad but we don’t want a free fall)..  Put it all together and you end up with less money flowing into the economy.   A slower economy usually means sustained low-interest rate environment… stay tuned folks..

MY ADVICE

If you are in a Variable rate mortgage, I would stay there.  Your rate is less than 3.00%.  Why would you want to lock in at over 3.00%?   If you are worried that rates could skyrocket, it’s unlikely given the fragile global economy and even our own economic instability.  However, if you can’t sleep at night because you are worried about the rates, and don’t mind paying a higher fixed rate for the assurance of knowing what your payment will be, then lock in or choose a fixed rate.   I’ll be staying in short term priced products like the Variable rate or a 2 or 3 yr term.  These products have proven to be the lowest cost products.

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

Spring housing market in the Fall?

Fewer homes in the summer.  Lower average home selling price in the summer.  That’s this year’s headline.  But it could also apply to last year or the year before or the year before that.

What hasn’t been said much is that house prices almost always go up in the Spring and fall during the summer. 

This year isn’t much different.  Except that this Spring, we saw ridiculous price increases in the 20% range.

That’s just not sustainable.  Check out some of these graphs from Canadian Real Estate Association.

This summer, house prices have fallen a little more than average.   And sales are also down compared with the last 2 years.  But listings haven’t increased.  In fact, listings dropped in July signalling we could have reached the bottom.

Hey, if we were in a housing bubble, you would have seen new listings continue to spike up.  That’s when we know the market will have changed gears.

 

PENT UP BUYER DEMAND?

Some are speculating that we could see a busy Fall market this September or October.  The Fall has historically been the 2nd busiest housing market.    If we look at Vancouver in 2016, after they announced their 15% Foreign tax rule, their market went soft and was very quiet.  Many pessimists were saying it was the bubble bursting.

Six months later and Vancouver’s market is busier than ever. Fully recovered.  The initial shock of the Foreign tax rule came and went.   We could see that same sort of comeback for Toronto.

A WORD TO OUR FEDERAL GOVERNMENT AND REGULATORS…

To the Federal govt:  Please, no more mortgage rule changes.  Let the market absorb all the massive changes already made.  Listen, I’m telling you with 28 years of mortgage lending experience.. I can’t recall when qualifying for a mortgage has ever been harder… and I was around during the last real estate recession of 1990.

Non-bank lenders are being penalized as their cost of funds are higher than BIG SIX BANKS (thanks to the new Fed govt mortgage rules), hence driving more customers towards the BANKS… THE WINNERS:  BIG SIX BANKS.  THE LOSERS: CONSUMERS. Let’s bring back competition among Mortgage Lenders… and let’s make mortgage financing accessible again.  The pendulum has swung way too far to the conservative lending side.

BANK OF CANADA RATE HIKES ON HOLD?

The Bank of Canada hiked the Prime rate by 0.25% in July.  It was headline news for weeks.  Many said this was the 1st of many hikes to come.  Today, the forecast is for a possible October hike.  But that isn’t a sure thing.  And if the uncertainty with the housing market continues or if the NAFTA trade agreement gets turfed like President Trump says, you can bet the Bank of Canada governor will think twice about raising the rates.   More likely a rate drop!

Stay tuned.. Maybe we’ll see a Spring market in the Fall?

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

Rates went up, so now what do you do?

fearOn July 12th, for the first time in seven years, the Bank of Canada increased the overnight rate by .25%, withdrawing some of the stimulus that was needed after the oil price collapse and 2008 financial crisis. Variable rate mortgages and lines of credit will see higher rates and modest payment increases. Fixed-rate mortgage – which are based on the bond market – had already been trending slightly upward, although if you have a fixed mortgage, you aren’t affected until it’s time to renew. Keep in mind that this is a very small increase, and we’re still in an ultra-low rate environment and an incredibly stable market. We’ve also seen increases before to only see them decrease again. But rates have risen, so here are answers to the questions I’m getting:

Should I jump into the market now? Actually, my advice is always the same: buy when you are financially ready. Don’t jump the gun just because rates “may” go higher. But by all means, if you’re thinking about buying, I can arrange a pre-approval so you’re protected from rate increases while you shop around.

Should I lock in my variable rate mortgage ASAP? 
Read the rest of this entry »

Canadians bought more U.S. real estate than almost anyone else!

From April 2016 to March 2017 Canadians spent $19billion buying U.S. properties, according to the U.S. National Association of Realtors.

Put another way, Canada was only behind China for all foreign purchases of U.S. real estate in 2016.   That’s an incredible stat that deserves more attention.

And what’s not been talked about is where Canadians are getting the money to buy these U.S. properties.  It isn’t so easy for a Canadian to borrow money from US Bank.  So, instead, Canadians are borrowing in Canada by refinancing the mortgage on their house, or getting a secured line of credit.  This is called leveraging.  Borrowing to invest isn’t a bad thing.  Most Financial Planners and advisor promote this.

THE STATS SHOW WE CANADIANS ARE SAVVY INVESTORS

Yet, all we keep hearing about is how Canadians are borrowing and spending like foolish children. And that’s just not true.  Here’s some numbers from 2016 …

Read the rest of this entry »

Banks pass on rate hikes but not the savings.. Shame on the BANKS!

On January 2015, the Bank of Canada cut the prime rate by 0.25%.  But the BIG SIX BANKS didn’t cut the Prime rate as they normally do.  Instead, they waited a week… tried to justify why they couldn’t cut the rate… and finally caved in and cut it.. but ONLY by 0.15%.

That’s right, they pocketed the remaining 0.10%.  And in case you haven’t heard, the BIG SIX BANKS have been posting record profits, year after year after year after year after year.   In 2016, the 5 most profitable corporations were:

  1. RBC
  2. TD
  3. SCOTIABANK
  4. BMO
  5. CIBC

Read the rest of this entry »

Bank of Canada rate hike.. it’s really not a big deal.

BREAKING NEWS… BANK OF CANADA RAISES RATE BY 0.25% AND THE SKY HASN’T FALLEN!!

Stephen Poloz, the Bank of Canada Governor, raised the Target rate by 0.25% to 0.75%.   Maybe now the media will move on to other news.

Seriously, aren’t we all kinda tired of hearing how rates are going to skyrocket,…how this is going to make our mortgages unaffordable… how we have record debt levels.. how we are going to default our mortgages, lose our homes and go into a recession…it’s doom and gloom?  This isn’t happening.

SOME FACTS ABOUT THE RATE HIKE Read the rest of this entry »

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