CMHC Makes Policy Changes – Genworth & Canada Guaranty Stay Put
It came as a surprise to many mortgage industry insiders when the Canada Mortgage and Housing Corporation (CMHC) announced its plan to further tighten their lending guidelines on July 1, 2020. Thankfully for many potential homeowners, Canada’s two private insurers, Genworth and Canada Guaranty, have decided not to follow suit.
Citing a need to mitigate its exposure (and taxpayer’s) to what the Crown Corporation’s CEO Evan Siddall’s predicts will be a drop in house values by as little as 9% and as much as 18% due to COVID-19, and a potential surge in household debt from 176% to 200% through 2021, they implemented changes that would cut purchasing power by up to 11%.
Under CMHC’s new guidelines, which is set to go into effect on July 1, 2020, the following will apply:
According to Mortgage Professionals Canada, 61% of first-time home buyers buy with less than 20% down. And 20% of down payment funds come from borrowed sources. This move by CMHC could cut purchasing power by up to 11%. For example, a family earning $100,000 with 5% down, with no other debt, would qualify for a $320,000 mortgage (approx.) Under the new CMHC guidelines that mortgage amount gets reduced to approx. $280,000.
Siddall said in a statement, "COVID-19 has exposed long-standing vulnerabilities on our financial markets, and we must act now to protect the economic futures of Canadians. These actions will protect home buyers, reduce government and taxpayer risk, and support stability of housing markets while curtailing excessive demand and unsustainable house price growth.”
Critics of the move wondered out loud at the timing of these changes, when provinces have begun easing lock-down restrictions to kick-start the economy, they felt it was counterproductive to efforts focused on regaining confidence in the housing sector.
Paul Taylor, CEO of Mortgage Professionals Canada was quoted as saying, "...I think the timing for the introduction of these restrictions is poor, especially since the Federal government itself is pouring billions of dollars into the economy to keep it afloat.”
Canada’s Private Insurers Hold Firm
In Canada, federally regulated lending institutions such as banks, non-bank lenders, credit unions and trust companies, are required to insure high ratio mortgages – those with less than 20% down –against default. There are three insurers in Canada -- CMHC is a federal Crown Corporation, and Genworth and Canada Guaranty are private sector suppliers of mortgage insurance. After reviewing their policies and CMHC’s decision, the two private insurers have decided to NOT follow CMHC’s lead. Both insurers made statements defending their current underwriting polices and are confident in their ability to manage risk. This is positive for borrowers.
As the economy starts its slow climb to recovery, we have seen positive signs across the country as sales start to increase.
When it comes to real estate, consumer confidence is key. As we continue to ease restrictions, continue to practice safe protocols, and consumers start to feel comfortable again, we may see both homebuyers and those critical home sellers become more active.
It’s hard to say what the true impact to the market might have been if all three insurers had decided to tighten their rules. It’s clear that having a competitive market for mortgage insurance greatly benefits homebuyers.
We’ve had back-to-back changes recently in the mortgage world – one direct, one indirect. The benchmark rate used to qualify will change downwards starting April 6, 2020, and the Bank of Canada (BoC) just cut its key lending rate from 1.75% to 1.25%.
Two years ago, the stress test was introduced as a safeguard against rising interest rates, to make sure homebuyers would still be able to make their mortgage payments if their rate increased. To qualify for a mortgage, buyers need to qualify at the greater of 2% higher than the contract rate or the Bank of Canada’s average 5-year rate, which today is 5.19%.
Earlier this month, Minister of Finance, Bill Morneau, announced changes to the benchmark rate used to determine the qualifying rate for insured mortgages – mortgages with less than 20% down payment. This change will come into effect on April 6, 2020.
There has been mixed response from the financial community about this change. For some, the new qualifying rate will make it more affordable; for others, it won’t make much of a difference, especially in hot-market areas, where prices are rising quickly.
Then, on Wednesday, March 4, 2020, the BoC cut its key lending rate by 50 basis points, from 1.75% to 1.25%, which had an almost immediate effect on lines of credit and variable-rate mortgages -- banks dropped their prime rate from 3.95% to 3.45%.
This means that borrowing costs for mortgages, auto loans and other lines of credit are set to head lower. Consider a $400,000 mortgage on a 2.95% variable rate. The mortgage rate would shift to 2.45%, and mean about $100 per month in savings.
Why is this happening?
The interest rate drop comes on the heels of the US Federal Reserve’s decision to lower its rate by .50 points due to the global economic challenge posed by the uncertainty of the coronavirus that will likely affect domestic spending. The BoC’s rate cut of the same percentage took many by surprise – it was expected that rate would drop a quarter of a percentage.
There were also other yellow alerts prior to the coronavirus – a drop in global equity markets and in oil prices, created uncertainty in the financial markets. It wasn’t a stretch to think that the same drop in confidence would hit consumers as well. The BoC does not want to jeopardize domestic growth.
With regard to the stress test, there has been pushback from some economists and housing experts who say that the new stress test will just further fuel the housing market.
Here’s what we know about the stress test:
What does this mean for fixed versus variable-rate mortgages?
Fixed rates are priced on the bond market, which have fallen quite dramatically since January, so it’s likely that fixed rates will continue to move lower. Now, with the BoC rate cut, and the banks following suit by dropping their prime rate, variable-rate mortgages will also drop.
Many factors go into deciding whether to choose a fixed or variable mortgage, and it’s a topic to discuss with your mortgage professional.
For now, these changes could be good news for homebuyers.
Happy New Year!
As we enter this new decade, do you have some spending regret? You promised to stick to a budget; you promised to scale down and have an old-school, back-to-basics, holiday. But some items were just too hard to resist.
Well, you’re not alone. Holiday spending has been ticking up over the past few years, according to a report from PWC Canada. While the 2019 numbers aren’t out yet, PWC predicted that holiday spending would be up 1.9% to an average of CA$1,593. Why? Canadians’ confidence in the economy and their own personal finances is up. And while a quarter of Canadians planned to spend more than they did in 2018, it’s younger shoppers who are leading the charge, with 42% of Gen Z and 35% of millennials bringing more joy to their world.
Every holiday season, many consumers reach their debt limit. And January is when there is a rise in bankruptcy filings and consumer proposals.
What can you do?
Here are a few tips to help get rid of that extra debt quickly.
Create a budget
Know where you’re at financially and start wherever you are. If you’re unsure of where to start, try a budgeting app. Once you know what you earn and what you spend each month -- it helps to see those numbers written out and itemized -- any monies left over can be used to pay off debt. See what bills have high-interest rates, and pay those off first.
Change spending habits in the short-term
Put away the credit cards. Pay at least the minimum amount owed to avoid extra fees, but if you can, pay extra to get that debt down faster. Look at your other expenses and see where you can trim. You can review your grocery budget; cancel subscriptions and/or put memberships on hold.
Find, or negotiate, a lower interest rate
Credit card interest rates can be notoriously high. Sometimes, if your payments have been current, creditors may be willing to reduce the rate if you simply ask. Your card company wants to keep your business, after all, and now is when competitors unleash their most attractive balance-transfer campaigns.
Get a game plan to pay off multiple cards/debts
If you’re still stuck with high-interest cards, list them in order of rates, highest to lowest. A reasonable approach is to attack the highest-interest cards first (making sure you pay the minimum on the other cards) and work your way down.
This doesn’t actually reduce debt but it can make monthly payments easier and if the loan has a lower interest rate than a credit card, then you’ll save dollars in the long run. If you own a home, consider speaking with a mortgage professional for a way to consolidate debt.
Refinance Your Mortgage
Mortgage rates are lower than consolidation loans and the increase can be amortized over the life of the mortgage. If you think refinancing may work for you, contact your mortgage professional and review all your current debts.
Use your holiday bonus
If you got one, consider using it toward paying off debt rather than spending it on a vacation or other luxury purchases. I know, you worked hard to get it, but you’ll be less stressed in the long run.
Life insurance loan
If you’ve been paying into a life insurance policy that has built up a cash value, check to see how much is available to you. You won’t be cancelling your policy but companies may let you borrow the cash that’s been accumulated.
Don’t despair, there is usually a solution for everything.
It seems like the news is full of negativity about the housing market slow-downs, the mortgage stress tests that shut millennials out of home-ownership, the low inventory, the slowing economy…
Although it may seem gloomy to many, there are a few silver linings – and I’m all about silver linings!
The Canadian dream of home-ownership is still alive, it just might look a bit different than our more traditional ideas of owning a home.
First of all, the make-up of home buyers has changed from the “traditional” trend of buying with a partner/spouse. According to the recent RBC Home Ownership Poll, 28% of those polled say they need help and are purchasing, or planning or purchase, with their family. That is almost as many as those who say they can purchase alone (32%).
Compared to past years, buying a home with a partner or spouse has been steadily declining (42% vs 49% in 2017), while non-traditional trends, like purchasing a home alone (32% vs 29% in 2017), are climbing!
It’s also clear that what’s happening in today’s market is having an impact on buyers with 56% of Canadians thinking it’s better to wait until next year to purchase a home. And almost have of those are prepared to push the purchase out two years or more.
Here are some more highlights from the poll:
In the poll, 8-in-10 Canadians say a home or condominium purchase is still a good investment. When we look at the condo market, there is a lot happening. This year, a record number of condos are set for completion in the Greater Toronto area, which will likely slow price growth.
Non-traditional housing and co-owning arrangements are popping up across the country. The focus is on community and co-housing projects that generally consist of individual homes with shared amenities. These amenities generally contain a kitchen and dining room.
While it’s try that the government policies have made it harder for some to qualify, the new ‘shared equity program and the RRSP withdrawal increase may help some of those people.
As we find ourselves in the Spring market, listing start to increase as buyers and sellers come out of hibernation! It’s important for home-buyers to educate themselves about mortgages, including how to qualify in this new stress-test environment. I can help you navigate the ins and outs of the mortgage process, from qualifying to approval and through to closing. It’s what I do!
And if you don’t qualify right now, I will show you ways to increase your likelihood of qualifying in the future.
Let’s talk! Because, yes…you can fulfill your dream of home-ownership.
A recent report from the Bank of Canada reviewed the impact of the government's policy changes on the mortgage market. It found that overall market activity had slowed -- something we knew would happen. The bank also found a correlation between the quality and quantity of credit. While the data shows a slowdown in "riskier" mortgages, some economists wonder if these borrowers have turned to the unregulated market.
Approximately 20% of the mortgage lending market were made up of people who borrow at least 4.5 times their annual income to buy a home. That percentage went down to 6% in the second quarter of 2018. That amount of mortgage indebtedness may or may not be a problem for borrowers; however, coupled with other debt, including credit cards, lines of credit and car loans, it may cause some financial problems as rates rise.
History of Mortgage Lending Changes
In 2016, the Office of the Superintendent of Financial Institutions (OSFI) announced a stress test for insured mortgages (mortgages with less than 20% down and requiring mortgage default insurance), stipulating that those buyers must qualify at the Benchmark rate (currently 5.34%).
Then in October 2017, a similar rule was unveiled for uninsured mortgages (mortgages with more than 20% down) stipulating that those buyers must qualify at either 2% more than the contracted mortgage rate or the Benchmark rate, whichever is higher.
These two rule changes, along with several others, including increasing minimum down payments, mortgage premium hikes, and decreasing amortization limits, have made it harder for Canadians to qualify for mortgages, which is what the government wanted for borrowers 'on the margin'. The rationale was to encourage people to take on less overall debt, including less risky mortgage debt, which would, in theory, keep housing markets safe and protect borrowers in the event interest rates increased.
Mortgage brokers can attest that the impact was seen almost immediately. The rate of clients who may have qualified previously but no longer did from large banks and traditional monoline mortgage lenders went up as much as 20%.
As a result, alternative lenders saw an uptick in business as brokers presented highly credit worthy homebuyers and refinancers with borrowing options in the unregulated space including private lenders, mortgage investment corporations (MICs) and credit unions. Some credit unions opted to include the stress test as part of their mortgage lending requirement.
The Bank of Canada admits that this segment of mortgage lending is growing, although it falls outside their purview. For example, the market share for private lenders in the GTA has grown by 50% since last year, and now makes up nearly one out of every 10 borrowers, the bank said.
There are now questions about risk in the unregulated market; however, the market is not necessarily riskier, it’s just not under OSFI’s purview. What the unregulated market is seeing are better quality mortgage clients. Hali Noble, Fisgard’s senior vice-president of residential mortgage investments and broker relations said in an interview, "A lot of these people should be bankable, but they’re not (when applying the new stress tests)."
So, many good quality borrowers have to shift down the ladder to lenders with a higher risk tolerance. The one downside is it comes with a higher cost, but not necessarily more risk. Borrowers who don’t fit into the mainstream box are now not limited to those with past credit issues, and may include those who are self-employed, those who are new to Canada, and even "A" clients. They simply don’t fit into the new box.
The Unregulated Market
The unregulated market is primarily comprised of private mortgage lenders -- companies and individuals -- who fall outside the purview of Canada's banking regulators. Private lenders offer mortgage rates higher than traditional mortgage lenders for shorter terms. Typically, borrowers who could not qualify for traditional lending turned to alternative lenders.
Alternative mortgage lenders or private lenders, also known as "B" Lenders, are more willing to look at each situation on a case-by-case basis. They do have criteria, but consider a borrower's "story". For example, if a borrower had a bankruptcy or have some credit issues, they want to know why. For self-employed borrowers, they will consider other documentation to prove income rather than a tax return, which may reflect business write-offs.
Yes, rates are higher compared to "A" lending, because the borrower profile is considered riskier, but remember it's only a short-term solution.
You can also expect to pay a larger down payment, from 15% to 35%, depending on both your situation and the property you're financing. And, there may be lender fees and mortgage broker fees. Usually, the pre-payment privileges are flexible but there may be a charge for paying out the mortgage early. Alternative lenders are strict about missed payments, and service fees may be higher as well.
Whatever the reason for needing to use an alternative lender, the goal is to get back into the "A" lending space.
Is there cause for concern?
Maybe, maybe not. The reason for all the changes was to ensure that borrowers could manage their debt loads in the future, as interest rates rise. Inadvertently, the new rules have grown the unregulated market, which may or may not defeat the purpose. People want to buy homes and will do what they need to, to get one.
The increase in demand has caused interest rates to go up even in the private sector, but these lenders are short-term lenders. There must be an exit strategy. There is the risk that borrowers will rely on the private funds for longer terms, which may have a negative financial impact.
The Bank of Canada is also concerned about the potential for mortgage default and bankruptcies. Consumer insolvencies peaked during the 2007-08 financial crisis and have been relatively stable since 2012. Around 120,000 Canadians went insolvent last year, less than 0.4 per cent of the country's population.
Purchasing a home is a big financial commitment. In addition to moving costs and closing costs, most home purchases require a down payment of at least 5% of the purchase price. This is the amount of money you are personally committing.
Coming up with a down payment can be challenging; however, there are options, depending on the lender, the location of the purchased property, the loan to value and your credit score.
Ideally, you’ve saved the down payment in a savings account or have an RRSP, from which you can withdraw up to $25,000 with no penalty under the Home Buyer’s Plan (HBP). If you choose to take advantage of the HBP, here is what you need to know.
RRSP Withdrawal Conditions
I’d also like to mention the First Time Home Buyer’s Tax Credit (HBTC). You will qualify if:
The tax credit is not connected to Home Buyer’s Plan so your eligibility for the tax does not change whether or not you also participate in the Plan.
Lots of info here, so reach out and let's discuss it together!
Your Road to Mortgage Freedom
Do you dream about paying off your mortgage? The new year is usually a time when people review their finances and, if they are in debt, create a plan to reduce that debt. With interest rates rising in Canada, the perennial question resurfaces: Should you pay off your mortgage early? Or invest your money instead? Paying off your mortgage may be the best investment you can make.
Here are some ways to save some serious money and become mortgage-free faster. It only takes a few small steps and may save you thousands of dollars in the process.
Accelerate your payment frequency
This is a popular strategy. If you’re making monthly payments on a $300,000 mortgage with a 3% interest rate, amortized over 25 years, it will cost you approx. $125,920.44 in interest. By increasing your payment frequency to accelerated bi-weekly payments, you will shave nearly three years off of your amortization schedule, and save approx. $16,058.57 in interest.
Round up your mortgage payment
This is pretty painless. Every dollar counts when it comes to paying off your mortgage. If your accelerated bi-weekly mortgage payments are $543, consider rounding up to $600 instead. The extra $57 can save you thousands of dollars in interest over the term of your mortgage and you might not even notice the difference in your monthly budget.
Refinance to a shorter-term amortization
You may be able to refinance into a mortgage for 10, 15 or 20 years. Your payments will be higher on a 15-year amortization, but perhaps not as high as you think.
Make lump sum payments
Adding just $1,000 extra to your mortgage per year will allow you to pay it off sooner and, combined with accelerated bi-weekly payments, can chip off a substantial amount of the interest as well.
A lower interest rate
It doesn't hurt to work together to see it we can negotiate a better rate. The difference between a 3.49 % and a 4.29 % rate can add up to significant savings in interest over the term of the mortgage.
It’s easy to forget about your mortgage when you’re making automatic payments. It’s a good idea to keep up-to-date on mortgage options and interest rates, which could potentially save you thousands of dollars.
The freedom of being completely debt-free is a dream for many Canadians. If you’re unsure of what your next step should be, call me. Together we can review your mortgage, look at your financial picture and devise a mortgage-reduction plan that works for you.
Separation and divorce can impact a family on many levels including financially. It's a stressful process for all concerned.
In addition, there may be the messy business of splitting the assets, including the family home and the mortgage. Many couples end up selling the house to pull out their equity, which may cause additional stress. However, there are other options.
For most couples, their home is their largest asset and where they have the majority of their equity. If one spouse prefers to stay in the home, it may be possible to get a new mortgage to purchase the property from the other spouse for up 95% of the property’s value.
It’s the Spousal Buyout Program and allows one spouse to keep the home while paying the ex-spouse their portion of the home’s equity. This can create some stability for the family during this often-trying time.
Similar to other mortgages, the purchasing spouse must qualify to carry the loan. A legal Separation Agreement and a Purchase Agreement is also required.
Each province and territory have their own laws regarding the division of family/marital property. Generally, marriage is seen as an equal partnership in the eyes of the law, so for the most part, anything that has been acquired during a marriage and is still owned at the time of separation would be divided equally.
The "matrimonial home" is the space where both spouses have their primary residence at the time of separation, and regardless of whose name is on the title of the house, both parties have an equal right to the home unless there is an agreement that states otherwise.
Here are a few requirements for a Spousal Buyout:
If you have any questions about this program or would like to review your options, reach out to me today.
It's me again! I will be posting articles with more in depth information regarding specific mortgage scenarios. I do my best writing when my kids are asleep...