Tagmortgage rules

Posted December 17, 2012 Case study

Fed govt, BIG SIX BANK’s pushed us into Fixed rates!…part 1 of 2.

VARIABLE RATE MORTGAGES WERE THE BEST OPTION

For years, I’ve promoted the merits of Variable rate mortgages vs Fixed rates. To me, it was a no-brainer. Historical stats showed that you would save over 1.00% on your mortgage, per year, every year (some years had savings of over 3.00%!). Do the math… That works out to $1,000 to $3,000 per year for every $100,000 of mortgage.

And for years, the BIG SIX BANKS, the Bank of Canada, the Federal govt and other fear-mongers pointed out that Variable rates fluctuated and your rates would change and possibly go up…

If you were able to block out these warnings, do a little research, then you may have been lucky enough to enjoy the huge savings that Variable rates gave us over the last 15 years… Fortunately, over 80% of my clients listened to my advice and chose Variable rate. But even at the height of Variable rate popularity, just 45% of Canadians were ever in a Variable rate product at any one time. Today, it’s less than 15%.

In 2008, the U.S. sub-prime mortgage crisis hit. Financial markets were in turmoil. New Variable rate mortgages were either pulled from the shelf or were priced so high as to make them an unattractive option (prime plus 1.00% with some Banks).

BEGINNING OF THE BANKS HIGHER PROFITS

The Banks actually liked this. After all, the most profitable mortgage product is the 5 year Fixed rate. Not hard to figure out. The lower the interest rate, the less the Bank’s make. This became a great opportunity for the Banks to reduce their Variable rate exposure… And so began the great campaign to force us into 5 year fixed rate mortgages. (by the way, these inflated Variable rate prices only lasted around 6 months…we’re not back to the good old days of Prime less 0.90% but anything at Prime less 0.50% or better is worth a look….it’s worth noting for the record that I still didn’t recommend 5 year fixed rates to my clients during this time… I recommended shorter term fixed rates ranging from 6 months to 3 years and then went back to Variable rate… history has shown that this was the right strategy).

Starting in late 2008, and continuing today, Bankers would call, email or write letters to their Variable rate mortgage clients to warn against higher rates coming… and they should consider locking into a 5 year fixed rate mortgage. There were many reasons given… a bad economy… uncertainty in the financial markets… or my favorite, a special rate offer (it was special alright! Lol!!)… And the media jumped in too. TV, radio, newspapers, major news websites…how many times have you have heard the warnings about rising mortgage rates??…or record personal debt levels?? This created an even higher level of uncertainty and fear… Mr. Potter would be proud!

Think about it… The Banks were strongly recommending that Variable rate clients go from a rate of 3.25% or better, and into a 5 year fixed rate of 5.50%!!? (November 2008). And the worst part about all this is that hundreds of borrowers listened and did it… and have regretted it ever since!!! Where’s your Banker now?…

watch for part 2 of 2… FED GOVT, BIG SIX BANK’S pushed us into Fixed rates!… tomorrow!

Getting a mortgage today? Speak with a Mortgage Broker…and think twice about sticking with your BANK…. you could just save yourself $thousands.

As always, I welcome your comments and questions. Let me know if I can help.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

Posted September 13, 2012 Mortgage News

HELOC’s capped at 65% but some exceptions still apply..

Earlier this month marked the beginning of the end of 80% loan to value HELOCs. Several Banks and of the Financial Institutions began to cut back the maximum LTV from 80% to 65% as per OSFI’s regulations. But there are a few loopholes in the new rules….

The good news is that existing HELOC clients don’t have to worry.. these changes don’t apply to them. OSFI is allowing them to keep their HELOCs at 80%….
Only OSFI regulated Financial Institutions are affected… Provincially regulated FI’s aren’t affected… Credit Unions don’t fall under OSFI’s rule… there are still some Credit Unions offering HELOCs to 75% and even 80% loan to value.
Some of the Banks are still offering a combination of a HELOC and a mortgage of up to 80% ltv as long at you have at least 15% of your balance in an amortized payment schedule, and not interest only payments.

There is more good news… The BIG SIX BANKS can’t offer you an 80% LTV HELOC but the credit unions can… Maybe Canadians will start to seek other Lenders……They may finally discover that there much better options out there. Watch for the Credit Unions to take a chunk out of the BIG SIX BANK mortgage pie.

Not sure where you fit in? Call me for details.

Steve Garganis

416 224 0114

Posted July 9, 20122 Comments Mortgage News

New Mortgage rules start today… but BMO study says Canadians pay their mortgages in 15 yrs!

The govt’s new mortgage rules go into effect today… well, actually, most Lenders put them into effect a week ago to ensure they had enough time to process applications already in the pipeline.

The new rules are supposed to help us pay our mortgage off faster, make it tougher to borrow money and slow the housing market which in turn will save us from a housing bubble. And this is also supposed to help lower our personal debt levels. It all sounds great, but the govt has not provided us with any real data to suggest that we need saving from ourselves.

In fact, a new BMO study shows that Canadians are paying off their mortgages in 15 years or less. Does that sound like a bunch of irresponsible borrowers? And there is a lot more data out there that shows over 20% of us are making lump sum payments… and even more are accelerating their payment schedules by increasing their minimum mortgage payments..

If the govt did make a mistake and used a sledgehammer to kill a fly, then let’s hope they will act just as quickly to adjust the rules if their policies were too strong… Let’s hope they will put some sort of review procedure in place to measure the impact of these changes….We already have some pretty tough standards when it comes to borrowing for a house…. maybe we should bring in some rules for Credit Cards or personal loans… seems like anyone with a pulse can get one of these….

Posted June 22, 20121 Comment Mortgage News

Part 2 of OSFI’s new mortgage underwriting rules announced

Hot topics this week are all the govt changes to mortgage lending… but before we get into the bad news, I thought I’d start with some positive news… Interest rates are still at all time lows…. if you have a mortgage or will be getting one soon, today’s rates are lower than ever before… That means more money in your pocket! We don’t seem to hear enough about that…

Okay, now for the update…Remember, these changes will affect ALL Federally regulated financial institutions….BUT they won’t affect MOST CREDIT UNIONS and other Lenders..

Yesterday we got a double whammy… First the Federal Department of Finance announced changes to CMHC insured mortgages.… And later that day, OSFI announced Part 2 of their changes to Residential Mortgage Underwriting Practices and Procedures, better known as RMUP… but I prefer RUMP because that’s exactly where most of us will be feeling the effects of these changes…

The timing of all this tightening puzzles most of us in the mortgage industry. Canada has been the envy of the world when it comes to our mortgage underwriting practices… The govt seems to be getting more into credit underwriting and procedures than ever before… And yet they have not given us any true data or reason for these changes….

Nevertheless, it’s important to keep up to date as these changes will affect us all. Part 1 of changes were announced earlier this month through a Draft update on June 6th.. And here are the details of the final changes which come into effect later this year… there is a lot of text in the final draft but we are only focusing on the changes that will have the greatest impact on us:

Credit checks should be done more often.. minimum credit scores should not solely relied up to determine a borrower’s credit worthiness.
Home Equity Lines of Credit will be limited to 65% loan to value, down from the current 80% loan to value. (still not sure if there will be any grandfathering of existing lines but my guess is no)
there is more wording with regards to Lender’s Senior Management having more minimum reporting… (this looked like make-work stuff to me as most Lenders have tons of reporting).
Cash-back mortgages are gone (no big deal here…. very few of these products were ever used by us ‘irresponsible Canadians’… )
Self-employed individuals will be required to provide and pass an ‘income reasonability’ test… (these already exist with most Lenders)
Lenders should use the 5 yr fixed contract rate or the Bank Posted rate when qualifying for Variable rate products…even conventional mortgages… (again, nothing new here.. most Lenders are doing this already….yawn)

Who can blame you if you if you’re having trouble keeping up with all these changes to mortgage rules and lending policies. We must question the purpose of these changes… little to no proof has been presented with regards to why the govt feels these changes are needed… and the timing may come back to bite them in the RUMP! Some experts are making the argument that the govt’s attempt to avert a major housing downturn, could actually be the cause of it…..let’s hope not.. only time will tell.

I question why the govt is so focused on the estimated $1trillion residential mortgage market, when we have little or no rules when it comes to the other $500billion of non-real estate debt such as credit cards, loans and lines of credit. Why is it okay to buy a car with $0 money down or okay to make NO payments for 6 months or 1 year, with interest rates of 8%, 18% and 28%, but if you want to buy or refinance your home, you better be prepared to jump through several hoops? Can you say, ‘I need to refocus my energy and efforts’?

THE GOOD NEWS

Mortgage Brokers will be much busier with these new changes. Your traditional Bank and ‘A’ Lender WILL NOT be able to provide the same financing as before…. BUT there are several other Lenders that are ready to fill the gap… including Credit Unions and other non-bank Lenders….. We could see the small Lenders grow with these changes… As always, feel free to contact me if you have any questions or need clarification.

Steve Garganis

Posted June 21, 2012 Mortgage News

Fed govt tightens mortgage rules again… 4th time in 4 years.

The Harper govt and the Minister of Finance are making it even harder to qualify for a mortgage.. they are also cutting back on how much you can refinance your mortgage. With the 4th set of major rule changes in as many years, the govt is acting like a big brother, looking over your shoulder when it comes to borrowing on a mortgage. Yet, they don’t seem too concerned with Credit Card rules or unsecured lines of credit or other higher interest loans that are very easy to qualify for…

In fact, it’s common knowledge in credit and collections, that most defaults and losses occur on unsecured debts and credit cards. That’s really easy to understand… these debts carry 18% and 20% interest rates… they have little or no qualifying rules, and little or no security…. (we get in that in more detail further in this article).

So we must ask why the govt feels is necessary to impose so many changes and restrictions when it comes to borrowing for the roof over our heads?

THESE CHANGES ONLY AFFECT HI-RATIO MORTGAGES, FOR NOW…..OR THOSE MORTGAGES THAT ARE GREATER THAN 80% LOAN TO VALUE AND REQUIRE CMHC INSURANCE. (Although these changes are specifically for hi-ratio insured mortgages, we know that historically, Banks and other Lenders have followed these rules for all mortgages… even for those that are less than 80% loan to value…. No word yet, if and when, the Banks will embrace these changes and make them standard practice for all mortgages…:

The maximum amortization for insured mortgages or those with less than 20% down payment will be 25 years.
Refinancing your mortgage just got a little tougher… the govt has cut back the maximum loan to value from 85% to 80%. In other others, the govt is out of the insurance business when it comes to refinances sine you you can get a conventional mortgage up to 80% with no insurance.
Fixed the qualifying Gross Debt Service Ratio (GDSR) to 39% and the Total Debt Service Ratio (TDSR) to 44%… no real changes here since very few lenders allowed anyone to go above 35% on the GDSR…
Limit the maximum home value to $1million. This one will affect very few of use since most home buyers in this price range have adequate resources to qualify.

Here’s a link to the Department of Finance website which announces the changes in more detail with a little political spin to make you feel good about the changes.

THE GOVT HAS IT WRONG

One of my client’s is also an executive with a Major Cable provider. He encourages his staff to buy a home and get a mortgage. His motives are simple. If you own a house and have a mortgage, you will be motivated to work hard and perform. You have more to lose. This philosophy has served his staff well. He tells me that those with more financial responsibility are also the ones that perform best.

If the govt is really concerned that we are getting in over our heads, because of the low interest rates… and they are truly concerned that we are taking on too much mortgage debt… and they don’t want us to suffer from interest rate shock, if and when interest rates do rise, then why not just make qualifying for a mortgage more difficult? Why not make the qualifying rate as the Bank Posted rate for a 5 yr fixed rate product? Today, that rate would be 5.24%… that’s a full 2.00% higher than the contract rate of a 5 yr fixed rate mortgage… If you can qualify for a mortgage that is 2.00% higher, then isn’t your risk of interest rate shock less? Wouldn’t that solve the problem? By the way, we already have to qualify at Bank Posted if you take a Variable rate or a Fixed rate if the term is shorter than 5 yrs.

Not high enough? Make it Bank Posted plus 1.00%… That would resolve all concerns about interest rate shock… but it would also allow qualified borrowers to leverage and take advantage of these historical low rates…. There are a great number of articles lately, being written by those with huge exposure in the stock market or mutual funds or pension funds, that want to see more money diverted back into the stock markets to protect their investments…

I’m not interested in building a stock portfolio… I’m interested in building my own pension plan… my own investment and income stream… Real Estate is a proven winner. It’s where the richest of the rich, make their fortunes… Even today, you will see pro athletes, rock stars, movie stars, or other wealthy individuals buy real estate… That’s because it’s regarded as a safe, long term investment… We seem to be losing sight of that fact..

THE REAL IMPACT OF THESE CHANGES

The Fed govt wants us to believe they are looking out for our best interests… they have repeatedly said we aren’t managing our finances properly… we need big brother to watch over us….does anyone really believe this? Their actions aren’t helping us benefit from the lowest interest rates in history… and I have a problem with this… paying less interest is a good thing to me… paying less to own my home is a good thing…

The govt seems to be grouping all of us together… It’s like throwing out the bath water with baby….. their concerns are with a small percentage of us.. the data doesn’t back up their claims... the stats show our mortgage arrears are lower than ever.. affordability is as high as it’s ever been (yes, low interest rates are a huge reason why)….we are spending our money wisely, on investments, not just buying TVs or new cars…. and we are paying our mortgages off faster than ever before with a large percentage of us (we can thank low interest rates)… 23% of us are making more than the minimum payment… 19% of us are making lump sum payments towards our mortgage…. Does this sounds like a nation in trouble?

The govt changes are only doing 2 things here… they are pushing us into higher interest rate products such as unsecured lines of credit or credit cards… and they are making it harder for us to access the capital in our homes.. The HELOC limit from 80% to 65% loan to value was probably the most ridiculous change ever… No data was given to back up this move… It was already to tough to qualify for a HELOC… this was just unnecessary.

TALK ABOUT BAD TIMING

We need to question the timing of these changes… there really hasn’t been enough time to see what the true impact of all will be… If you’re one of those people that fully trust our govt’s decision, then I only need point you to 2002 when the govt prematurely raised rates, only to slow the economy and reduce them just months later… it was a huge miscalculation. We ended up lowering rates for several years to come…

By making it harder to qualify for a mortgage and by reducing how much we can leverage our homes for (HELOC’s to 65% maximum loan to value), we are taking money out of the market… out of the economy… I just don’t get it…

I for one, am fed up with all this negative news coming from the media.. the fear mongering has to end! I keep seeing prudent and responsible people wanting to enter the housing market. They want to invest in homes…..they don’t want to ride the stock market roller coaster. We should support this segment of the population, not punish them.

WATCH HERE FOR MORE DETAILS

We will keep you up to date with how this unfolds… and what options you will have in the future… My sources tell me that some Lenders are already coming up with some options to assist responsible borrowers with some new products…. stay tuned for more info..

As always, I welcome your inquiries… We’re here to help… Feel free to contact me anytime.

Steve Garganis