Strength in Turbulent Time – Impacts of Canada’s New Mortgage Rules

Mortgage brokers have become an integral part of Canada’s financial landscape. Rather than deal directly with banks, about 30 per cent of Canadians turn to independent brokers to help them secure the best terms for their loan.

But as residential real estate markets continue to power ahead at a time of economic uncertainty, government regulators have started to tap the brakes. And it’s understandable that many mortgage brokers are getting edgy about what lies ahead.

Consider.
Lending rules for homes worth more than $500,000 have been toughened, lowering the amortization period to 25 years for high-ratio insured mortgages and tightening processes for mortgage approvals based on income.
New mortgage “stress tests” from the Office of the Superintendent of Financial Institutions (OSFI) take effect on January 1. They’re designed to ensure that if interest rates begin to rise from historically low levels, Canadian homeowners will be able to withstand the resulting pressure. It’s not an altogether unreasonable move given the context: Canada has the highest level of private debt of all G-7 countries.

It’s all the more relevant because the Bank of Canada has raised its key interest rate target by a quarter of a percentage point twice this year. In turn, those increases have pushed up the big bank prime lending rates which are used to determine rates for variable-rate mortgages and lines of credit.

The new rules are expected to reduce the number of first-time homebuyers entering the market. Now, even with a top-up from the Bank of Mum and Dad that bumps them over the 20 per cent insurance threshold, borrowers still have to pass that stress test for higher rates.

Many mortgage brokers are rightly concerned about an immediate hit to the overall volume of their business.

After all, many Canadians will now need more income for the same amount of mortgage. Early estimates suggest that a potential buyer of a $1-million home putting down 20 per cent, would see about a 15 per cent reduction in purchasing power.

There’s another downside to the coming change as well: The rules will not apply to mortgage renewals with an existing lender which has the effect of entrenching existing relationships and reducing the incentive to shop around for a better deal – and new lender.

For the overwhelming majority of brokers, however, any short-term impact is offset by the promise of a more sustainably healthy residential real estate market.

Mortgage brokers with high standards, who have a practice rooted in robust verification, due diligence and KYC rules, will be nominally affected. That’s also true for those who already adhere to the industry “best practice” of thoroughly reviewing the sources of a down payment.

As it is in any sector, disruption of the status quo causes anxiety. But in the case of mortgage brokers, the changes that lie ahead will lead to a stronger business in turbulent times.

– by Steve Ranson

The easy option isn’t always the best

For those of us looking for mortgage financing options for our first or next home, the prevailing attitude is, ‘easiest is best’.

For most of us, myself included, applying for any type of financing is a stressful event; its always easier to, when you’re in your local branch, to strike up a conversation with an account manager and when they say, “Sure, I can help you with that”, to just treat that help as your only option.

On the outside, most mortgages are pretty much the same ( they’re not, but that deserves a separate discussion ), right? Anyway, if you can just walk in and walk out with a pre-approval, why not just do that?

Well, lets look at what you really want to get out the financing;

Let’s say you’re self employed ( not a stretch, really) and have, a couple of years ago started your own small business. Your spouse is also self employed, but works as an independent contractor, in IT, for example.

Initially qualifying for financing might be a bit of a struggle, but you rely on your banks’ mortgage specialist to get you the financing option you need. Of course, they come through in the end and a few months later, you’re happy in your new home and you’re happy you’ve started a relationship with someone who can help.

On the business front, its good news as well. Your small business grows and grows and in about three years down the road, you’ve got a new contract that you won’t be able to fulfill without some financial help.

When you approach the bank, you’re told time and again that, in spite of your great ‘relationship’, what you need doesn’t meet their lending guidelines and they can’t or won’t help you grow your business.

You leave the financial institution thinking, “I deserve better than this” and you’re right, you absolutely do.

Part of my role as a Mortgage Professional is to not only find the right mortgage but also try and anticipate what you might need in the future. I always recommend a lender that you can have a meaningful relationship with, if that’s what is needed.

A Dominion Lending Centres mortgage specialist will give you options and recommendations, as well as a clear explanation of why they’re recommending one over another. That’s a promise.

– by Jonathan Barlow

OSFI mortgage changes are coming

As many of you may remember, this past October the Office of the Superintendent of Financial Institutions (OSFI) issued a revision to Guideline B-20 . The changes will go into effect on January 1, 2018 but lenders are expecting to roll this rules out to their consumers between December 7^th – 15^th, and will require conventional mortgage applicants to qualify at the Bank of Canada’s five-year benchmark rate or the customer’s mortgage interest rate +2%, whichever is greater.

OSFI is implementing these changes for all federally regulated financial institutions. What this means is that certain clients looking to purchase a home or refinance their current mortgage could have their borrowing power reduced.

 What to expect

It is expected that the average Canadian’s home purchasing power for any given income bracket will see their borrowing power and/or buying power reduced 15-25%. Here is an example of the impact the new rules will have on buying a home and refinancing a home.

 Purchasing a new home

When purchasing a new home with these new guidelines, borrowing power is also restricted. Using the scenario of a dual income family making a combined annual income of $85,000 the borrowing amount would be:

Refinancing a mortgage

A dual-income family with a combined annual income of $85,000.00. The current value of their home is $700,000. They have a remaining mortgage balance of $415,000 and lenders will refinance to a maximum of 80% LTV. The maximum amount available is: $560,000 minus the existing mortgage gives you $145,000 available in the equity of the home, provided you qualify to borrow it.

In transit purchase/refinance

If you have a current purchase or refinance in motion with a federally regulated institution you can expect something similar to the below. A note, these new guidelines are not being recognized by provincially regulated lenders (i.e credit unions) but are expected to follow these new guidelines in due time.

Source (TD Canada Trust)

These changes are significant and they will have different implications for different people. Whether you are refinancing or purchasing, these changes could potentially impact you. We advise that if you do have any questions, concerns or want to know more that you contact your Dominion Lending Centres mortgage specialist. They can advise on the best course of action for your unique situation and can help guide you through this next round of mortgage changes.

– by Geoff Lee