I’ve been asked repeatedly just exactly how the new government stress test affects borrowing capacity and exactly who is affected by these changes.  From my analysis, 20.3% of my clients may be affected.

To keep it really simple, I’ve created two very short videos that show you the answers including:

• the range of reduced borrowing capacity for those 20.3% affected; and
• a side-by-side comparison of current vs. 2018 borrowing capacity

The stats used are all from my own client portfolio to help establish a realistic, not a government or media sample, of who is really potentially affected by these changes and by how much.

I hope it helps you better understand the changes.  Please click here to watch and share these two videos.  Your comments are welcome on the video landing page too.

Cheers, Mark

I hope you’re enjoying this fine start to summer with all kinds of wonderful local events planned for this “special” holiday weekend.

Before your weekend starts, I wanted to let you know that fixed mortgage rates are going up and have already gone up as much as 0.25% for some lenders because of rising yields in the bond markets.

Variable rate mortgages may go up too, but we’ll have to wait and see if the Bank of Canada (BOC) raises its bank rate (target for overnight rate) on Wednesday, July 12th.  Some experts think they won’t because of the recently reported lower inflation rate.   That said, the Chartered Banks can still independently increase their prime lending rate without any move in rates from the BOC, which directly affects variable rate mortgages.

How might this relate to you?

You can use the following as a guideline to help you determine a rising payment estimate for your mortgage:

• For a fixed or variable rate mortgage with a rate increase of 1/4% of 1 percent or 0.25%, your payment on average could increase approximately $6.30 per month for every $50,000 of mortgage balance owing;
• for example, if you have a $450,000 mortgage balance – $450,000/$50,000 = 9 x $6.30 which equals a monthly payment increase of $56.70 or half that, $28.35 for a bi-weekly payment.

So if your budget can tolerate a rate increase based on the above noted example or even twice this amount, you are in a good affordability zone.  If not, or you want a payment review, click here to send me an email to discuss your options.

Have a great Canada Day long weekend!

Cheers

Mark

Hi, it’s Mark Alltree, franchise owner of Dominion Lending Centres Innovation Group here in Vancouver.

After reading this, please consider reaching out to your Member of Parliament and ask them why they are risking your mortgage affordability and mortgage choice and the opportunity for your children to ever have the pride and the joy of home ownership.

Our Dominion Lending Centres President, Gary Mauris, will make a presentation before the Standing Committee on Finance in Ottawa on Thursday.  We are thrilled Gary has this opportunity.  I have prepared a few additional perspectives and recommendations to share with Gary in the hopes they will complement his testimony to the committee.  This I do on behalf of my current and future clients, fellow mortgage brokers, our lender and insurer partners and to all Canadian home owners and aspiring home owners.  If you could please share these comments and show your support by liking and forwarding them to all your contacts, that would be most appreciated.

Here are my topics:

a)   Intervention vs. Stakeholders – a history lesson;

b)   10-Years ago vs. today – another history lesson;

c)    Out of touch benchmark stress testing – Posted vs. Discounted Rates;

d)   a reminder to the Government of Canada the main “purpose” of the National Housing Act;

e)   Foreign National Lending Policy? Does B20 (residential mortgage underwriting practices and procedures) apply to Foreign Nationals? Today, Foreign Nationals are the silent killer of affordable housing in Canada.

f)     Prejudicial policies for non-deposit taking or “monoline” lenders – A history lesson in full motion.

Intervention

This is intended to be a historical reminder of how policy changed the course of the Canadian real estate market.  Government intervention, if appropriate and well thought out in advance, especially combined with stakeholder input prior to the introduction of any policy change, can have a remarkable outcome and is a great process to experience.   I’ve personally worked with government as a stakeholder and enjoyed the resulting outcome.  I appreciate our stakeholder opportunity being heard but I, too, would appreciate our government taking appropriate action with stakeholders’ participation before considering changing policies of any kind in the future.  Given that mortgage brokers have a significant mortgage audience in Canada, perhaps the mortgage broker industry could now have seats at a formal table with the Standing Committee on Finance going forward which may help prevent an unnecessary reactive process.  Serious consideration would be most appreciated.

Government intervention, at one point in our recent history, permitted 0% down financing and 40-year amortizations and was heading down the pathway of U.S. lending practices.  In my opinion, this is clearly what commenced the creation of an unaffordable housing market in Canada.  Despite the intended goal to help Canadians achieve home ownership at the time, the unrestricted insured lending policies which included investment property and homes valued over $1 million, did more harm than good and has had lasting negative effects on market value today.  Moving from a 25-year amortization to 40 years increased borrowing capacity by nearly 18%.  Combine this with zero down, the increased capacity then becomes nearly 23%.  Again, this increase in capacity simply pushed market values upward, over-extended consumers’ affordability, created the potential for great risk to our financial system and put greater stress on our mortgage insurers and lenders.  Today, would-be Canadian home owners are still suffering the consequences of the failed yesteryear policies.

Reducing amortizations back to 25 and 30-years respectively, together with changes to down payment policy was proactive to protecting our banking system, but too late for Canadian home buyers.  Again, zero percent down and 40-year amortizations had already taken their toll and should never have been introduced in the first place.   Had government policy not changed from the traditional lending policy of our parents’ time, we may likely have been in a lower market value territory today without this government intervention.  Some may argue this is simplistic thinking compared to the complex analysis of market analysists and economists, but I believe it’s a simple fact.  If the government can back off on the policies of October 2016, perhaps history won’t be repeated. But, more has to be done…please read on.

10-years ago vs. Today – Another History Lesson

This conversation is about first-time-buyers under $1 million and how it’s important to compare where we were with borrowing capacity in 2007 compared to today.  Prior to the October 2016 policy change, we had approximately 15% increased borrowing capacity compared to 2007.  The insured lending policy introduced last October (which required borrowers to qualify on the 5-year benchmark rate or stress rate), significantly reduced Canadians’ borrowing capacity by 20% below that of 2007.  This reduction is based on the loss of the 15% change from 2007 plus the 5% loss post the policy introduction (see chart).  Putting insured first-time-buyers on this backward treadmill will not serve Canadians’ ability to achieve home ownership like all those before them.  Prior to this policy introduction, the National Housing Act (the “NHA”) carried on the privilege and purpose of the NHA.  Now a majority of first-time-buyers may have to put their aspirations aside for perhaps as long as a decade or more.  The benchmark stress rate puts even more pressure on a household to achieve and see a rising income that can reach and sustain buying capacity while trying to keep pace with market appreciation, neither which are likely achievable. Return the “purpose” of the NHA back to Canadians.

Out of touch benchmark stress testing – Posted vs. Discounted Rates

I stress-test my clients against their personal budget in nearly every transaction and have done so almost my entire career.  By taking the position to stress test the market with a qualifying rate (currently 4.64%) in my opinion, is simply statistically out of touch.  If a stress test is deemed essential, this should be revisited and I have a recommendation.

Using Bank of Canada rate statistics together with our discounted mortgage rate data, I estimate the benchmark stress rate to be 81 to 100 basis points too high. This will vary depending on lender discounted rates available.   Discounted 5-year rates, in my opinion, have averaged 3.829% over the last ten years.  This is achieved by reducing the benchmark rates from 2007 until today by an average spread of 170 basis points across the board.  Generally, this spread would represent arriving at conventional discounted mortgage rates.  Insured rates on the other hand are usually up to 200 basis points below the benchmark rate in many cases.  Stress testing today at 4.64% or 81 basis points above this average of 3.829% makes no sense given our rate history.  If a stress test is absolutely essential, the government should give merit to the fact that lending in this country is discounted.  Reasonable stress testing should be considered if government policy sees no way to avoid a policy of this kind.  Presently, my recommendation would be to test against the 10-year average of the discounted 5-year rate of 3.829%.  This would likely bring a greater share of first-time-buyers back into the market.  The current benchmark stress rate is counter intuitive to the NHA “Purpose” to “promote housing affordability and choice” and this recommendation would hopefully bring the purpose back.    

A reminder of the “Purpose” of the NHA.

So my emphasis is again to remind the Government of Canada the original purpose of the Act as described in sec. 3 of the NATIONAL HOUSING ACT (see extract below).  Bring back the purpose of the NHA and return the hope and encouragement of home ownership to the insured first-time-buyer market.  Let the Bank of Canada continue its good work with inflation control and in doing so, let market interest rates dictate Canadians’ future financial borrowing capacity and their ability to attain home ownership, but not by using unrealistic stress testing together with shocking the Canadian real estate market and Canadians with surprise counterproductive policy.

Foreign National Lending Policy? Does B20 (residential mortgage underwriting practices and procedures) apply to Foreign Nationals? Today, Foreign Nationals are the silent killer of affordable housing in Canada.

Foreign Nationals, in most cases, have lending alternatives that are far reaching; they don’t require proof of income, and by themselves, are understood to have contributed immensely to unrealistic market activity and market value appreciation.  This makes it extremely difficult for existing or aspiring home owners to get to the next level in their financial and ownership potential.  It would appear B20 has no application to foreign nationals and they need to be brought in line and into the 21^st century.  It’s as though a foreign national has escaped the B20 Guidelines or is exempt altogether.  Similar lending alternatives are not available to Canadians, nor are they available to non-resident Canadians unless these non-resident Canadians pay income taxes in Canada on their work abroad.  This seems to be a very discriminating set of rules, in my opinion, that needs immediate attention.  Shooting the first-time-buyer in the foot is not the answer when they are far from the root cause of current market values.  I would recommend that stakeholders take immediate action to suggest imposing B20 underwriting policies on foreign nationals and expand B20 to include these borrowers (perhaps naming it B20FN), at the very least, and put measures in place that will mitigate the possibility for abuse, potential fraud and market manipulation.  This has been a national topic but has not been addressed in any significant way to date.  Today, this is the silent killer of affordable housing in Canada.

My comments may not be scientific, but I make these comments on behalf of nearly 60% of my 2016 first-time-buyers who, post the October 2016 policy introduction, would not be enjoying the pride of home ownership today or at any time in the near future.  Take foreign national real estate participation seriously into consideration and make lots of noise about it.  Foreign nationals should be treated to an even higher test than those imposed on Canadians.  Establish B20FN immediately.

Prejudicial policies for non-deposit taking or “monoline” lenders.

This, too, is not a new topic of discussion.  Our non-balance sheet or “monoline” lenders have been gradually constrained by NHA policies.  These changes give rise to ask the question; could these gradual policy changes be the equivalent of a constructive dismissal of an employee in a company?  Is it the government’s intention to eliminate these alternative sources of mortgage financing to consumers?  Monoline lenders have been an integral part of the mortgage broker industry for decades and have provided a competitive source of funds to consumers, as well as outstanding customer service, and include mortgages for purchases, refinances and for properties valued over $1 million.  Depending on the investor relationship of these monoline lenders, consumer “choice” and “affordability”, as described in the NHA, is slowly being stripped from these lenders and many can no longer consider refinance business and are constrained to mortgages on real estate transactions valued under $1 million. 

Canadians need these additional sources of financing to keep the market competitive and again, to continue to give consumers “choice” and “affordability.”  Affordability, too, comes with a cost-effective source of funds, the latter of which has changed so dramatically, these lenders are challenged in some cases to compete in the mortgage market place.  There is no level playing field between the banks and monoline lenders.  The increased insurance premium for bulk insured low ratio securitized mortgages sends a clear message to these lenders and ultimately, higher rates for lower loan-to-value borrowers.

Canadians deserve better!  These lenders are essential to Canadians and essential to the housing market in Canada.  Don’t do a constructive dismissal of monoline lenders.  They, too, represent a huge mortgage audience in Canada, and one of respect and trust they worked hard to establish with investors and consumers alike.  Look at their historical contribution to the housing market and don’t let policy changes of today become another unfortunate history lesson for the government.  This history lesson is already in full motion.

Extract from the National Housing Act

3 The purpose of this Act, in relation to financing for housing, is to promote housing affordability and choice, to facilitate access to, and competition and efficiency in the provision of, housing finance, to protect the availability of adequate funding for housing at low cost, and generally to contribute to the well-being of the housing sector in the national economy.

R.S., 1985, c. N-11, s. 3;

1992, c. 32, s. 6;

1999, c. 27, s. 2.

Watch quck video! 

Savings, market value and government guidelines are obvious obstacles but in my opinion, one topic that doesn’t get discussed in enough detail is consumer debt payments.

First a quick definition: Disposable income, is described as total personal income minus current income taxes. Essentially, your take-home-pay.

Here’s a “live” case study.

This consumer has $62,601 in non-mortgage debt or $0.86 for every dollar of disposable income. A model citizen by Canadian standards given StatCan’s most recent report reflected Canadians have $1.64 in debt for every dollar of disposable income.

The minimum payments currently required on this $62,000 debt is $1,878.03 per month. If this consumer chose to pay only the minimum payment requested on each monthly statement toward the repayment of this debt, it would take between 73 and 98 years to pay it all off. What will AMAZE you is by keeping unchanged the exact minimum payments required today, these debts could be totally paid in full between 39 and 50 months from now. Therefore, keeping the same payment every month from this point forward rather than paying the declining payment being requested on each statement is the key to paying the debt off faster. It’s remarkable to think you could pay it off this quickly given the average annual cost of borrowing of 16.794% which is actually even worse when annual credit card fees are added, making the effective annual cost of borrowing 21.054%. By the way, anybody getting this kind of return on your market investments at the moment? Hmmmm?

Now, watch this and take a deep breath. This same $1,878 per month would carry a mortgage principal of $410,513. Amazing buying capacity eh?…all tied up in a mere $62,600 in debt.

That’s right. If this consumer were debt free, it would be possible to save for a down payment with some simple strategies and a starter home (or condo more likely) is well within reach.

Now here’s a comparison for you.

Annual interest cost on this consumer’s debt is estimated at $8,975. Meanwhile the annual interest cost in the first year on a mortgage principal of $410,513 is $10,839. The difference is a mere $1,864 for the entire year. Wouldn’t you rather be a home owner paying interest on an appreciating asset?

Here’s my formula for eliminating the debt in this case study. My recommendations:

Stop using all cards, switch to cash only. Close all credit card accounts except two primary credit cards like a Visa or MasterCard. Write letters to all the other creditors requesting the accounts be closed and be sure to follow it up. Call the two credit card companies whose cards you are keeping and get them to give you their lowest rate available with no annual fee and no loyalty points. Nothing is for free! Use any savings remaining at the end of each month and apply it to the smallest debt owing until the debt is paid in full then use the freed up payment and apply it to the next smallest debt and so on.

There are a multitude of strategies that you can take here including paying highest interest debt off first, but I often find the former approach is usually more successful and you see the results faster. Every debt reduction plan should be designed specifically for the finances of the household and this is a good place to start.

The bottom line: don’t get distracted by the destructive effect of non-mortgage debt, get help to establish a plan with your mortgage broker and, as always…experience a strategy…not just a mortgage. We here at Dominion Lending Centres can help!

Here are answers to some frequently asked questions on the government changes to down payment requirements that take effect today, February 15, 2016.

If you recall from my last video, the down payment requirement has increased from five per cent, to ten per cent for the portion of the purchase price above $500,000, but less than $1,000,000.

The application of the government down payment requirement during any transition can often be confusing. To clarify the application of this requirement, and the grandfathering of this new requirement, here’s a few snippets of what we learned from CMHC’s underwriting department.

Purchases

• The new minimum down payment requirement naturally only applies to purchase transactions, not refinancing your mortgage.

Unchanged Premiums

• We are advised mortgage insurance premiums will remain unchanged.

Important dates to remember

• If you received an insured mortgage approval between December 11, 2015 and February 14, 2016 (inclusively) with a planned closing date after July 1, 2016, the new down payment requirement will still apply.
• If you received an insured mortgage approval before December 11, 2015, and you entered into a purchase and sale agreement also before December 11, 2015, the “old” down payment requirement may still apply regardless of the closing date.
• If your planned closing date is postponed after July 1, 2016, “CMHC acknowledges industry realities and will accommodate delays that may occur that are beyond a lender or buyer’s control and will be looked at on a case-by-case basis.”

Switching Lenders

• If you wish to give your mortgage business to a different financial institution for a more competitive rate or product and you received an insured mortgage approval under the “old” down payment requirement before December 11, 2015 and the property and the buyers(s) remain unchanged, the new mortgage insurance application request made by this new lender would be reviewed in accordance with the “old” requirement, regardless of the date the alternative lender requests mortgage insurance approval from CMHC.
• Similarly, if the mortgage insurance approval from the existing lender was submitted between December 11, 2015 and February 14, 2016 inclusively with a planned closing date on or before July 1, 2016, this new mortgage insurance approval request will be reviewed in accordance with the “old” requirement.”

Again, these are just a few snippets of some frequently asked questions. You may likely have a few of your own so let me know yours. Be certain to speak to your own mortgage broker concerning your purchase if you’re under way as well.

Have a great rest of the week and remember, we are always here at Dominion Lending Centres to help you with your mortgage questions!

 

Share this article:

Mark Alltree

Dominion Lending Centres – Accredited Mortgage Professional
Mark is part of DLC Innovation Group based in Vancouver, BC.

More Posts – Website

Follow Me:

My #mortgagebroker vs. #bank #mortgage #rate spotlight for this week. For more info

Pre-holiday rate alert on the day of the U.S. Fed announcement. Watch to see how very quietly discounted mortgage rates have been creeping upward with absolutely no media attention. Get your mortgage rate stress tested!

Welcome back it’s Mark Alltree, franchise owner of Dominion Lending Centres Innovation Group with a pre-holiday rate alert. 

“…not a creature was stirring, not even a mouse”, as the poem goes, well the same can’t be said for the Federal Reserve in the US today which ended 7 years of “zero” by moving up ¼%.  A stark contrast to the Bank of Canada where they recently suggested they are taking a look at the negative rate policies of other central banks.  Even prior to this announcement, there has been a shift in the financial markets that has definitely squeezed the profitability of the Canadian banks, and a reason to keep monitoring your risk to any climb in rates.

Discounted mortgage rates have been creeping upward the last several weeks, but unless a rate change is announced by the Bank of Canada, there’s a hike in the prime lending rate by the big banks or better still, a hike in their “posted”, not “discounted” mortgage rates, not a media creature has been a stirring, not even a TV studio mouse!

Well there continues to be some very attractive discounted rates through mortgage brokers, particularly insured mortgage rates, I’ll point out two rising chartered bank rates to make my point.

The 5-year posted fixed rate remains unchanged at 4.49% for most of the big banks.  But the corresponding discounted rates have risen from as low of 2.59%, back in August to as high as 2.99% today.  The cost of money reached a 10-year low on August 24, 2015 and has nearly doubled since then putting pressure on the banks to increase their discounted rates.

My second point is the 5-year below prime variable rate mortgage.  Well the bank’s prime rate remains unchanged at 2.7%, their below prime discounts too have crept up.  Rats as low as prime minus 75% offering an attractive variable rate of 1.95% are now a mere prime minus 20 or 2.5% for a variable rate with the big banks today.

Now how is this relevance to you?  For every $100,000 in mortgage principal amortized over 25 years, a 5-year fixed rate would cost you $2,571 more, and a variable $1,884 move over the corresponding term.  For example, a $300,000 5-year fixed rate, now costs $5,651 more in interest cost than back in August.   If you take that increased interest cost and simply divide by 5 year, that certainly cuts into the holiday spending budget by $1,130 a year.

So now you ask, where’s the media studio mouse now?  The answer, right here in my office navigating client mortgage stress reports.

To be sure the mouse in your house knows exactly how high mortgage rates would have to rise before you become so stressed you forget to leave it cheese, get your mortgage stress tested now, after all, you don’t want to starve your mouse of any cheese just before the holidays! 

Down Payment Alert from Mark Alltree on Vimeo.

Canadian fixed rate mortgages may have reached a 10-year low territory.  Of many questions, a few important questions to ask yourself.  How high would rates need to rise for me to experience “rate stress”?  AND, if rates do eventually go up, and I have a variable rate mortgage, when should I lock in my rate or should I stay variable? 

I’ve prepared a video to discuss what I call “rate stress” using my mplan® process, give you examples of how I measure rate stress, what’s in an mplan® rate stress report and how this is relevant to your own mortgage.  Click the image below to be redirected to the video.