13 Feb

Big-6 Banks’ prepayment penalty charges give reason to consider fair-penalty mortgage lenders

Mortgage Facts & Stats

Posted by: Garth Chapman

From a recent Robert McLister article in the Globe And Mail. 

Committing to a mortgage for five long years exposes people to the most insidious aspect of residential financing: prepayment charges.

And when it comes to such charges – the penalties you pay come when you back out of your mortgage early – some lenders take a greater toll on your bank balance than others.

Big banks are usually the worst. Mortgage finance companies are often the best.

And these bank competitors want you to know it. More and more, smaller lenders are using their preferential penalty calculations as a selling point, as well they should.

This year I’ve seen lenders such as Equitable Bank, Manulife Bank of Canada, XMC Mortgage Corp., Merix Financial, CMLS Financial Ltd., RFA Mortgage Corp., First National Financial LP, and MCAP all go out of their way to step up marketing and educate consumers on how bad penalties from major banks can be. (Mind you, a few of these lenders also have “no-frills” mortgages with high penalties – for example, 3 per cent of principal. So watch out for those.)

Read more here

13 Feb

The mortgage stress test is making housing supply issues worse — and making homes even more unaffordable

Mortgage Facts & Stats

Posted by: Garth Chapman

With a growing number of first-time homebuyers frozen out of the market by the stress test, many builders have cut back on building.

Governments bear much of the blame for this undesirable market imbalance, as a narrow focus on suppressing household debt has dominated the policy mix while the root causes of undersupply — including excessive red tape, fees, taxes and nimbyism — have gone largely unaddressed.

If we want to address housing affordability in Canada, governments need to redesign the policy mix to confront these factors. For its part, the federal government could start by developing a more nuanced mortgage “stress test.”

First, consider mortgage debt in the Canadian context. More here

13 Feb

Could Canadians gain access to longer-term mortgages?

Mortgage Facts & Stats

Posted by: Garth Chapman

In the USA 15-year and 30-year mortgage terms are very common.  So why not in Canada? Is it that there is less banking competition, or are there other forces at play?

Longer-term mortgages would benefit Canadian homebuyers by bringing more stability to the homebuying process, says a recent brief from the C.D. Howe Institute.

In “One More Case for Longer-term Mortgages: Financial Stability”, author Michael K. Feldman argues that mortgage periods of ten years or longer would decrease the number of renegotiations homebuyers would be required to engage in over the course of a decades-long amortization, thereby limiting their exposure to higher rates.

On the demand side, most Canadians simply don’t realize that longer-term mortgages are a possibility. “I think if you asked most people, they would think you can get a loan for five years or less, and that’s it,” Kronick says, adding that the institutions providing longer-term mortgages also charge premium rates to mitigate the losses in revenue they face from less frequent loan negotiations/interest rate hikes and early mortgage pay-offs.

More here 

13 Feb

OSFI Hints at Changes to the Mortgage Stress Test Qualifying Rate

Mortgage Facts & Stats

Posted by: Garth Chapman

OSFI on the STRESS TEST – expect a modest relaxation, likely not enough to really help us on the Prairies.

OSFI on RENEWALS – not sure if we’ll see elimination of the stress test for borrowers who want to move their maturing mortgage to another lender at maturation.

OSFI on HELOCS – we may see a tightening on this product as the ‘boss of the banks’ sees a threat from consumers using their HELOCs as bank machines.

More here 

13 Feb

Insured…Insurable…Uninsurable

Mortgage Facts & Stats

Posted by: Garth Chapman

Once upon a time we had high ratio vs. conventional mortgages, now they are Insured, Insurable or Uninsurable.

How it Was Then

High ratio mortgage – down payment less than 20%, insurance (aka CMHC insurance) paid by the borrower.

Conventional mortgage – down payment of 20% or more, the lender had a choice whether to insure the mortgage or not at their own expense.

How it is Now

Insured –a mortgage transaction where the insurance premium is or has been paid by the client.  Generally, a down-payment below 20%.

Insurable –a mortgage transaction that is portfolio-insured at the lender’s expense for a property valued at less than $1MM that fits insurer rules (qualified at the Bank of Canada benchmark rate over 25 years with a down payment of at least 20%).

Uninsurable – a mortgage that is ineligible for insurance. Examples of Uninsurable are refinances, single unit rentals (rental buildings with 2-4 units are Insurable), purchases/transfer for properties greater than $1MM, equity take-out mortgages greater than $200,000, any mortgage with an amortization greater than 25 years.

So what does this mean when you need a mortgage for a purchase or when you have a maturing mortgage you want to transfer?

  • If it was originally insured (borrower paid default insurance – aka CMHC insurance), we can get insured rates (lowest rate tier).
  • If it was originally back-end insured by the lender (basically the same as being conventional) we can get insurable rates (2nd lowest rate tier).
  • If the mortgage was placed before October 17, 2016, we can grandfather the insurable rates even if it was a $1 million+ value house and/or with a 30-year amortization.  It then depends if it was insured (borrower-paid insurance) or conventional as to whether you qualify for insured or uninsurable rates.
  • If it was placed after October 17, 2016 and the property was over a $1MM value or had a 30-year amortization, we can only get uninsurable rates (highest rate tier).

For insurable rates we need to consider the current loan to value and the beacon score.

6 Jan

A Short History of Changes to Canada’s Mortgage Rules Since the 2008 Financial Crisis

Home Ownership

Posted by: Garth Chapman

Actions taken since the 2008 financial crisis to address the federal government’s concerns about Canada’s housing market.

Before the 2008 FINANCIAL CRISIS

This was a time of easy money for Canadian mortgage borrowers.  The below were some of the many options available during this time:

  • 100% financing options (aka $0 down).
  • 40-year amortizations.
  • Cashback mortgages (you get cash from the lender after closing in exchange for a higher rate).
  • 95% Loan-to-value ratios on refinances.
  • 5% down-payment on rental properties.
  • You qualified for fixed and variable rate mortgages at the contract rate (the rate you pay, not a higher rate – no stress test).
  • No limit for your gross debt-service ratios (GDS) if you had strong credit.

July, 2008:

  • After briefly allowing the CMHC to insure high-ratio mortgages with a 40-year amortization period, then Conservative finance minister Jim Flaherty moved to tighten those rules by reducing the maximum length of an insured high-ratio mortgage to 35 years.

February, 2010:

  • Responding to concern that some Canadians were borrowing too much against the rising value of their homes, the government lowered the maximum amount Canadians could borrow in refinancing their mortgages to 90% of a home’s value, down from 95%.
  • The move also set a new 20% down payment requirement for government-backed mortgage insurance on properties purchased for speculation by an owner who does not live in the property.

January, 2011:

  • The Conservative government tightened the rules further, dropping the maximum amortization period for a high-ratio insured mortgage from 35 years to 30 years.
  • The maximum amount Canadians could borrow via refinancing was further lowered to 85% of a home’s value.

June, 2012:

  • A third round of tightening brought the maximum amortization period down to 25 years for high-ratio insured mortgages.
  • A new stress test was also introduced to ensure that debt costs are no more than 44 per cent of income for lenders seeking a high-ratio mortgage.
  • Refinancing rules were also tightened for a third time, setting a new maximum loan of 80 per cent of a property’s value.
  • Another new measure limited the availability of government-backed insured high-ratio mortgages to homes valued at less than $1-million.
  • Limit the maximum gross debt service (GDS) ratio to 39% and the maximum total debt service (TDS) ratio to 44%.

December, 2015:

  • The recently elected Liberal government moved to tighten lending rules for homes worth more than $500,000, saying it was focused on “pockets of risk” in the housing sector.
  • The package of measures included doubling the minimum down payment for insured high-ratio mortgages to 10% from 5% for the portion of a home’s value from $500,000 to $1-million.

October, 2016

  • All INSURED mortgages with less than 20% down must qualify at benchmark rate (currently 4.64).  The details – borrowers who take out insured mortgages that are fixed-rate loans of five years or longer will be subjected to a “stress test,” by qualifying at the Bank of Canada’s Benchmark rate (then about 2% higher than a typical 5-year fixed rate).  This same stress test is already in place for all mortgage terms of less than 5 years and for those taking a Variable Rate.
  • Ottawa unveiled new measures aimed at portfolio insurance, a type of bulk insurance that banks use for mortgages with down payments of 20 per cent or more.  Starting Nov. 30, the federal government will now require portfolio-insured mortgages to qualify under the same criteria used for the insurance taken out on homeowners with small down payments. Portfolio-insured mortgages will now be limited to a maximum amortization period of 25 years and a maximum purchase price of less than $1-million. It requires all portfolio-insured mortgages to be owner-occupied, prohibiting insurance on rental homes and investment properties. This change handed the banks a huge advantage over the Monoline mortgage lenders, and increased their market share and ultimately allowed the banks to increase mortgage interest rates.

January, 2018:

  • Stress Test now applies to all Mortgages – Home buyers with a down payment of 20% or more will be subject to stricter qualifying criteria (also known as a “stress test”) that would determine whether a homebuyer would be able to afford their principal and interest payments should interest rates increase.  REFINANCING an existing property (20%+ Equity) will also be subject to the stress test.  For qualification, the stress test will use either the 5-year benchmark rate published by the Bank of Canada or the customer’s actual mortgage interest rate plus 2.0%, whichever is the higher.  Estimated reduction in borrowing for the average borrower, 15-20%
  • OSFI directs lenders (excluding credit unions and private lenders) to have internal risk management protocols in higher priced markets (sometimes called “hot real estate markets” like Toronto and Vancouver). This is a continuation of a policy already in place. Many mortgage lenders have been following the principles of the policy for the last 10 to 12 months.
  • Elimination of “bundles mortgages.” – Mortgage lenders (excluding credit unions and private lenders) are prohibited from arranging with another lender: a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law. This is often referred to as “bundling” or “bundle partnership”.
13 Feb

Changes to Canada’s mortgage rules since the 2008 financial crisis

Real Estate Market

Posted by: Garth Chapman

Actions taken since the 2008 financial crisis to address the federal government’s concerns about Canada’s housing market.

July, 2008:
• After briefly allowing the CMHC to insure high-ratio mortgages with a 40-year amortization period, then Conservative finance minister Jim Flaherty moved to tighten those rules by reducing the maximum length of an insured high-ratio mortgage to 35 years.

February, 2010
• Responding to concern that some Canadians were borrowing too much against the rising value of their homes, the government lowered the maximum amount Canadians could borrow in refinancing their mortgages to 90% of a home’s value, down from 95%.
• The move also set a new 20% down payment requirement for government-backed mortgage insurance on properties purchased for speculation by an owner who does not live in the property.

January, 2011:
• The Conservative government tightened the rules further, dropping the maximum amortization period for a high-ratio insured mortgage from 35 years to 30 years.
• The maximum amount Canadians could borrow via refinancing was further lowered to 85% of a home’s value.

June, 2012
• A third round of tightening brought the maximum amortization period down to 25 years for high-ratio insured mortgages.
• A new stress test was also introduced to ensure that debt costs are no more than 44 per cent of income for lenders seeking a high-ratio mortgage.
• Refinancing rules were also tightened for a third time, setting a new maximum loan of 80 per cent of a property’s value.
• Another new measure limited the availability of government-backed insured high-ratio mortgages to homes valued at less than $1-million.
• Limit the maximum gross debt service (GDS) ratio to 39% and the maximum total debt service (TDS) ratio to 44%.

December, 2015
• The recently elected Liberal government moved to tighten lending rules for homes worth more than $500,000, saying it was focused on “pockets of risk” in the housing sector.
• The package of measures included doubling the minimum down payment for insured high-ratio mortgages to 10% from 5% for the portion of a home’s value from $500,000 to $1-million.

October, 2016
• Borrowers who take out insured mortgages that are fixed-rate loans of five years or longer will be subjected to a “stress test,” by qualifying at the Bank of Canada’s Benchmark rate (then about 2% higher than a typical 5-year fixed rate). This same stress test is already in place for all mortgage terms of less than 5 years and for those taking a Variable Rate.
• Ottawa unveiled new measures aimed at portfolio insurance, a type of bulk insurance that banks use for mortgages with down payments of 20 per cent or more. Starting Nov. 30, the federal government will now require portfolio-insured mortgages to qualify under the same criteria used for the insurance taken out on homeowners with small down payments. Portfolio-insured mortgages will now be limited to a maximum amortization period of 25 years and a maximum purchase price of less than $1-million. It requires all portfolio-insured mortgages to be owner-occupied, prohibiting insurance on rental homes and investment properties. This change handed the banks a huge advantage over the Monoline mortgage lenders, and increased their market share and ultimately allowed the banks to increase mortgage interest rates.

January, 2018
• Home buyers with a down payment of 20% or more will be subject to stricter qualifying criteria (also known as a “stress test”) that would determine whether a homebuyer would be able to afford their principal and interest payments should interest rates increase. REFINANCING an existing property (20%+ Equity) will also be subject to the stress test. For qualification, the stress test will use either the 5-year benchmark rate published by the Bank of Canada or the customer’s actual mortgage interest rate plus 2.0%, whichever is the higher. Estimated reduction in borrowing for the average borrower, 15-20%
• OSFI directs lenders (excluding credit unions and private lenders) to have internal risk management protocols in higher priced markets (sometimes called “hot real estate markets” like Toronto and Vancouver). This is a continuation of a policy already in place. Many mortgage lenders have been following the principles of the policy for the last 10 to 12 months.
• Mortgage lenders (excluding credit unions and private lenders) are prohibited from arranging with another lender: a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law. This is often referred to as “bundling” or “bundle partnership”.

18 Oct

New mortgage Stress test to be imposed on Canadians effective Jan 1, 2018

Economy

Posted by: Garth Chapman

On October 17th Canadians awoke to the news that the nation’s banking regulator (OSFI) has announced that they will in fact go ahead on Jan 1, 2018 with a stress test for all conventional mortgage borrowers (those with more than 20% down).

This new Stress test will require that home-buyers (and those refinancing existing homes) who do not require mortgage insurance because they have a down payment (or existing equity) of 20% or more, will have to prove they can continue to make payments if interest rates rise by 2.0%. In fact it even goes a little further than that. “THE MINIMUM QUALIFYING RATE FOR UNINSURED MORTGAGES TO BE THE GREATER OF THE FIVE-YEAR BANK OF CANADA BENCHMARK RATE (that rate today is 4.89%) OR THE CONTRACT RATE PLUS 2.0% ”

The impact on buyers will be a reduction in their maximum mortgage amount of at least 20% and as high as 25%.

So if you are currently considering the purchase of a home, it is important to know that a purchase that closes after Dec 31, 2017 will have to qualify under the new rules, unless (maybe, we’ll know soon) you have a firm contract and a signed mortgage commitment in hand prior to Dec 31. Barring your having that, the mortgage amount you now qualify for will not be the amount you qualify for on Jan 1, 2018.

As has happened with past rule changes we expect that there will be clarifications issued around these dates to ensure that banks will honour the mortgage commitments signed by buyers, borrowers who have a home under contract and have waived all conditions. If so then buyers with firm purchase contracts and signed mortgage commitments should be able to close those purchases after Jan 1 as planned.

As to new-builds, well the question there is “how far out will they be able to close those deals under the terms of the mortgage commitments they have signed”.

On that front, Jencor has access to new-build mortgage commitments for 12 months at 3.29% where the appraisal can be done prior to signing the mortgage commitment and removing the finance condition, with an inspection just before possession to confirm completion of the build only.

This is huge, as there is thereby no risk of a lower future value wreaking havoc with the financing at time of possession.

If you are a pre-qualified purchaser you should now call your Mortgage Advisor or Banker and find out what your new maximum purchase price is effective Jan 1, 2018.

Garth

6 Nov

Interest Rates are on the move up so what is going on?

Interest Rates

Posted by: Garth Chapman

Well here we are now with a shift in the market and they always seem to come rather suddenly.  We have announcements today from a number of lenders that their rates are headed up. This will surely spread to virtually all the banks within days.

So what is behind this?

5-year bond yields drive 5-year mortgage rates in Canada

The 5- year benchmark Canadian Bond yield as of today Nov 6 is 1.04%  It has been as low as 0.6% in mid-September, and as high as 1.5% in January 2015, so quite a large range there.  This latest rise has bit into the spread lenders want to achieve, so we are now beginning to see increases in mortgage interest rates.

It seems to me the banks these days are less predictable than at any time in my memory as to just what yield they want, which makes it harder than ever to predict interest rate movements.

What is happening in the rest of the world and how does that impact us?

Bond markets around the world have been experiencing slowly increasing interest rates for the last few weeks.  The big bond traders around the world trade hundreds of billions of dollars in bonds daily seem to be pricing in an increase in the US Fed Rate in December.

If the US Fed does increase its overnight rate ,which has direct impact on variable rates, we will continue to see the variable discount decrease.  We are already off from the Prime less 0.65% rates we saw in the busy summer period.

Conclusions and Recommendations

This may be the beginning of a larger and longer move up, or it may just be a small adjustments. Hey, rates could even head back down next month, as we have seen happen over the last couple of years. World events can change markets very quickly and sometimes to large effect.

For Buyers on the fence, lock in a Rate Hold to protect against rate increase  for as long as 120 days.

For Borrowers with variable rate mortgages who have been planning to lock those mortgages in to a fixed rate when the fixed rates go up, now is a good time to review that plan.

22 Jul

The Devil In The Fine Print – some mortgages have restrictions

Mortgage Facts & Stats

Posted by: Garth Chapman

Not all mortgages are created equal.  In fact most mortgages, even within a single financial institution, will vary from one another. Pre-payment privileges, portability, increased payment and extra payment privileges, payment holidays, and all sorts of other issues come into play.

Your own particular needs and desires must be understood by your Mortgage Broker or Banker and then be considered what deciding which of these and many other specific rights and obligations are important or even necessary for you to have in your mortgage. Make sure these issues are addressed and explained fully so you will make the best decision possible for your borrowing needs.

One key clue to just how restrictive a mortgage is likely to be is simply the interest rate.  Most often the lower it is the more restrictive the mortgage itself will be.

There is an excellent article on this topic in Canadian Mortgage Trends here The Devil In The Fine Print