The Bank of Canada has raised interest rates for the second time in less than two months. The central bank’s benchmark rate was raised twice by 0.25% since July and now stands at 1.00%. For consumers, this means the Prime Rate now stands at 3.20%. It was as low as 2.70% just a few months ago. With these increases Canada joins the U.S. as the only two G7 nations raising interest rates in an effort to help moderate our strong economic growth that surprisingly topped 4% last quarter.
Canada is in the middle of one of its strongest growth cycles since the 2008 recession, with economic expansion accelerating to an average of 3% over the past four quarters. According to the Bank’s press release, robust consumer spending, solid job and income growth, cooling housing markets, as well as more widespread strength in exports and business investment were all factors leading to this decision.
The rate increase works out to an extra $13 per $100,000 borrowed per month, approximately.
As Rates Rise, Clients Qualify For Less
What many people don’t realize is that as interest rates go up, qualifying for a mortgage becomes more difficult as lenders are required to qualify consumers based on a rate that is correlated to the Bank of Canada rate. As rates rise, clients qualify for less.
On top of rising rates, the Office of the Superintendent of Financial Institutions (OSFI) announced that it is considering requiring lenders to ‘stress test’ mortgage applications for buyers who have a 20% down payment or more. This would have a significant impact on a large segment of home buyers who would suddenly find themselves qualifying for approximately 20% less financing. For those living in areas with already record high housing prices, more people than ever will find it difficult to own a home.
Now, more than ever, it is imperative that clients engage the services of an experienced Mortgage Consultant to review their options before trying to purchase, sell, or refinance or renew.
This post is brought to you by Marc Shendale at Genworth Canada, originally appearing on Dominion Lending Centeres’ website here.
Buying a home is financial decision, but also an emotional experience.
Before we’ve explored every room, we often start imagining our new lives there. Where our furniture will go. The parties we’ll host in the open-concept living-dining space. The mornings we’ll spend at the breakfast bar overlooking the garden or skyline… When a home speaks to us emotionally, the fear of missing out on it can set in fast.
That’s especially true in a real estate market where multiple offers and bidding wars are common, where a financing condition can put you at a disadvantage, and where prices are at all-time highs.
According to the 2017 Genworth Canada Homeownership Study, 60% of first-time buyers were worried they might miss out on the “perfect” house. That can lead emotional homebuyers to act against their own best interests by, for example, forgoing important conditions, or paying more than they had budgeted.
There’s no need to lose the dream — you will host those parties — but you’ve got to take emotion out of the deal, and these strategies will help.
Assemble your entire team before looking at any property.
That means: interview experienced real estate agents with expertise on your desired neighbourhoods; consult a financial advisor to help determine how homeownership fits into your other goals (a wedding, saving for a child’s education, retirement planning, etc.) and establish a budget including “what-if” scenarios, such as a layoff or maternity leave; find a DLC mortgage broker to help you secure a pre-approval, explain your options, and answer your questions here. You may be able to achieve homeownership sooner than you think. Find out how
Get the names of 3 home inspectors. Call and introduce yourself now.
Many emotional homebuyers forego the inspection process in an effort to make their bid more competitive. That’s a risk. With 3 recommended inspectors on speed dial, you should be able to get a qualified professional to visit a property the day you want to make an offer. Your real estate agent is one source of referrals, or check with the Canadian Association of Home and Property Inspectors.
Don’t visit properties outside your price range.
Best-case scenario, you’ll walk away deflated. Worst-case scenario? You’ll bid on something you can’t comfortably afford. Stick to your homeowner budget (likely to be higher than renting, since it includes property taxes/maintenance fees, utilities, etc.) and practice living on it for a few months before you decide to make a purchase.
Focus on the things you can’t see.
The efficiency of the heating and cooling systems, the age of the roof, the state of the electrical… these matter most when it comes to deciding if a home is a good financial deal. Hardwood floors, quartz counter tops, and stainless steel appliances can be seductive, but they shouldn’t be a priority.
Surprise repairs and upgrades to fundamentals — like a furnace on its last legs, plumbing that isn’t to code, or uninsurable knob-and-tube wiring — could sink your budget. And if problems have been covered up, you might just have to rip out those magazine-worthy finishes and details.
There is no disputing that buying a home is a massive financial decision as well as an emotional experience. But minimizing emotions throughout your homebuying experience is a heads-up move that will ultimately benefit you.
For more tips on what you should know before you purchase a home visit www.homeownership.ca.
Spring is definitely here in full force, minus the sun. Multiple offers on condos and houses continue to keep us busy and lenders on their toes. 4Front has expanded again adding a new full time in house underwriter to assist with our files. We have a total of 16 brokers working with our clients to ensure financing is never a challenge. Please ask us how our pre-approval process can benefit your clients who need to enter into a quick closing, or no subject offer. We can help in all types of situations, from bridge financing, refinancing, private financing, and all financing in between.
Rates Trending Sideways And Down
On Wednesday, the Bank of Canada left its prime rate unchanged as most economists predicted. The bank is optimistic on the Canadian economy, expecting it to grow at a rate of roughly 2.5 percent, compared to 1.4 percent last year and 0.9 percent the year before. Bright spots in the economy include revised activity in the oil sands, small and medium size business investment and of course housing. Notwithstanding this, there are still significant uncertainties ahead including the unknown U.S. economic policies with respect to NAFTA, and potentially overheated housing markets in Ontario.
At best, rates should remain unchanged until there is a clearer picture of the effects of these headline topics. At some point the bank will increase prime rate, however this is likely at least a year away. In the meantime borrowers can still enjoy low fixed and variable rates, both of which have decreased over the last few weeks. Please ask us for details on current rates anytime.
BC Home Equity Partnership Loan
We have seen significant numbers of applications for this program. Buyers and Realtors should be aware that there is a fee of $560 charged by the provincial government to set up these loans which is payable by the borrower. With the extra legal fees involved to register the loan on title as well as higher mortgage insurance premiums, the merits of the program are still somewhat questionable.
This post is brought to you by our friends at CLMS, highlighting the complicated nature of the mortgage market and the greater needs of homebuyers and homeowners alike to lean on the expert advice of a professional mortgage experts.
The last quarter of 2016 brought considerable change to Canada’s residential mortgage business. In October, the Department of Finance Canada announced new mortgage rules that have had a tempering effect on the market. Then, in late December, the Office of the Superintendent of Financial Institutions (OSFI) mandated a new capital framework for our three mortgage insurers. In the space of three months, our government has changed the rules of lending and borrowing, further complicating the residential mortgage world for Canadian homeowners.
Now borrowers must have their borrowing capacity stress-tested, not against the lender’s current mortgage rate offerings, but against a new qualifying rate, currently posted at 4.64% for insured high-ratio mortgages. This has reduced every homebuyer’s buying power. Some homebuyers who may once have qualified for a mortgage will now not qualify at all.
In addition, traditional lender funding mechanisms have changed, and low-ratio portfolio insurance premiums have increased. These changes have driven up interest rates for Canadian mortgage borrowers, some more than others. Since October, mortgage rates have gone up around 30-60 basis points with many lenders. This has created a double-whammy for the borrower – their purchasing power has gone down while interest rates have gone up.
For consumers, the recent changes represent a major step back, due to the new and far more complex mortgage pricing structures, product surcharges, risk and LTV-based surcharges and new qualification methodology. With these additional layers of complexity, it is doubtful that web-based direct-to-consumer or self-serve residential mortgage sites will be growing any time soon.
But all of these changes work to the benefit of professional mortgage brokers. Why? Because the more complicated the mortgage market gets, the greater the need for homebuyers and homeowners alike to lean on the expert advice of a professional mortgage expert.
Full-service mortgage brokers – the people who live mortgages every day as a sole source of income and are on top of the latest regulatory changes — can help homeowners navigate these increasingly complex waters. They understand the ins and outs of all the regulations; the strengths and weaknesses of the different financial institutions, from bank to non-bank lenders, trust companies to credit unions; and they look for a mortgage to suit the homebuyer, not the other way around. Mortgage brokers don’t work for lenders; they work for the homebuyer. So their advice is informed, unbiased and honest.
That’s why mortgage brokers have been getting a bigger share of the action over the last few years. As revealed in the 2016 CMHC Mortgage Consumer survey, “mortgage broker share of the market is trending upwards for renewers and refinancers, increasing from 21% in 2015 to 26% in 2016 for renewers, and from 33% in 2015 to 38% in 2016 for refinancers…. Market share is even higher among first-time buyers at 51%.”
Homebuyers and homeowners can trust a pro to explain what the new mortgage regulations mean to them, and what their options are so that they can make the most informed decision. A home is typically the biggest purchase people will make in their life. To buy a home without the insight of a professional, full-time mortgage broker just doesn’t add up. I’m proud to say that at CMLS Financial, we originate our business exclusively through the mortgage broker channel and we expect to see this channel continue to grow as a result of these most recent changes.
There was a time when car owners with some mechanical aptitude could perform general maintenance on their cars and only needed to visit their mechanic as a last resort. Then car engines became more computerized, and car owners no longer had the specialized tools and skills. Mechanics became more sophisticated and knowledgeable, and demand for their skills increased.
Today, the inner-workings of a mortgage in Canada is much like the inner-workings of a car engine. Better off in the hands of an expert.
The mortgage process can be overwhelming. Knowing the key terms that are part of it can help reduce confusion and help guide your first conversation with your mortgage broker.
Length of time over which the mortgage will be repaid.
Length of time that the mortgage contract conditions and interest rate is fixed.
Costs in addition to the purchase price of the home that are payable on closing day. See the Process & Costs worksheets for more details.
The portion of the home price that is not financed by the mortgage loan. It must come from the buyer’s own funds or other eligible sources before securing a mortgage.
The difference between the price for which a home could be sold and the total debts registered against it.
Fixed / Variable Mortgage Interest Rate
A fixed rate is a locked-in rate that will not increase for the term of the mortgage. A variable mortgage interest rate can fluctuate based on market conditions, but the mortgage payment remains unchanged.
High-ratio mortgage / Conventional Mortgage
A high ratio mortgage is a mortgage loan higher than 80% of the lending value of the property. A conventional mortgage is a mortgage loan up to a maximum of 80% of the lending value of the property.
Open / Closed Mortgage
An open mortgage is a flexible mortgage that allows you to pay off your mortgage in part or in full before the end of the term. A closed mortgage, in some cases, cannot be paid off in whole or in part before the end of the term. In other cases, the lender may allow for partial prepayment of a closed mortgage in the form of an increased mortgage payment or a lump sum prepayment.
If you break your mortgage contract early, likely if you choose to sell your home or refinance it, you will have to pay the lender a penalty called a break penalty (also called a prepayment penalty). The amount will depend on a variety of factors including whether you chose a fixed or variable rate mortgage, the terms of your contract, and how much time is remaining on your term.
CMHC raised their insurance premium rates on January 17th, 2017. These new CMHC premiums are seen as a direct consequence of the regulatory changes that OSFI (Office of the Superintendent of Financial Institutions) implemented in October 2016. Those changes already had immediate impact to non-bank lenders in the industry: from tougher lender requirements, higher rates for certain Canadians and for some lenders, or they just stopped lending resulting in fewer choices for Canadians.
The new capital requirements set out by OSFI were seen as a move to slow down hot markets within the county, mostly targeting Vancouver and Toronto. In simple terms the changes made lenders hold more capital to support the loans they give Canadians. If you are holding onto more money as a company, you can’t make money off it, so the ‘cost’ of doing business gets more expensive. One result to remedy this for the company is to raise rates.
Let’s focus on the Vancouver market. In the last few months, the BC government has done a few things to improve affordability in the real estate market, particularly for first time buyers or the average home owner. This included raising the BC Homeowner Grant to $1.6MM from $1.2MM and the recently launched BC HOME Loan Program. Although some opinions differ on the effectiveness of these programs, most would generally agree that its two steps forward.
Back to the new CMHC premiums. As most agree that those were two steps forward, the same majority would agree that this is one step back for the affordability of home ownership. In their press release, CMHC advises that it should only increase the monthly payments by $5 a month. However, that’s based on an average mortgage of $245,000. In Vancouver, not many first time buyers or people look to move up the property ladder have a mortgage of $245,000.
Let’s use the example to couple together the two steps forward and one step back. Let’s say a first-time buyer is buying their first condo for $700,000 and will be using the BC Government’s HOME program. They’ve saved their 2.5% which the government will match, so they have a 5% “non-traditional down payment” who’s premium has jumped from 3.85% to 4.5%. You may be wondering what “non-traditional” means, well if you use the BC HOME program and your total down payment with the government’s money is only 5%, you pay an even higher insurance premium!
Purchase Price: $700,000
5% Down-Payment: $35,000 (remember BC HOME program loaned $17,500 of that)
Mortgage Required: $665,000
New CMHC Premium: $29,925 Total Mortgage: $694,925
Your total mortgage of $694,925 is pretty close to the purchase price! And these numbers don’t include your property transfer tax of $12,000 which will have to be paid for outside of the mortgage.
Oh, and don’t forget, you still owe the BC HOME loan repayment starting in five years’ time. Let’s factor that in: Your equity (purchase price less mortgage) is $5,075 on day one of your purchase (despite your $35,000 down payment) …. But in five years you’ll owe $17,500 to the BC HOME program. If we include that in the equity calculation, well bad news for your equity …. It’s now a negative $12,425.
This is one view of the changes. Everyone’s goals and finances are different and the changes impact everyone differently. Working with a Mortgage Consultant takes the stress out of the process as they keep up to date with the changes and can access the majority of lending options in Canada. Let us make sure your two steps forward are bigger than any one step back.
Our office will close for the holiday season Friday December 23rd at 12pm and will re-open for regular business hours Tuesday January 3rd. We look forward to seeing our clients, BDMs, and other business partners in 2017!
Thanks to our friends at B2B Bank for their economic outlook report. See more communications from B2B and Laurentian Bank here.
With the new mortgage regulations in place, now is a good time to discuss the state of the Canadian housing market. Previous tightening in mortgage rules, including the reduction in the maximum amortization period from 30 to 25 years in 2012, have not been enough to temper buyers’ appetite for risk, especially in expensive Toronto and Vancouver markets.
The substantial drop in interest rates likely offset the effect of stricter regulations in recent years, allowing many households to become homeowners. The current context is quite different. The likelihood that the very low mortgage rates will drop further is much lower than it has been in the past. Rising interest rates on the bond markets in the wake of both Brexit and the American election outcome and stricter rules for Canadian lenders suggest that interest rates will rise, though more slowly than in the past.
Therefore, the federal government’s new measure for ensuring a buyer’s borrowing capacity at higher interest rates will likely have a lasting effect. The bar for becoming a homeowner was raised in mid-October, with the ultimate objective of reducing default risk in the event of a negative economic shock. All potential buyers with a down payment of less than 20% must now pass a stress test based on the posted mortgage rate (currently 4.64%) to qualify for a mortgage and to determine the maximum borrowed amount. This stress test even applies to those choosing a fixed-rate, 5-year term, the preferred product of two-thirds of mortgage holders. By making access to home ownership more difficult, borrowers, especially first-time buyers, will have to adapt: by saving longer before buying a property, looking for a similar property in a less expensive neighbourhood or buying a smaller house.
Testing a buyer’s ability to handle higher interest rates for all insured mortgages will have a relatively larger impact in the competitive markets of Toronto and Vancouver, where buyers have been borrowing more relative to their financial capacity in recent years. Thus, Canadians looking to become homeowners soon must reassess their strategy, which should slow the fast-paced market over the next few months.
In Toronto in particular, Ottawa’s new stress test requirement will help cool the overheated market which has been driven by vigorous job creation and the lack of land supply. These conditions have made Toronto the only place in the country where prices are rising sharply. The new stress test combined with a shortage of affordable housing in Toronto may help strengthen the current trend of buyers looking to neighbouring cities such as Hamilton and Barrie. This being said, the federal government’s higher immigration objective for 2017 will benefit housing demand in Toronto and surrounding areas and will likely minimize the impact of the new stress test. Also, the Ontario government announced that first-time buyers will benefit from an enhanced rebate on land transfer tax starting in January 2017.
In Vancouver, the stress test will prolong the housing cool off that began last spring. The federal government’s announcement comes at a time when some potential buyers were already sidelined by uncertainty created by the new 15% tax on residential housing for foreign buyers. Since the introduction of this tax on August 2nd, foreign buyers have been involved in only 1.3% of resale activity in the Greater Vancouver area, as compared to 13% in June and July. While the virtual disappearance of speculative activity will likely slow the high-end market, buyers seem more reluctant to purchase across all categories of housing, including entry-level condominiums. This slight loss of confidence contributed to both a drop in sales and in price stagnation this fall. This slow down should be short lived considering the return of many British Columbians from Alberta and new well-paid jobs, both of which will increase demand for housing. Construction of smaller, more affordable condos should also help maintain a healthy level of activity.
In Montreal, the new stress test will only modestly affect a buyer’s borrowing capacity due to the city’s relatively affordable market. For example, the price of a single-detached house in Montreal is lower than the price of a condo in both Vancouver and Toronto. However, the test will affect a larger percentage of the population in Montreal and throughout Quebec compared to the rest of the country, as the Quebec housing market is more dependent on first-time buyers (39% of Quebecers rent, as compared to approximately 30% in Ontario and British Columbia). Ultimately, this new requirement will not have a significant effect. The housing market in Montreal, already on solid ground, should remain balanced: moderate job creation, less speculative activity and fewer high-risk first-time buyers should minimize the impact of the new federal measures. Ideally, a slowdown in new construction should continue to help absorb the number of new, unsold condos, which is slightly above historical norms.
Finally, in Alberta, the slightly more challenging access to home ownership caused by the latest tightening in mortgage rules will delay the rebound in housing market activity, which remains relatively slow. Stabilization in employment since last summer is a sign that the worst is behind us. The significant downturn in construction by developers is also helping to stabilize housing prices and preventing the market to fall into an oversupply situation. The situation, however, remains far from perfect. Albertans continue to leave the province in search of work, which may result in fewer potential buyers and less demand for mortgages for some time.
Author: Sébastien Lavoie | Chief Economist Laurentian Bank
People refinance their mortgages for a number of different reasons, and it can be a great way to help with your financial goals. Whether it is to consolidate debt, get a better interest rate, or take out equity from your home, knowing when to refinance is an important step in the process.
Good timing for refinancing:
When Interest Rates Are Low
In today’s low rate environment, refinancing when rates are low simply makes good sense. Breaking your current mortgage to take advantage of a lower rate can potentially help you save thousands of dollars.
When Your Home Has Increased In Value
Although the Canadian housing market has been estimated to cool in 2017, most home owners have seen the value of their homes increase every year for the last decade or so. By refinancing, you can access up to 80% of the value of your home, minus any current mortgages. If your home has increased in value and you have been paying down an existing mortgage, you likely have equity available to refinance.
When Your Break Penalty Is Low Enough
By breaking your existing mortgage early, your bank will charge you a break penalty. The amount of your break penalty will vary depending on your rate, mortgage amount, and the terms of your contract. Typically break penalties are the IRD (interest rate differential) or three month’s interest. A mortgage broker should be able to help you calculate your break penalty, and find out if breaking the mortgage makes good financial sense.
Knowing When To Refinance Also Depends On Knowing What To Do With The Money
Good reasons to refinance include: paying for renovations, buying investment properties, other investment opportunities, consolidating existing debt, or to help pay for children’s education. If you are carrying debt that is at a higher interest rate than your mortgage such as car loans, credit cards or lines of credit, refinancing would likely make sense.
Thanks to Pino Decina at HomeTrust for his post on Self-Employed Mortgage Applicants. See the original post here.
The Canadian workforce is expected to undergo a revolution in the coming years and it is anticipated this will result in more workers being categorized as “self-employed”. Whether operating a small business or working on a contract or consulting basis, the expectation is that in the not-so-distant future, fewer individuals will be considered fulltime, salaried employees.
This eventuality has significant implications for the housing industry. Currently, about 16% of the workforce is considered to be self-employed and as the ranks of the self-employed grow, so too will the frustration this group already feels with the way they have been traditionally served by the country’s big banks. As many self-employed workers know only too well, the major banks don’t exactly roll out the welcome mat when applying for a personal loan or a mortgage.
Home Trust has a different view and believes that being in business for yourself doesn’t automatically make you less worthy of a mortgage. This is evidenced by Home Trust’s long history of providing mortgage loans to self-employed individuals and an application review process designed specifically to service self-employed – or “business for self” – clients. We’ll discuss this process in greater detail later in this Home Trust Mortgages Blog entry.
But before we move on, something to think about; if you are self-employed and intend to apply for a mortgage, do yourself a favour and speak with a qualified mortgage broker. An experienced mortgage broker can take much of the stress out of the application process and help you understand what you need to provide for supporting materials. Your broker works directly with lenders like Home Trust and can present your application to multiple lenders to obtain the mortgage that best matches your needs.
The Major Banks and Self-Employed Mortgage Applicants
Despite the significant number of Canadians who are self-employed, the big banks continue to treat business for self clients as a greater credit risk. Much of this stems from the fact that self-employed workers do not have the same documents to verify their employment and income as someone working for a large, established corporation. There is also the additional risk that the self-employed mortgage applicant’s small business could fail.
To determine the degree of risk this represents, an assessment of the business must be part of the loan review process. Such basic things as an examination of the business’ financial records as well as the business plan are necessary to gauge the viability of the business and this does take more effort than a traditional full-time employment scenario. It also requires employees with the appropriate skills to evaluate the supporting documents. So unless it is a large deal, often times the banks will simply refuse to even consider the application.
Establishing Ownership of the Business
Because business-for-self clients are largely small business owners, it is necessary to provide evidence of not only the business’ existence, but also your relationship to that business. Generally, small businesses fall into one of three categories – sole proprietorship, partnership, or corporation. With each of these types, there are specific documents that you can provide to help Home Trust assess the business – for example:
Master Business License
Business Name Registration
GST / HST Registration
Articles of Incorporation
Corporate Profile Report
*Partnership supporting materials must clearly denote the percentage of the partnership owned by the applicant
Note that in order to qualify for the best rate, you need to not only have a down payment equal to 20% or more of the purchase price, but must also provide documentation to support the business’s existence.
In addition to these mandatory documents, you may also be required to provide one or more of the supplemental documents listed here:
Additional Supporting Documents
Business bank account reference letter
Notice of Assessment
Current health or safety certificate
Current business license or vendor’s permit
Business bank account reference letter
Business credit report
Liability insurance certificate
Certificate of Existence
Letters of Patent
Verifying Income from Business for Self Enterprise
You must also demonstrate that the business is capable of generating the personal income you’ve stated on your mortgage application. The following documents are required to support your stated income:
Business bank account statements for the previous six months
Independently-prepared financial statements
Borrower’s most recent Notice of Assessment
Additional documents may also be required to further establish the reasonableness of the income stated and could include:
Company-prepared financial statements
Recent contracts (to show company revenue)
Invoices (to show company expenses)
Depending on the nature of the business, other specialized documents may also be required such as Commissions Statements for commissioned sales persons. If you have any questions about these documents, or are unsure as to what you need to provide, your mortgage broker can explain what you need to make available to support your application and make sure your file is complete before sending to a lender for review.