I participated in a Q & A with one of my good realtor friends, Jenelle Cameron of Remax. We had a chance to discuss the current impact of COVID-19 on mortgages and the real estate market in general. Find out the latest on mortgages, what’s happening with closings during this time, and more!
Jenelle Cameron: Thank you Steve for joining us. This is great because we usually do a Q & A every Tuesday, but the questions I am getting all the time right now are about mortgages and lending and what’s going on and obviously with interest rate changes and the deferral programs out there and all the other things are so much, sort of, to unpack so maybe we can talk a little bit about, if you don’t mind, what interest rates are doing right now.
Steve Garganis: Oh boy that’s a good question. Of course we’ve seen and heard that the Bank of Canada cut rates, but it’s not really translating into lower mortgage rates. I’ll explain that. It requires a bit of explanation. The Bank of Canada rate directly affects the prime rate. The prime rate is what the variable rate mortgages are based off of. Typically, let’s say the prime rate is 3%, you’ll see a variable rate, prime less, I don’t know, .5%, that’s been fairly typical and average over the last 20 years or so and as prime goes down you get a lower mortgage rate. Prime rate has come down 1.5% this month; that’s unheard of.
These are emergency rate cuts because of the Covid-19. So the prime rate right now is 2.45%. That’s great, it’s low… Here’s the problem, fixed rates are going up. Fixed rates are directly priced from the Five-Year government of Canada Bond. That’s dropped like a rock, that’s actually sitting about points .7-.8%, somewhere in that ballpark. Normally, you would see fixed rates be about 1.50, maybe 2.00% at most, above that. We should be seeing rates of 2.25 – 2.50%, somewhere in that ballpark and we did when this virus first started, or at least was impacting Canada, everything dropped but that lasted only for about a week. You probably saw that. After that, rates have been going up. We’re over 3.00% now for most products on fixed rate mortgages. But why? What’s happened is the investors are looking for a premium from the banks on their mortgage products because the stock price has come down 30-35%. They want a higher profit, a bigger spread and unfortunately, Canadian consumers are sort of footing the bill.
I mean that’s the best way to explain it. I know it’s a bit confusing and I get asked that question every day. I don’t know how to answer it in the shorter, more condensed format.
Jenelle Cameron: Yeah, definitely nothing we’ve seen before, at least that I can recall.
Steve Garganis: No. I mean, we saw something like this in 2008/09 after the US subprime mortgage crisis and again with SARS 2003, but not to this extent, no. This is new territory.
Jenelle Cameron: So, does it mean that people are having a harder time getting a mortgage right now or easier? Or, and then part two of that is, if they are able to get a mortgage should they be considering variable or fixed?
Steve Garganis: Yeah, good question. I love variable rate because it’s usually the lowest price product. It’s hard to take it today; current pricing on variable rates is prime minus .05 maybe .10%. There’s one lender that’s still hanging on, I was kind of taking a look to see if they sent any notifications this morning, but I haven’t seen anything. They are at prime minus .30%. Prime is 2.45% minus .30, you’d be at 2.15%. That’s great! Should you take that versus a fix? Well, fixed now is 3.00, or over 3%, so the spread is there, theoretically, to take a variable rate. I would take that right now because I think bank prime is going to be low for some time to come. We’re not going to get out of the economic emergency for a couple of years, I would say. We’re going to get out of this coronavirus thing, I mean hopefully in the next month or two? I don’t know, but we’re not expecting it to last six months to a year. Please, no!
So I like variable-rate. It depends on the situation, the purpose it’s for, people’s budgets, etc. I think a lot of people are nervous right now. They’re right in that thinking; their jobs are in jeopardy and/or they are laid off, but I think what I’m also seeing though is there is hope. The government has stepped up and is offering all sorts of guarantees for income. The banks have jumped on board with deferral, I know you’re asking that question later on. So, what should I take? I don’t know, it depends on the individual.
Jenelle Cameron: With a lot of job losses happening and the uncertainty in the stock market are you finding that people are still trying to get mortgages right now and if so, is it a problem?
Steve Garganis: Yeah, very good question. That’s the big question. “I’m getting laid off, how can I get a mortgage right now?”, “How do I buy a house?”, or “How do I refinance or renew?” Interesting enough we’ve just seen two circulars from a couple of the bigger lenders, the banks, saying, and this was on Friday by the way, that they are going to look at people that have been laid off. The question they want to know is if this is permanent, is it temporary? So, if it’s temporary, because of what’s happened, they will do the mortgage still. That’s great news by the way. We’ve never seen this. Normally, if you’re laid off and you go apply for a mortgage you’re not going to get it. That’s just standard. But today everything’s changed. They’re saying, tell me about your layoff. Is it permanent? I mean as long as your job letter says that you’re going to be able to come back, or are expected to come back to work, you’ll be fine, but it’s a case-by-case basis, but there’s still lots of hope there.
Jenelle Cameron: What about those people that are caught in the middle? They’ve purchased something, they’ve been pre-approved, now before it closes they lose their job? Or all the money that they were planning to put down for a down payment they’ve lost substantial amounts in the stock market? What’s going to happen to them?
Steve Garganis: Again, the lenders are working with them. They’re not just turning their backs and saying see you later…get lost! They’re saying, okay is this a permanent type of job loss or is it temporary? If it’s temporary, again, you’re probably going to be okay. It’s a case-by-case basis. They’re making assessments on each individual situation.
Jenelle Cameron: I think it’s such a scare for a lot of realtors in my position and also my buyers who are concerned about the properties not closing for whatever reason. Small lenders not being able to fund it on time, or not having the money, or any other issue that could go awry between the time the property has finalized versus the time it actually closes. Do you see any issue with properties not closing that are supposed to close?
Steve Garganis: Not yet, I haven’t seen that yet. I think nobody wants to be in the headlines to say “we didn’t close” and you know the media is waiting for that. They love to publish negative news. You and I talk about that often. I wish they would stop making it all negative; it’s not all negative. But, no, I haven’t seen that yet. It’s probably going to happen but I have not even heard of a case yet.
Jenelle Cameron: Okay, I had one personal situation this week, where the lender said they did not have the staff to close. This was the buyer of the property and their lender wasn’t able to get enough staff together or something and then pushed the closing off for a month. That is the only instance I’ve kind of heard of. It was a member on my team with this experience, so I guess it’s the only instance I’ve seen so far. I don’t know, I’m hoping that won’t come about more often as time goes along. So, nothing like that? Other than that story you haven’t seen anything bizarre like that?
Steve Garganis: No, the only thing I saw was the adjustment period for all the banking staff, or financial institutions, to shift from an office environment to a work-at-home. You know we’ve heard again, I got an update on Friday, that they’re at about 80% capacity. So that’s great. They’ve made a transition. Technology is far better now than it has ever been, so grab a laptop and a cell phone and you know you’re good to go. I did see a week ago when it was very chaotic. If you had a Condition on Finance in your offer, I saw lenders not being able to meet that. They all asked for extensions and sometimes that wasn’t possible. I saw that happening; closings delayed, I’m not surprised. Thank goodness I have not experienced any, but I’m sure they’re still going to be a few going on out there. But again, I think as time goes on that should be less of a problem.
Jenelle Cameron: Now more than ever I would assume you would recommend that if anyone is putting an offer on a property that they be careful of their financing. Obviously, tell people whenever they can to put a financing condition in their offer, and with the market the way it was, it was sometimes difficult to do. Now, I am assuming more than ever we should make sure that any buyers have that conditional offer in their contracts. Or is it the same as it always was?
Steve Garganis: Yeah, good point. Definitely should have that in your offer, and you should have had that before in your offer. There are situations where you’re putting 40% down on a purchase, you don’t care if the appraisal comes in a little bit less, your income has already been approved, you know you qualify with great credit. At that point it becomes a business decision; should you go in without a condition of finance clause? You probably could. There are still some things that can go wrong, but it’s less likely at that point. Versus someone who’s really tight, maybe putting 20% down. They can’t afford for the house to appraise for less. That would be very costly, or even individuals with less than 20% down, I’d be careful. But I think like you have said, nothing’s really changed. You should be putting in that condition of finance clause if possible, even in a competitive market, yes.
Jenelle Cameron: Now let’s talk about this deferral program. I think there’s a lot of information out there, including an article you and I discussed yesterday, that if you do defer your mortgage that it may affect your credit rating, according to the Toronto Star. There are a number of questions I have about the deferral programs. If you could give us a bit of an overview on what it looks like. What exactly does that mean? Is it going to cost more money to do that? Does it depend on the bank?
Steve Garganis: A deferral is not a bad thing first of all. It’s something that was advised by the banks and the government knowing that everybody was going to be not working or working from home. A big percentage of the population is not working right now and if you’re not working usually you don’t get paid, so what do you do? You have a mortgage payment coming up next month, and no money, or little money, or not expecting money.
There is nothing wrong with deferring the payment. All you have to do is call up your financial institution and ask them to defer it. You can defer 1, 2, or more. It simply means that you’re taking that monthly payment, let’s say you pay $2,000 a month, and you’re putting it aside. You’re going to pay it at a later date.
No one is even talking about the repayments of that at this point. It’s too early. All they’re doing is they’re saying you want to defer it, great let’s push it to the side, we’ll get to that later and later means probably in about a year’s time or so. A discussion will still need to be had with the financial institution, with your mortgage lender, and figure out how you are going to repay that.
Jenelle Cameron: Are different lenders giving different rules? How does that work? Does it depend on the lender itself?
The other question I have is about interest? I mean you have to still pay your interest on your mortgage during that time right?
Steve Garganis: Right! Yes, each lender is different, but generally speaking their programs are very similar. Which means you call up, you ask for a deferral of one or two payments, or three. I have seen some people ask for six straight months of deferred payments and some financial institutions are doing that. Quite frankly, I don’t know why you’d want to do that right off the bat. I would suggest deferring two or three and then calling up again in three months or so and asking him to defer those payments. As far as the interest rate and costs goes, this is where the Press has been putting a lot of negative publicity about this. There’s no hidden costs, or extra cost to do this, there is no fee to do this. You’re going to pay interest at whatever rate your mortgage is at on the payment. So, the example that I’ve been using is, let’s say you have a 3% interest rate, you have a $2,000 a month payment. $2,000 works out to be about $60 a year. That’s what your cost is, your interest cost, on deferring that payment. So, if I’m not working, it’s $60, so what! I mean it’s such a small cost and it’s not an inflated cost, it’s just whatever your interest rate is. So that’s how it works. I would definitely recommend it. There’s nothing wrong with it.
Jenelle Cameron: Is there any chance at all that the lender would say no you can’t have it deferred?
Steve Garganis: Yes, there is a chance. I had some clients call me up the other day and they both had government jobs and nothing changed with their incomes. I wasn’t sure why they were inquiring about deferring their payments, but I told them, no, this isn’t for you. This program is an emergency situation, it’s for people that have had a change in their income, to help them. If your income hasn’t changed please don’t call up. The banks are overwhelmed right now with phone calls. Long waits and delay times. It’s just for people who have had a change in their income to help them out.
Jenelle Cameron: Do you need to prove that you have had a change in your income, or is it just sort of, they take your word for it?
Steve Garganis: No, it’s just a questionnaire. They just ask some questions. There is no time to do any thorough sort of checks on that. Again, it’s not like the banks aren’t charging for this, they are charging, but they’re charging the right amount. They’re charging interest that should be charged.
Jenelle Cameron: From what I understand for most lenders you can do that either online or by giving them a call. Is that your understanding as well?
Steve Garganis: Yes, they have all set up phone numbers and now they have set up email addresses and websites to go to. They are overwhelmed with the calls. I know I heard someone had an eight hour wait. Because it’s so new. Everyone has been thrown into it. I would say be patient. You will get through and they will honour it. Maybe put it on speakerphone while you’re on hold.
Jenelle Cameron: I had the same, as an aside. I had to call for an e-transfer that did not go through and I had no choice but to call them and I was on hold for about 2 hours. This was last week. It wasn’t even about a mortgage so I could just imagine.
Steve Garganis: It’s sort of all hands on deck and they have pulled people from everywhere, so it’s affecting all the services at the banks.
Jenelle Cameron: Is there anything else that you think people should know with mortgages right now that maybe we’re not hearing in the news or anything of importance you think is worth noting?
Steve Garganis: Yes, I do. On that six month deferral, I sent you that article yesterday Janelle from one of our big Media newspapers or sources, saying that this could affect your credit score, credit rating. I’m talking about deferring your mortgage payments and I want to tell everybody that’s not the case. That is possible if a mistake is made. A mistake being that if the bank doesn’t, in their own internal system, doesn’t identify that you’ve deferred the payment and are not treating it as though you’ve bounced a payment, like an NSF check. You’re fine. Will a mistake happen? Sure! With hundreds of thousands of these inquiries taking place and adjustments being done, yeah mistakes are going to happen. But mistakes happen every day.
For the media to come out and say this is going to damage your credit score, credit rating, I was quite disgusted actually to see that that came out. It’s not true and it’s fear-mongering. That’s one thing I wanted to say. There’s nothing wrong with it.
The other thing to tell you is that, and you’re seeing it Janelle because this is your domain, but I really haven’t seen real estate prices tank, or go down, or nosedive. I’ve seen some more supply on hand, you know more homes for sale but I haven’t seen, you know, this crash or real estate bubble we have talked about. I don’t think it’s going to happen. I think as we come out of this, and we will come out of it, I think we’re going to be fine. I think the real estate market will be strong by the way. Again, sorry this is your domain, but it’s kind of what I am seeing in the forecasts from the financial institutions. That is why I am making the comment on that and I don’t see a big panic. Which, actually, I’m a little surprised. I thought we would have seen, or I would have seen, forecasts for that but I haven’t, so hopefully they’re right and the real estate market will be resilient and continue on. I think that is going to happen and I just wanted to pass that message along.
Jenelle Cameron: It’s good that people hear that from someone other than me. I agree with you. The prices are still pretty stable. There’s been a few pockets I would say where we haven’t seen the multiple offers we have seen. But there are some we have. There was someone in my office that had nine offers on a property in Pickering the other day. We’ll see how the next few weeks or months shake out.
I do have a lot of people right now that are thinking about panic selling. What’s going to happen to the market? Is it going to crash? Should we get rid of our place now? That kind of thing. So I’ve just said to everybody let’s just see what happens. It’s too early to make any rash decisions I think at this point.
I will make sure that your contact information is in our post so that if anyone wants to reach out and talk to you about mortgages. I really appreciate it. Maybe we can get you back doing this again in a couple of weeks and give us another update.
Steve Garganis: Happy to help Jenelle. There’s a lot of programs being rolled out still, like income supplements and things like this. So stay tuned I guess is my message. There’s hope. There’s assistance. Stay positive. We will get through this and that’s my message. Don’t watch the news too much. I’m happy to help in any way I can and answer any questions, so thanks for having me and I hope this helps.
Jenelle Cameron: Absolutely, Thanks so much.
Your best interest is my only interest.
As always, I welcome your comments, calls and questions.
Steve Garganis 416 224 0114 firstname.lastname@example.org
As an industry insider, Steve will share info that the BANKS don't want you to know. Steve has appeared on TV's Global Morning News, CBC's "Our Toronto" and The Real Life TV show. He's also been quoted in several newspapers such as the Globe and Mail, The Toronto Star, The Vancouver Sun, The Star Phoenix, etc.