Anyone remember this guy? Ben Bernanke. He’s just the former Chairman of the US Federal Reserve Bank. He served two terms from 2006 to 2014. Earlier this month, he revealed that he was declined for a mortgage refinance. Now, just to put this in perspective, he used to make a nice 6 figure salary. And today, he is paid an estimated $250,000 per speaking engagement.
How can he not qualify? Clearly, the mortgage rules tightening process has gone waaaaaay overboard. But this isn’t just happening in the US. Canada’s mortgage lending rules have always been tighter than the US. And over the past 6 years, the Canadian govt has brought in numerous changes to tighten the rules even further. (Actually, experts agree that they went way overboard. And we are only now seeing the effects of the rule changes.. Look out. You’re in for a big surprise the next time you need mortgage money).
CANADIAN MORTGAGE RULES ARE EVEN TIGHTER!!
Canada’s Banking industry has been the envy of the world. We came out of the 2008 US sub-prime mortgage crisis with no visible scars. In fact, our BIG SIX BANKS never skipped a beat and continued to post record profits year after year. Yet, our Federal govt agencies have mysteriously found it necessary to continue to tighten our mortgage rules. Each of the last 5 yrs has seen mortgage rules get tighter and tighter.
But why? and was it really necessary? We already had some pretty tough qualifying rules in place. Here’s a SUMMARY OF THE MORTGAGE RULE CHANGES OVER THE PAST 5 YEARS… CAN YOU SAY OVERKILL??
- Variable rate mortgages were being qualified at 5 yr fixed rates. The govt said that wasn’t enough made us qualify at the Posted 5 year fixed rate.
- We had 40 yr amortization but this got cut back to 25 years.
- Secured lines of credit could be had up to 90% loan to value (ltv). That was cut back to 65% ltv. That’s right, you can only borrow up to 65% ltv on a secured line of credit.
- Refinancing was available up to 95% ltv. The govt cut this to 80%.
- Self employed individuals qualify with different rules. Lenders use their net after tax income to qualify. Line 150 on their tax returns. Salaried employees get to use their gross pretax income to qualify. New rules force lenders to use this after tax income to qualify.. An $80k self-employed income is the same as a $104k income.. yet, this self-employed person can only qualify for a $387,000 mortgage. The salaried employee qualifies for a $512,000 mortgage. How is this fair or even prudent?
- Self employed used to have access to self-employed programs where they could borrow up to 80% ltv without paying any CMHC or Genworth insurance. Not any more. Anything above 65% ltv has to be insured by CMHC or Genworth at the borrowers expense.
- Self employed individuals must also pass a new income reasonability test to prove they can service the mortgage. (the definition is so vague that NO Bank or Lender can explain this in writing).
- Eliminated mortgages for rental properties above 80% ltv. You used to be able to finance these up to 90% ltv. (in fact, most lenders have cut these back to 75% ltv)
- Lenders can now only use 50% of rental income to offset the mortgage for qualification purposes. That’s down from 80%. End result is fewer people can qualify to buy a rental property.
- Eliminated mortgage insurance for homes over $1million. (while some might think it’s not necessary to buy a home for a $1million plus with less than 20% down, the reality is that most mortgages get insured by your Bank or Lender, after closing so that they can offer lower cost rates.. it’s hidden to the borrower but it provides a low-cost source of funds. And in markets like Toronto, Vancouver and Calgary, where $1million house sales are becoming more common, this has had a significant impact on mortgage qualifying).
- Cashback mortgages will disappear from Banks.. some local Provincial lenders will still offer this.. This helped those that didn’t have enough down payment but could afford the monthly payments… say good-bye.
- If you want a mortgage term for less than 5 years, or a Variable rate mortgage, you must qualify at the 5 year post rate. This is forcing Canadians into longer terms… Longer terms usually means higher rates.
- If you have an unsecured line of credit, or a secured line of credit with a $0 balance, Lenders and Banks will have to factor in a minimum payment in your debt servicing ratios. In many cases, the borrower will have to cancel their credit lines in order to qualify for a mortgage. Yet, any financial advisor will tell you that it’s important to have and keep a line of credit available for emergency situations. (we haven’t seen this sort of underwriting policy since the early ’90s. Back then, Lenders had to factor in a 3% minimum payment based on your credit limit ..example $5,000 limit = a $150/mth payment to be added to your liabilities… this sort of old school thinking disappeared when stats showed this was an unnecessary policy… yet it’s back now. )
- Most Banks and other major Lenders will not lend on more than 4 properties. If you own 4 properties, and you want to buy a 5th, better contact your Mortgage Broker for advice. This new rule is making life miserable for veteran property investors. (like investing in the stock is a better option)
CONCLUSION….. WE’RE PAYING OUR MORTGAGES AND UNSECURED DEBTS BETTER THAN EVER BEFORE!
Get the picture? In case it still isn’t clear, let me give it to you straight. Our mortgage arrears are at record lows. Our unsecured debt arrears are at record low levels. We don’t have a credit default problem. Canadians are actually paying their mortgage way faster than first believed. Well known CIBC Economist, Benjamin Tal, was recently quoted as saying “Today, for every mortgage dollar taken, a record high 90 cents of principal are being paid back.”
Wow! Did you get that? We are paying back our mortgages faster than ever.. So do we really need to continue to tighten the mortgage rules? It feels like a truck going downhill with no brakes. The momentum is pushing qualified applicants, from just a few years ago, either out of the housing market or into the ‘B’ lending market where the same borrowers are now perceived as higher risk. These people are now having to pay 1% and 2% higher interest rates.. Something is very wrong with this picture. There is no data to support the huge credit crunch.
EXAMPLES OF CANADIANS THAT DIDN’T QUALIFY FOR A MORTGAGE
And if you really need to see how ridiculous things have become, These are some examples where Canadian applicants were declined recently… these same applicants would have easily been approved just a few short years ago…
- A mutual fund manager for a well-known organization (manages over $3billion) earning $400k plus salary, was turned down for an 80% ltv mortgage because he had too much real estate. He owned close to $8million in real estate, had a net worth of over $3million, but was considered a risk?? This would have been approved just a few years ago.
- A middle management employee working for a major corp with 25 yrs on the job, perfect credit and a $200k income. Owned 4 properties with an average 50% equity position.. His net worth was over $2million. He was declined for a small mortgage on house he wanted to buy and rent because they said he had too many properties.
- A Canadian living and working overseas earning $210k wanted to buy a house with 25% down. He was declined because the Bank wanted 35% down payment.
- A young couple bought a home 2 yrs ago. There was a small collection item on their credit report. The lender disregarded this as the rest of his financial profile was very strong. Today, he wants to do a $40k reno. He was declined by that same lender for an increase because of the collection item. Thank you new rules!!
- A client can buy a house with as little at 5% down today. They can even finance home improvements at the time of purchase. Yet, they were conservative, and didn’t want to get into too much debt at first. They waited 3 years and then decided to to the renos. But they were out of luck. Why? Because the govt decided you can’t refinance your mortgage above 80% ltv. So this couple is now forced to pay down the mortgage for another 4 or 5 years before being able to get their renos. By they way, they fully qualify for a much higher mortgage but can’t get access to the money.
- In 2008, with an annual income of $55,000, you could qualify for a mortgage of $300,000. Today, you need to earn $68,000 to qualify for that same mortgage. Shorter amortization periods and tighter qualifying rules are killing the dream of home ownership for Canadians.
- Most small business owners have a hard time financing their business. Instead, they turn to the equity in their homes. In years past, you could borrow up to 80% ltv on a secured line of credit. This sort of flexible financing was a perfect product as it allowed one to borrow and repay the debt as needed… it’s gone. Today, you can only go to 65% ltv. These borrowers are now pushed to secondary lenders with rates 2% and 3% higher.
- An elderly couple has a $500k home. They live on CPP and Old Age Security. Their combined income is $43,000 year. They want a $250k line of credit to live comfortably during their retirement years. In years past, they could borrow up to 65% ltv on a line of credit. (that’s $325k) This was a good credit risk as there was little to no chance the Bank would ever lose money on them. Today, you cannot borrow any money unless you can prove that you can make repayments. The new line of credit rules mean this couple has to qualify using the posted 5 yr fixed rate (4.79% today) with a 25 year amortization. They can only borrow $130k. Why should this couple be limited to only being able to borrow 26% ltv? They will probably forced to sell an appreciating asset or get a Reverse Mortgage. Reverse Mortgage rates are around 2% higher than regular rates.
- Put another way, I have another couple with a $700k home. They want to borrow $350k to do some small renos, use funds for kids university fund, take a small trip. Only problem is that he was off work for year due to being injured. That’s okay. He put enough aside for just such an emergency. His credit is great. He’s back to work. There is no risk to the Bank on this mortgage. Plenty of equity in the home. No way the Bank would lose. Today, they can’t borrow any funds unless they go to a secondary lender.. paying rates 2% higher than normal. That’s because they aren’t able to show any recent income. Does anyone think this couple would actually default on their loan and lose all that equity? Of course not.
Do ya think the govt has gone too far with their mortgage credit tightening agenda? Remember folks, they haven’t touched unsecured loan rules or credit card rules. And both of these credit facilities are considered to be ‘BAD’ debt. Buying cars, TVs, electronics, etc, are not good spending habits. (strange how the BIG SIX BANKs keep having record profits as more Canadians are forced to borrow higher interest rate product) Depreciating asset purchases are never good. But buying a home, an appreciating asset, is considered ‘GOOD’ debt. Yet more Canadians are being forced out of home ownership.
STAY POSITIVE ABOUT HOME OWNERSHIP
It’s easy to get depressed and feel negative about real estate. These past few months has seen a steady stream of negative news when it comes to the housing market and house prices… I’m really not sure why the media is so focused on slamming our housing market. Don’t get caught up in the negative talk regarding real estate. History has proven it be a solid investment. It’s harder to get a mortgage today, but it’s still possible. Don’t be discouraged. I encourage buying for the long term. Plan to own and hold for at least 7 years. It’s not exciting but it’s a proven strategy. Get a sound plan and stick with it.
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 email@example.com