Realtor

So, on October 3, the Department of Finance introduced some major changes to how you get qualified for a mortgage.

Why? Apparently, they want to protect Canadians from taking on bigger mortgages than they can afford while we are in this period of historically low interest rates. Good intentions.

But – Still no intervention relating to credit card debt, unsecured lines of credit and loans. Essentially, you can have as much unsecured debt as you desire and that you can get your hands on, but secured debt is being curbed to “protect you”. You can form your own opinion on this. From my perspective, I cannot recall the last time I met with a client that was highly leveraged on his home with little and manageable unsecured debt that was having financial issues. Yet, I regularly meet with clients with lots of equity in their home, but have allowed unsecured debt to get out of control. Just saying!

What is the change all about?

As of Oct. 17, a revised “stress test” will be used for qualifying high-ratio mortgages. This will apply to all insured mortgages, even if the down payment exceeds 20 percent. The stress test is designed to comfort the lender that you could still afford the mortgage if interest rates were to increase.

Currently, those choosing a term less than a 5 year fixed, or those choosing a variable rate mortgage, have been subject to the same stress test. However, after October 17th, the qualification rate will apply to all insured mortgages. Currently, the qualification rate is at 4.64%.

So, financing that extra amount by going to a five year fixed term or greater is off the table. You must now qualify at the qualification rate regardless. Last time I checked, 5 year fixed terms were over 50 percent of the market, so this is impactful. Think about it – qualifying at 2.39% vs. 4.64%.

The stress test also dictates that no more than 39 per cent of income can be made available to home-carrying such as mortgage payments, heat and taxes. Also that 44% of income is the maximum when all other debt payments are included.

Approved applications will be grandfathered from the change, excluding pre-approvals.

What is the impact?

Simply, lower buying power for potential purchasers. On the average, 15% to 20% less buying power. So a purchaser who qualified for a $700,000 purchase price would likely now qualify for about $550,000 or so.

For high ratio mortgages, this is more or less a level playing field for all lenders. However, for non-bank lenders who insure all (or most) of their transactions, they will not be able to entertain many of the applications presented to them. That business now must go to a bank or deposit taking institution that can fund the transaction on their own (not insured). This results in much less competition, which usually means higher rates.

Further, if banks cannot insure any part of their portfolio with down payments greater than 20 percent, the cost of funds will be higher as they are not able to sell to the secondary market (Mortgage Backed Securities). Guess what? You will have to pay more for a mortgage when your down payment is more than 20 percent.

Renewals will be affected. If your equity is more than 20 percent at time of renewal and you don’t meet the criteria, your mortgage may not be able to remain insured, meaning the lender may not renew or your rate may be higher.

Mortgage Insurance for rental properties no longer an option.

Amortization is reduced from 30 to 25 years maximum if your down payment is 20 percent or greater. Further reducing buying power. If you want a 30-year amortization, banks or credit unions only please.

Maximum purchase price of $1 million. Anything greater, banks or credit unions only.

Possible Results

Taking away this much potential business from non-bank lenders will not protect you should rates rise. It simply eliminates your choices and reduces competition in the market place. This can only result in higher costs, to you.

Final Thoughts

I am not an economist, a politician, a prime minister or a finance minister. Nor am I suggesting that I can confirm the changes are bad or good for Canadians and the economy. What I am suggesting is that these changes seem to have been introduced and implemented without regard to the potential impacts. In fact, of all the major lender representatives I have spoken with, non of them knew of the changes, or if they did expect something, not to this degree.

The government spends millions of dollars on called studies. However, I have seen nothing to suggest that the potential impact of these changes was methodically thought out and that they were introduced for the greater good of Canadians, the economy, the lenders and all of the industries that this could impact. Perhaps they were, but again, I have seen no evidence of this.

Optically, it appears that on a whim, the policy makers made these changes and forced it down our throats to “protect us”. However, broker lenders have already started to hike rates (forced to do so). Broker lenders have had to eliminate many of their product offerings. Canadians will be forced to pay higher interest rates because the home they easily afforded yesterday can no longer be afforded at renewal, with the solution (believe it or not) to send them to another lender with a higher rate.

The magic wand of the policy makers has also given even more power to the banks. For example, you want a 30-year amortization? Go to the bank. You want to refinance your home, bank. The choice and competitiveness is now gone.

All of this because the government is trying to protect us. If the market should crash, they are on the hook for insured mortgages that go in default. Now, that is a different topic for a different day all together. But, surely, the insurers should have, or ought to have a sufficient buffer built into their business model to withstand a major market fall and then some. And then some more. There is no excuse that I can see for this buffer not to be in place. Remember, the insurers are for the most part, insuring mortgages that are greater than 80 percent of value. Yet, the insurance premiums they charge are not based on the amount exceeding 80 percent, but rather on the entire amount of the mortgage. With the exception of some bumps in the economy, delinquency rates are almost entirely off the radar. So, if the insurers are running a model that allows for major delinquency should it happen, where is the buffer? I find it difficult to understand that with delinquency having been so low for many years, why the insurers would not have a contingency fund in place to support a major market collapse, if it were to happen.

I think in the end, the qualifications rules are not a bad idea, although they need some tweaking. However, taking the non-bank lenders out of the market while doing so is going to cause undo harm not only to potential purchasers and home owners, but to the entire industry and economy. Let’s wait and see how this goes.

Have any questions, need any advice? Visit us at www.thefinancialforum.ca. Email us at mortgages@thefinancialforum.ca. Call us at (905) 265-0246.

VERICO The Financial Forum Ltd.

“Your Connection To A Better Mortgage”

Together, We Make Mortgages Easy!

 

When it’s time for you to either sell your home or start looking for a new one, a Real Estate Agent can be a very valuable asset. A good Realtor can help speed up the process, save you money when buying, they can help you sell for more if listing, and they can find you the perfect home and so on. But with literally tens of thousands to choose from, how do you select the right Realtor that will suit your needs? Follow the 7 tips we’ve laid out (in no particular order) below and they should help narrow down your search:

  1. Connection to the Area – You could hire the number 1 Realtor in Canada and he may not be as effective as an experienced and reputable Agent that specializes in your neighbourhood. The knowledge of different pockets within a town or city is invaluable. Agents who are well connected and very knowledgeable in a certain area will know that markets history and future better, they will know and probably have sold some houses on your block, and they may even have access to listings before they even hit the market. Ask around about your candidate to get a feel for his reputation and ask him good questions about your area.

  2. Realtor

  3. Personal Connection – This is often overlooked by many people. There is a good chance you will be working with this agent for a couple of months and if all goes well, again in the future as well. Wouldn’t you want to get along with them on some level? Also, a friendship with your agent will smooth out the process for you in a few different ways. Friends always work a little harder for each other!

  4. Professionalism – Keep an eye out for red flags, you don’t want to be represented by someone who is unprofessional. It looks bad to the other parties and the other realtors involved. Are they punctual? Dress professionally? Do they use slang or speak properly/know real estate lingo? Can they communicate their message in an efficient and well-spoken fashion? Make sure they meet your standards.

  5. What is included in their service and at what cost – The number one question most people have is what commission percentage is being charged? But your inquiry should go a little deeper than the number. What is included for that cost? What tools do they use? Do they hire a professional photographer or stager for you? Do they hire a mover on your behalf? Some agents include more than the traditional service. You get what you pay for – the cheapest isn’t always the best choice.

  6. Ask them to explain their marketing strategy (when selling) – This is very important as it will determine not only the amount of exposure your home gets, but the quality as well. Where do they list the home? Do they include pictures or videos? Is there any special type of promotions they use? Ask them for a step by step walk through, most are more than happy to show you. Again, it’s not always about just the rate they charge but what is included in their service.

  7. Background Checks – Basically, this means doing your homework. Ask them for references from past clients, read review online, check their website to see their current listings and how they market them. Also, check out reco.on.ca. RECO regulates the trade of real estate on behalf of the Ontario government. You can look up your agent to see any past complaints, licensing, etc.

  8. Don’t be pressured to use a family member or friend – If you have a family member or friend in the business, it is very hard not to use them. However, you need to protect the best interest of you and your family too. You are entitled to do all your homework as noted above and make your own educated choice on who you would like to use. Of course, if they are comparable to what you are looking for then it wouldn’t be a bad idea to get the family and friends discount.

Now, of course there are some other things to look for when selecting your agent. But these should be enough to make sure you make the right choice moving forward. Make sure to sign up for our weekly newsletter for more great tips and rate specials, click HERE to do so. If you have some more tips that you think would be useful, please leave a comment below for other to see.

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Have any questions, need any advice? Visit us at www.thefinancialforum.ca. Email us at mortgages@thefinancialforum.ca. Call us at (877) 335-4486.

VERICO The Financial Forum Ltd.

“Your Connection To A Better Mortgage”

Together, We Make Mortgages Easy!