What’s the TRUE Impact of Policy Changes on the Canadian Mortgage Market?

It’s certainly not what the Bank of Canada (BoC) is claiming!

The BoC recently released a document detailing what it believes to be a positive report on the Canadian Mortgage Market, but this article clearly shows how out of touch our government is.

The BoC is applauding their statistics… yet, these numbers show that the government appears to be measuring affordability as a multiple of one’s income – and not by the proven, standard method of debt servicing ratios. This is very odd and, quite frankly, I find it absurd.

So, the BoC is saying consumers who borrower above 450% of their annual salary are more prone to default or financial hardship should interest rates rise. They use 250% of annual income as a safer level. Yes, of course it’s safer. But who’s going to qualify for a mortgage using this formula?

And, why are we grouping everyone together?

There are so many different categories of people and multiple sources of income – some more reliable than others. Is the government trying to be politically correct, yet again, by grouping everyone together? Hey, Big Brother – it doesn’t work like that!

Should we group self employed, commissioned, salaried, salaried plus commission, etc together? If we look deeper, there are several things that need to be reviewed in order to make a proper approval or decline decision. Grouping all Canadians for the purpose of mortgage qualification is dangerous.

Here are some of the distinct differences that must be considered when looking at mortgage qualification:

• Are you at the beginning of your career or near the end?
• Do you have strong credit or hardly anything to report?
• Are you making a large down payment or a small one? (Interestingly, smaller down payments qualify borrowers for better interest rates in 2018. You read that correctly! Yet another twisted and difficult to explain result of the 2017 government mortgage rule changes)
• What percentage of Canadians’ income is salaried vs commissioned?
• How old is the borrower? Are they 26 years old and just starting out in their careers where the likelihood of their income will naturally increase steadily over the next 10 years? Or, are they in their late 50s and nearing the height of their maximum earning years? (Yes, this should influence mortgage approval and always has)

Special consideration for the self employed

If you’re self employed, it’s very likely that you’ll be showing a lower net income on your income tax returns thanks to being able to take advantage of extra tax write offs.

The self-employed community makes up well over 10% of working Canadians. And why is it that mortgages are qualified using a self-employed person’s net after tax personal income (line 150 in T1 general tax return) vs a salaried person’s gross income before taxes are deducted? I’ve never understood this… If someone has the answer please explain it, as this has been penalizing the 1.5 million+ self-employed Canadians for more than 30 years!

Let’s get back to debt service ratios

The standard has always been that you can’t use more than 42% of your gross income (net income for self employed) to pay for your mortgage, heat, property taxes and 50% of condo fees, if applicable.

These ratios have stood the test of time. They’re the gold standard, so to speak.

Last year, our federal government decided to stress everyone out by introducing a ridiculous stress test that added 2% to your actual interest rate AND shortened the amortization to 25 years for the new qualifying test.

This is why fewer homes are being sold. This is why fewer people can qualify. The demand is still there, yet banks and other lenders are forced to decline applicants. It’s also why rental vacancies are at all-time historical lows. People simply can’t qualify for a mortgage. And, since they need a place to live, they must rent. The demand to rent is high. And rents are costing more than what mortgages are costing in many communities across Canada.

More interesting is that home prices are not falling in most markets. Fewer listings combined with fewer sales doesn’t equal a housing bubble.

By the way, if you’re thinking about whether it’s a good time to buy vs rent, the historical facts offer an easy answer. It’s no wonder why the wealthiest people put their money in real estate.

The government needs to ease up on mortgage lending rules for the reasons mentioned above. Let’s hope the government is proactive soon, because being reactive means you’re usually too late.

Another reality is that banks can’t sit on all that cash. They need to output money. Watch for the banks to pressure the government soon as well!

We should also watch for interest rates to remain flat and possibly fall in 2019 or early 2020. Yup, fall! It’s looking more like the government has overestimated the strength of the Canadian economy. We have serious issues in Alberta with oil prices and production.

If more of our paycheques are going towards housing (higher mortgage payments and rents), then we have less money left over to inject into local shops, retailers, services, etc. How is our economy expected to grow?

Have questions? Call me anytime to discuss if buying or refinancing is right for you.

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@canadamortgagenews.ca