Big Changes to Mortgage Requirements: How They Will Affect You

The Biggest Change: First Time Home-Buyers will Qualify for Less

Buyers with less than 20% down payment will qualify for 20% less financing.  Previously a client could be qualified on the actual fixed mortgage rate they chose as long as that term was for 5 years or more.  If the term was less than 5 years or a variable rate, the client would need to demonstrate they could service the mortgage at the Bank of Canada Qualifying Rate. That rate is currently 4.64%.  With 5-year mortgage rates at the 2.40% level, if a client needed to qualify for a higher mortgage they would take a 5-year fixed rate in lieu of a variable rate or shorter term.

Effective October 17th, regardless of the term, anyone with less than 20% down payment will have their mortgage application approved based on the 4.64% rate. With house prices out of reach for many first time home-buyers, this change will make it more difficult for those with less than 20% down to qualify for a home unless there is a corresponding drop in real estate values.

The Cost Of Mortgages is Going Up – And Soon

The Bank of Canada would normally increase interest rates as a mechanism to cool the housing market.  Given the relatively fragile state of our economy they cannot do this without affecting the other parts of the economy.  Canada is technically in a recession: June was the worst month for the economy since the recession of 2009.

Instead, other policies such as shifting the cost of mortgage insurance to lenders will result in either higher mortgage rates or fees associated with obtaining a mortgage. This will likely lead to a less competitive mortgage environment as smaller lenders may be forced out of the market.  The impact of this remains to be seen. Details can be found here.

mortgage-changesForeign Buyers May Stay Foreign

All levels of government have been seeking ways to limit the participation of foreign buyers in the housing market. The federal government joined the regulatory foray and will eliminate the capital gains exemption previously available to foreigners who were able to claim a primary residence exemption.  This announcement, in addition to the recent BC government property transfer tax rules will no doubt have foreigners looking to other jurisdictions or avenues (pun intended) for their capital investment.

Some lenders, in a move that is long overdue are vastly increasing the amount of due diligence on mortgage applications for many non-residents which adds another barrier to investing in Canada.  Details can be found here and here.

How Can We Help?

Lenders will be quick to adapt to these new rules and there will certainly be clarification and amendments forthcoming.  Partnering with industry experts who can help you and your clients navigate through these changes is now more important than ever.  Educating buyers on ways to increase their down payment though a disciplined savings plan or leveraging existing real estate holdings and investments is something that we do on a daily basis.  Independent Mortgage Consultants offer choices. With access to over 60 different banks, credit unions and mortgage lenders we have the means to assist almost every client in finding a mortgage solution tailored to them.

The next few months, and specifically Spring 2017, will be a test of the new Canadian mortgage lending environment. The silver-lining here is that these changes are bound to create incentives for lenders, home builders, and governments to find a realistic solution to help average Canadians afford a home (not an investment).

Changes need to be tested and this shot-gun, knee-jerk approach will inevitably result in a middle of the road solution to solve the Great Canadian Housing Crisis once and for all. The pendulum does swing both ways. Then, we can all focus on hockey.

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Cooling the Market: Thoughts From the 4Front Team

Recently we have seen talk from all levels of government about the housing market. There is a consensus that the market may be a looming liability for the Canadian economy, and without a doubt it is a topic of conversation and concern for the average person. There is recent talk of increasing regulations and other measures to help bring the market back to equilibrium, however this is often motivated by other factors than simply controlling prices.

Certainly, there are arguments that support the case for some government regulations in certain sectors of the housing market. Rules designed to ‘slow’ the pace of growth have not thus far been successful mainly as they have targeted the wrong segments of the market. Property speculators and offshore buyers simply looking to ‘park’ money in real estate, for example, are relatively immune to small taxation or down payment regulations. The most recent efforts to ‘control’ the housing market via a rule mandating a small increase in down payments on property over $500,000 on insured mortgages has had little, if any impact on clients we see.

From our antidotal experience, we find that a vast majority of our clients are still purchasing well within their financial means. What is often left out of the news is that the average down payment has increased substantially. Clients who purchased their first condominium last decade have been cashing out and moving up the property ladder with down payments in the mid six figure range. Large tax-free capital gains, a dual income household and a partner who has also owned/owns property are a typical of the ’30 Something’ buyers that represent a majority of our clients.

cooling-the-marketMost homeowners are not speculators or investors. They are purchasing property for the same reason they did a decade ago; to have a home in which to live and raise a family and increase their household net worth by paying down low-cost mortgage debt. Price fluctuations in the short-medium term are irrelevant unless they need to sell. With vacancy rates near 0% there is always the option to hold property as a rental in a scenario where prices come down to the point where there is minimal equity in the property. Rates may rise, however we have been waiting for a decade for this to happen, and during this waiting period they continue to come down to record lows. Variable rate mortgages can be locked in to a fixed term to help protect clients if and when rates do go up. A 5 year fixed mortgage is now offered at 2.39% with many mainstream lenders.

The notion that the ‘free market’ will determine prices is a cornerstone of our economy. In respect to housing, a well-balanced and fair real estate market is beneficial for developers, tradespeople, unions, municipalities and other levels of government that rely on the housing market for jobs and revenue. The service and retail industries, among others also benefit from spill-over effects from this. It will be interesting to see what proposed regulations are brought forward and even more interesting to see if they have any impact on the small sectors that seem to unduly influence the market and headlines. Unfortunately, governments have generally proven incapable of introducing any meaningful legislation until after the market has self-corrected.

The Mortgage Process: What Happens after the Approval?

You’re approved! Congratulations, you are on your way to owning a new home, or perhaps refinancing your current home. While for some people getting approved for a mortgage is the hardest part of
purchasing a new home, for others the hardest part is actually once the approval is obtained. There are steps after the approval that can be confusing and pose more challenges if you have never gone through the mortgage process before.

Here are a few things to expect during the completion phase, after you have been approved.

1. Approval & Compliance Conditions
After your application is approved, the lender will require additional documentation from you. It could be in regards to your income, the property itself, or your debts and/or assets. The documents that the lender requests are either for the lender’s internal requirements or are for governmental regulatory compliance. Most often they will ask for 30, 60 or 90 day itemized history of funds for your down payment, an up-to-date statement on your property or income taxes paid, or other documents that they may require.

Regardless, the compliance conditions that accompany an approval are just as an important part of the mortgage process as the approval itself as the lender will not fund the mortgage without them being satisfied.

2. Instructions
After all of your approval conditions have been satisfied by the lender, your mortgage will move to the instruction phase. What this means is that the lender will instruct the lawyer or notary (conveyancer) that they are ready to prepare and register the mortgage and disburse the funds. Before you engage a lawyer or notary to act on your behalf always check with your Mortgage Consultant as some lenders have approved solicitor/notary lists which your conveyancer may not be on. Note that the conveyancer that represents you also represents the lender so they are responsible to keep both your and the lender interests in mind.

3. Disbursement of Fundsapproved-29149_960_720
The next step of the mortgage process is called disbursement. The lender provides the mortgage money (proceeds) to your lawyer in trust for future disbursement to the vendor’s lawyer. Money must not be disbursed unless the lawyer confirms, preferably in writing, that they are in a position to disburse the loan. How the mortgage funds are distributed will vary depending on your reason for
taking out the mortgage loan. For example, if you wanted a loan in order to consolidate an existing first and second mortgage, the lawyer will issue funds to the existing first and second mortgage lenders for amounts sufficient to obtain a discharge of both loans.

4. After Closing
After the funds have been disbursed, your mortgage file is taken over by the lender’s servicing department. That means that if you want to change your payment frequency or date, or change which account the payments come from, you should contact the lender directly. Near the end of your term, your mortgage broker will reach out to you to see if your financing needs have changed and explore how best to renew or refinance your mortgage.

Residential Mortgage Quarterly Review

Thanks to our friends at First National for their quarterly review, intended to provide an overview of the Canadian housing market.

With the first quarter of 2016 finished two key monitors of real estate and housing in Canada are updating their projections for Q2 and beyond.

The Canadian Real Estate Association had forecast some rebalancing, expecting slower national price growth due to slowdowns in British Columbia and Ontario during 2016. However, continued low interest rates – and the expectation that they will stay low longer – have CREA now predicting 2016 will look very much like 2015.

At the extremes the Association is calling for a 12% increase in MLS sales activity in B.C. (concentrated in the Lower Mainland) while Alberta is projected to show a 19% decline. Ontario is expected to be held in check with a 0.3% gain, due to a lack of affordable, low-rise housing. Elsewhere CREA sees economic improvements providing modest gains in Manitoba, Quebec and the Maritimes with resale increases ranging from 1.0% to 3.4%. The forecast for the national average price of a home has been increased to $478,100 – up 8.0% from 2015.

Looking to 2017 CREA expects an overall slowdown, largely due to reduced affordability in B.C. and Ontario. It is actually predicting a sales decline in British Columbia. Nationally resales are forecast to rise just 0.4% with the average price increasing by a modest 1.1% to $482,500.

Canada Mortgage and Housing Corporation data delivered in the quarterly Housing Market Assessment tends to support CREA’s forecasts. The HMA examines 15 major markets across the country and the Q2 report highlights on-going overvaluation and overbuilding in several of them.

Calgary, in particular, is noted for its overvaluations relative to the city’s overall economy, while Greater Toronto and Greater Vancouver are noted for their rapid price-acceleration. Vancouver’s overvaluation rating has been raised to ‘moderate’, from ‘weak’, in the Q2 report.

Montreal is also deemed to have ‘moderate’ overvaluation, based on the strength of its broader economy. The city’s condo market is seen as somewhat overbuilt. And Hamilton, Ontario is also showing signs of overvaluation. This is, no doubt, due to price increases triggered by an influx by buyers trying to escape the expensive Toronto market.

quarterly-review-residential-real-estate

Making Subject Free Offers Stress Free

Subject free offers are increasingly needed to ensure you are the successful bidder in today’s red hot Real Estate market.  For many clients, this adds another level of stress and uncertainty in what can be an already stressful set of circumstances. While never an ideal situation, there are ways to mitigate the inherent risk of writing subject free offers.

Here are a few tips that will help ensure a smooth transaction:

Get Your Financial Documents In Order

Ensure you have provided your mortgage broker with your financial documents. These should include income verification such as tax returns, T4’s, and a letter of employment. This is particularly critical for self-employed or commission based clients as some clients have write-offs or deductions that reduce the total amount of income that lenders will accept.

Strata Property Information

If you are purchasing in a strata property, a mortgage broker can find out if the building has been red-flagged for any building envelope or financial issues by mortgage insurers. This gives you comfort that the lender will not run into challenges with obtaining mortgage insurance, which is needed when the down-payment is generally less than 20%. Even when the down-payment exceeds 20%, lenders can access the mortgage insurer’s database to obtain strata information. Some lenders will require a Form B and Depreciation Report.  Having these reviewed by your mortgage broker in advance can ensure there are no challenges with your application process.

Funds for the Deposit

Time and time again we see clients with great income and equity in their home but limited free cash to use for the deposit on a new purchase. With deposits easily getting into the six figure range on detached homes, obtaining a line of credit or loan for such amounts can take time. Mortgage brokers can help by providing short-term bridge loans or lines of credits to be used in these situations.

Appraisals and Maximum Value

With multiple offer situations there is always a ceiling at which the purchase price can be justified via an appraisal. Appraisals are needed in most circumstances and are usually ordered after the purchase agreement has been completed. A mortgage broker can leverage their many appraiser contacts prior to an offer, for an opinion from the appraiser as to potential maximum value based on the MLS information. Appraisals can also be ordered in advance of the offer being made if the situation warrants it.

With some advance planning and preparation making a subject free offer doesn’t have to be stressful. A good mortgage broker can ensure that you have all your documentation needed to complete a successful offer.

10 Things to Know About B.C.’s New Budget Including Property Transfer Tax

In a bid to make home ownership within reach of more British Columbians, the B.C. government is giving a tax break to buyers of new homes worth up to $750,000. Here are 10 things you should know about yesterday’s announcement.

1.  Buyers of newly-built homes, condos and townhouses worth up to $750,000 will be exempt from the property transfer tax, saving up to $13,000. This is effective Feb 17, 2016 and is ONLY for Canadian citizens or permanent residents. There is a partial exemption for homes between $750,000.00 and $800,000.00. Please refer to the BC Government PTT website for more information.

2.  The Newly Built Home Exemption will only apply to people who actually occupy the home as their principal residence for a year after the purchase (relatives do not qualify) and B.C. will share information with Revenue Canada to double-check whether the rules are being followed. The occupancy criteria is (refer to the above link for more details):

  • You must move into your home within 92 days of the date the property was registered at the land title office and,
  • Continue to occupy the property as your principal residence for the remainder of the first year.

3.  All residential properties (both new and used) sold for more than $2 million will now pay a 3% increased property transfer tax on the portion of the sale value over $2,000,000. This is up from the current 2 per cent. (For example a $4,000,000 sale would be: 1% first $200,000, 2% next $1.8M, and 3% on the $2M over $2M, therefore PTT is $98,000. Under the old rules, that number would have been $78,000, a $20,000 increase.)

4.  The existing first-time home-buyers program for re-sale homes remains unchanged; the threshold remains at $475,000 (with a partial exemption for homes between $475,000.00 and $500,000.00).

5.  Property buyers will need to disclose their citizenship for government tracking.

Other Things to Note about B.C.’s Budget Announcement:
6.  MSP premium rates will rise $3 per month for an adult to $78, starting in 2017, children are now exempt from paying MSP premiums.

7.  The special discounted MSP rate for couples is eliminated, adding $14 a month to a family with two adults.

8. Taxpayer-supported debt is budgeted to rise to $43.2 billion, which means 3.7 cents of every dollar government earns is paid toward debt servicing.

9.  The $47.5 billion budget next year will have an estimated surplus of $264 million. The economy is expected to grow 2.4 per cent.

10.  Income assistance for those on disability will rise $77 a month, except for those who already receive a bus pass or transit assistance. It’s the first increase in the rate in nine years. The overall welfare rate remains unchanged.

A link to all the BC Government Property Transfer Tax exemptions is available here.

bcs-new-budget-property-transfer-tax

Monoline Lenders: The Un-Banks

As mortgage brokers, we work with a variety of lenders to find a fit for our clients financial needs. What many people don’t know is that the big banks only provide about 50% of all mortgages in Canada. Naturally you may wonder who makes up the other half, and the answer is monoline lenders.

A monoline lender is a company that focuses on solely mortgages.  They do not offer other products such as bank accounts, or RRSP’s, nor do they have expensive branch networks to maintain and staff. They are large companies that are regulated and governed in the exact same manner as all Canadian banks. First National, Home Trust, Street Capital and MCAP, are just a few examples of the billion dollar companies that provide just as many mortgages as most of the big banks.

Advantages of a Monoline Lendermonoline-lenders

The advantage of dealing with monoline lenders are that their rates are usually very competitive. In addition to ‘standard’ mortgages, some offer mortgages that specialize in different areas such a self-employed clients, new immigrants, or lower than average credit scores. They offer online access to your mortgage, great customer service with knowledgeable staff, and generous prepayment options. You can have them take your mortgage payment from your regular bank account for free as well. Being the best at what they do is how they compete with the big banks.

One of the other most important advantages of a monoline is they tend to have a lower penalties. This can be important if you need to get out of your mortgage before the end of your term. In a recent example, a client was charged $15,500 to break his 5 year mortgage after 3 1/2 years with his bank. If that mortgage was with a monoline the penalty would have been closer to $2,500.

Advantages of a Big Bank Mortgage

We also offer mortgages with several of the big banks and credit unions. Some customers feel comfortable knowing they can go into a branch if they ever need to make changes to their mortgage. Or, they may need other services such as a safe deposit box or a RRSP. A mortgage broker can usually negotiate a lower rate with the bank on your behalf.

Benefits of Consolidating Your Loans, Using the Equity in Your Home

According to CIBC, for the sixth straight year, 26% of Canadians consider paying down debt and keeping up with their bills to be their top financial priority in 2016.

With debt continuing to be a concern for many Canadians, it can be difficult to pay down multiple credit cards and loans. Instead of multiple payments, consider consolidating loans into one payment. Here are a few benefits:

  • You can secure a lower interest rate, potentially saving thousands on interest payments in the long term.
  • It can help you maintain good credit. Consolidating your credit can encourage you to make your monthly payments faster, ensuring that your credit score will not be damaged.
  • You will become debt free faster. Savings on interest and payments will allow you to save more money and pay more towards your debt.
  • Consolidated credit is easier to manage and is more convenient.

4FrontMortgages.com has access to multiple lenders that can help you consolidate your loans. Speak to one of our Mortgage Consultants today to find out about programs that are right for you.