Morneau Ordered to “Review” Stress Test. What Can We Expect?

The directive from Prime Minister Justin Trudeau to Finance Minister Bill Morneau on Friday was short and sweet: “Review and consider recommendations from financial agencies related to making the borrower stress test more dynamic.”

What will actually come from this review and the resulting tweaks (if any) to the mortgage stress test is unclear.

BACKGROUNDER: There are two mortgage stress tests, one on insured mortgages (less than 20% down payment) and another on uninsured mortgages. The latter, implemented on January 1, 2018, and overseen by the banking regulator OSFI—and arguably the more contentious of the two tests—requires buyers to be qualified at the greater of their contract rate plus 200 bps or the Bank of Canada’s benchmark rate, which is currently 5.19%. In an interview with BNN Bloomberg, Morneau noted that his mandate includes the insured part of the market, so it’s likely any changes that come from this review would focus on the insured mortgage stress test. However, the Office of the Superintendent of Financial Institutions (OSFI) could always follow the government’s lead and adopt its own changes for the uninsured stress test.

Up until now, the Liberal government and the head of the Canada Mortgage and Housing Corporation (CMHC)—responsible for implementing the stress tests—have been opposed to any tweaks.

“Given the context of a minority government, we should not be shocked [the Liberals] are giving it some consideration,” Robert Hogue, senior economist at Royal Bank of Canada, wrote in a research note.

And given its minority government situation, any tweaks will require the support of other parties in Parliament. During the election, the Conservatives had promised to “fix” the stress test to help first-time buyers, so it’s plausible any tweaks proposed by the Liberals will be palatable to the Conservatives.

Mortgage Industry Reacts Favourably

Friday’s announcement elicited positive responses from mortgage brokers on social media, hopeful the review will result in changes that will lessen the burden faced by first-time homebuyers unable to pass the current stress test.

Canada’s national mortgage association, Mortgage Professionals Canada (MPC), also welcomed the news, noting this marks the first time the Trudeau government has pledged to review the stress test, which was introduced under its watch.

“This news stands out for our mortgage brokering community because MPC has strongly advocated for a review and adjustments to the mechanism since their initial introduction, which occurred without consultation,” J.P. Boutros, Director of Government Relations for the association, told CMT. “MPC is not against stress testing, but feels it needs re-calibration. We also know that stress tests on mortgage switches and renewals especially bothered voters of all political stripes as being anti-consumer and anti-competitive.”

Boutros added he’s encouraged by the news, since mandate letters from the Prime Minster are traditionally deemed a priority for the government. “We appreciate the government’s perspective that stress tests have done what they were intended to do, and that there is now an appreciation that a review is needed.”

Potential Stress Test Tweaks

So, what could changes to the stress test look like? There are two key aspects of the stress test that are ripe for tweaking, according to industry observers.

One would be a change in how the minimum qualifying rate is calculated.

“The biggest problem with the stress test is that it relies on a number that can be manipulated, the benchmark 5-year posted rate,” wrote mortgage columnist Rob McLister in a story on Friday.

Since the rate is based on a mode of the Big Six banks’ posted 5-year fixed rates, he argues bureaucrats “can manipulate it by persuading banks (behind the scenes or with public moral suasion) to keep their rates propped up.”

Instead, McLister argues the rate should be based on a rate that adjusts to market conditions.

“One way the government could do that is by basing the MQR (mortgage qualifying rate) on an objective number, like Canada’s 5-year bond yield plus 300 bps, for example. Were that the case this past summer, the MQR would have been in the 4.30% range instead of over 5%, where it’s been stuck for almost two years.”

A second component that has been criticized is the application of the stress test on mortgage switches. That is, borrowers who want to switch to a different lender at renewal time, typically in pursuit of a more competitive rate compared to their existing lender.

The current rules allow borrowers who renew with their current lender to bypass the stress test, which has resulted in higher numbers of borrowers unable to change lenders.

“This policy traps a subset of renewing borrowers into staying with their current lender…” wrote Dave Larock of Integrated Mortgage Planners. “It is disappointing that this regressive policy has not already been rectified because its intrinsic unfairness was highlighted when the stress test was first introduced.”

Government Likely to “Tread Carefully”

Any change to the stress test is sure to be measured and cautious, so as not to further fan the flames of rising home prices.

Which is why observers say increasing available housing inventory needs to be part and parcel of any solution to addressing affordability.

“On the surface, ideas like relaxing the mortgage stress test, extending the maximum amortization period for insured mortgages, or increasing the amount of RRSP take-out for a first home down payment might bring short-term relief to buyers,” Hogue wrote in his research note. “What millennials in Vancouver and Toronto really need is more inventory of homes they can afford, and a better mix of housing options – be it to own or rent.”

He added, “A more nimble and responsive supply side of the market would go a long way to address the needs of buyers on a more permanent basis,” and that addressing the supply issue will require cooperation from all levels of government.

In addition to his directive to review the mortgage stress test, Minister Morneau has been tasked with limiting housing speculation by “developing a framework and introducing a 1% annual vacancy and speculation tax on applicable residential properties owned by non-resident non-Canadians,” according to his mandate letter. “This would involve working with provinces, territories, municipalities and law enforcement to track housing ownership and speculation,” it added.

–Steve Huebl

Housing Inventory at Lowest Level in Over 10 Years

Canada’s national housing supply is at the lowest levels seen in 12 years, according to the Canadian Real Estate Association (CREA).

There were just 4.2 months of inventory left across the country at the end of November 2019—the lowest level recorded since the summer of 2007 and far below the long-term average of 5.3 months. This means if sales continue at their current pace, all housing stock will be liquidated in just over 4 months.

“Home prices look set to continue rising in housing markets where sales are recovering amid an ongoing shortage of supply,” said Gregory Klump, CREA’s chief economist. “By the same token, home prices will likely continue trending lower in places where there’s a significant overhang of supply, perpetuated in part by the B-20 mortgage stress test that continues to sideline homebuyers there.”

Sales are going strong with transactions up 11.3% year-over-year. Most Canadian major urban centres in Ontario, British Columbia and the Maritime provinces posted an increase. The Prairies are the only markets suffering from an oversupply of homes, built during oil boom times.

It’s a basic case of supply and demand: if prospective buyers maintain or increase their demand for property and if prospective sellers continue to shrink or sit on their listings, then housing prices will rise.

Already we can see that housing prices edged higher this November compared to a year earlier. Benchmark prices in the 19 markets CREA tracks rose 2.6% year-over-year to an aggregate of $638,300. The average price, while a less accurate reflection of the “typical” home, showed a much greater jump, up 8.4% year-over-year to $529,000. Excluding the hyper-priced markets of Toronto and Vancouver cuts almost $125,000 from the national average price to $404,000 and shrinking the year-over-year gain to 6.9%.

Ontario cities are leading the way in price gains, with Ottawa benchmark prices soaring 11.45% to $443,500, the Niagara region up 7.99% to $431,200 and Greater Toronto up 6.52% to $823,700.

Smaller urban centres around the country with less expensive housing are also doing well, with Montreal properties rising 8.72% to $380,000 and Moncton up 4.88% to $190,300. British Columbia is still experiencing a short-term drop in prices from their peak in 2016 and 2017, possibly due to the stress test and vacancy tax, with prices down 4.59% to $1,002,700—the second most expensive area in the country next to Oakville, Ontario, a tony suburb of Toronto. All Prairie cities have declined over the long term, with Regina down 5.52% to $260,600 and Calgary down 2.43% to $414,200.

For more price information on Canada’s housing market this month, check out the infographic below:

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NOVEMBER DATA CONFIRM CANADIAN HOUSING REBOUND

Statistics released today by the Canadian Real Estate Association (CREA) show that national home sales rose for the ninth consecutive month and now stands a full 20% above the six-year low reached in February 2019. While the chart below shows that monthly home sales are now well above their 10-year average, they remain 6%-to7% below the record pace posted in 2016 and 2017.
There was an almost even split between the number of local markets where activity rose and those where it declined. Higher sales across much of British Columbia and in the Greater Toronto Area (GTA) offset a decline in activity in Calgary.
Actual (not seasonally adjusted) activity was up 11.3% year-over-year in November. Transactions surpassed year-ago levels in almost all of Canada’s largest urban markets.

“Sales continue to improve in some regions and not so much in others,” said Jason Stephen, president of CREA. “The mortgage stress-test doesn’t help relieve the ongoing shortage of housing in markets where sales have improved, and it continues to hammer housing demand in markets with ample supply.”

According to Gregory Klump, CREA’s Chief Economist, “Home prices look set to continue rising in housing markets where sales are recovering amid an ongoing shortage of supply. By the same token, home prices will likely continue trending lower in places where there’s a significant overhang of supply, perpetuated in part by the B-20 mortgage stress-test that continues to sideline homebuyers there.” Weakness continues to be most evident in Alberta and Saskatchewan where the economy has been hard hit by lower commodity prices and delinquency rates have edged upward.

New Listings
The number of newly listed homes slid a further 2.7%, putting them among the lowest levels posted in the past decade. November’s decline was driven primarily by fewer new listings in the GTA.
Slightly higher sales and a drop in new listings further tightened the national sales-to-new listings ratio to 66.3%, which is well above the long-term average of 53.7%. If current trends continue, the balance between supply and demand makes further home price gains likely.

Market balance measures that are within one standard deviation of their long-term average are generally consistent with balanced market conditions. Based on a comparison of the sales-to-new listings ratio with the long-term average, just over half of all local markets were in balanced market territory in November. That list includes the GTA and Lower Mainland of British Columbia, but market balance there is tightening. By contrast, an oversupply of homes relative to demand across much of Alberta and Saskatchewan means sales negotiations remain tilted in favour of buyers.

Meanwhile, an ongoing shortage of supply of homes available for purchase across most of Ontario, Quebec and the Maritime provinces means sellers there hold the upper hand in sales negotiations. There were just 4.2 months of inventory on a national basis at the end of November 2019 – the lowest level recorded since the summer of 2007. This measure of market balance has been retreating further below its long-term average of 5.3 months. While still just within balanced market territory, its current reading suggests that sales negotiations are becoming increasingly tilted in favour of sellers.

National measures of market balance continue to mask significant and increasing regional variations. The number of months of inventory has swollen far beyond long-term averages in Prairie provinces and Newfoundland & Labrador, giving homebuyers ample choice in these regions. By contrast, the measure is running well below long-term averages in Ontario, Quebec and Maritime provinces, resulting in increased competition among buyers for listings and providing fertile ground for price gains. The measure is still within balanced market territory in the Lower Mainland of British Columbia but is becoming increasingly tilted in favour of sellers.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.8%. Marking its sixth consecutive monthly gain, it now stands almost 4% above its low point reached last May. The MLS® HPI in November was up from the previous month in 14 of the 18 markets tracked by the index. (Table 1)
Home price trends have generally been stabilizing in the Prairies in recent months. While that remains the case in Calgary, Edmonton and Saskatoon, prices in Regina have again moved lower. By contrast, home price trends have clearly started to recover in the Lower Mainland of British Columbia. Meanwhile, prices continue to rebound in the Greater Golden Horseshoe (GGH) region while continuing to trend higher in housing markets to the east of it.
Comparing home prices to year-ago levels yields considerable variations across the country, with a mix of gains and declines in western Canada together with price gains in eastern Canada.
The actual (not seasonally adjusted) Aggregate Composite MLS® (HPI) was up 2.6% y-o-y in November 2019, the biggest year-over-year gain since March 2018.
Home prices in Greater Vancouver (-4.6%) and the Fraser Valley (-2.9%) remain below year-ago levels but declines are shrinking. Elsewhere in British Columbia, home prices logged y-o-y increases in the Okanagan Valley (+1.4%), Victoria (+1.5%) and elsewhere on Vancouver Island (+2.8%).
Calgary, Edmonton and Saskatoon posted price declines of around -2% y-o-y, while the gap widened to -5.5% y-o-y in Regina.
In Ontario, price growth has re-accelerated well ahead of overall consumer price inflation across most of the GGH. Meanwhile, price growth in recent years has continued uninterrupted in Ottawa, Montreal and Moncton.
All benchmark home categories tracked by the index accelerated further into positive territory on a y-o-y basis. Two-storey single-family home prices posted the biggest increase, rising 2.8% y-o-y. Price gains were almost as strong for apartment units (+2.6% y-o-y) and one-storey single-family homes (+2.5% y o y), while townhouse/row prices climbed a more modest 1.5% compared to November 2018.

–DR. SHERRY COOPER

HOW TO VERIFY YOUR DOWN PAYMENT WHEN BUYING A HOME

Saving for a down payment is one of the biggest challenges facing people wanting to buy their first home.
To fulfill the conditions of your mortgage approval, it’s all about what you can prove (hard to believe – but some people have lied in the past – horrors!).
Documentation of down payment is required by all lenders to protect against fraud and to prove that you are not borrowing your down payment, which changes your lending ratios and potential your mortgage approval.

DOCUMENTATION REQUIRED BY THE LENDER TO VERIFY YOUR DOWN PAYMENT

This is a government anti-money laundering requirement and protects the lender against fraud.

1. Personal Savings/Investments: Your lender needs to see a minimum of 3 months’ history of where the money for your down payment is coming from including your: savings, Tax Free Savings Account (TFSA) or investment money.

• Regularly deposit all your cash in the bank, don’t squirrel your money away at home. Lenders don’t like to hear that you’ve just deposited $10,000 cash that has been sitting under your mattress. Your bank statements will need to clearly show your name and your account number.
• Any large deposits outside of “normal” will need to be explained (i.e. tax return, bonus from work, sale of a large ticket item). If you have transferred money from once account to another you will need to show a record of the money leaving one account and arriving in the other. Lenders want to see a paper trail of where your down payment is coming from and how it got into your account.

2. Gifted Down Payment: In some expensive real estate markets like Metro Vancouver & Toronto, the bank of Mom & Dad help 20% of first time home buyers. You can use these gifted funds for your down payment if you have a signed gift letter from your family member that states the down payment is a true gift and no repayment is required.

• Gifted down payments are only acceptable from immediate family members: parents, grandparents & siblings.
• Be prepared to show the gifted funds have been deposited in your account 15 days prior to closing. The lender may want to see a transaction record. i.e. $30,000 from Bank of Mom & Dad’s account transferred to yours and a record of the $30,000 landing in your account. Bank documents will need to show the account number and names for the giver and receiver of the funds. Contact me for a sample gift letter.

3. Using your RRSP: If you’re a First Time Home Buyer, you may qualify to use up to $35,000 from your Registered Retirement Savings Plan (RRSP) for your down payment.

• Home Buyers Plan (HBP): Qualifying home buyers can withdraw up to $35,000 from their RRSPs to assist with the purchase of a home. The funds are not required to be used only for the down payment, but for other purposes to assist in the purchase of a home.
• If you buy a qualifying home together with your spouse or other individuals, each of you can withdraw up to $35,000.
• You must repay all withdrawals to your RRSP’s 15 years. Generally, you will have to repay an amount to your RRSP each year until you have repaid the entire amount you withdrew. If you do not repay the amount due for a year (i.e. $35,000/15 years = $2,333.33 per year), it will be added to your income for that year.
• Verifying your down payment from your RRSP, you will need to prove the funds show a 3-month RRSP history via your account statements which need to include your name and account number. Funds must be sitting in your account for 90 days to use them for HBP.

4. Proceeds from Selling Your Existing Home: If your down payment is coming from the proceeds of selling your currently home, then you will need to show your lender an accepted offer of Purchase and Sale (with all subjects removed) between you and the buyer of your current home.

• If you have an existing mortgage on your current home, you will need to provide an up-to-date mortgage statement.

5. Money from Outside Canada: Using funds from outside of Canada is acceptable, but you need to have the money on deposit in a Canadian financial institution at least 30 days before your closing date.  Most lenders will also want to see that you have enough funds to cover Property Transfer Tax (in BC) PLUS 1.5% of the purchase price available in your account to cover your closing costs (i.e. legal, appraisal, home inspection, taxes, etc.).

• Property Transfer Tax (PTT) All buyers pay Property Transfer Tax (except first-time buyers purchasing under $500,000 and New Builds under $750,000). This is a cash expense, in addition to your down payment.
  Property Transfer Tax (PTT) cannot be financed into the mortgage

Buying a home for the first time can be stressful, therefore being prepared with the right documentation for your down payment and closing costs can make the process much easier.
Mortgages are complicated, but they don’t have to be. Contact a Dominion Lending Centres mortgage professional near you.

–KELLY HUDSON

HUGE DECLINE IN JOBS IN NOVEMBER AS JOBLESS RATE SURGES

One month does not a trend make. Statistics Canada announced this morning that the country lost 71,200 jobs in November, the worst performance in a decade. What’s more, the details of the jobs report are no better than the headline. Full-time employment was down 38.4k, and the private sector shed 50.2k. The jobless rate also rose sharply, up four ticks (the most significant monthly jump since the recession), to 5.9%. Hours worked fell 0.3%, and remain an area of persistent disappointment—they’re now up just 0.25% y/y, much more muted than the 1.6% annual job gain.

The one area of strength was wages, with growth accelerating to match a cycle high at 4.5% y/y. But wages tend to lag the labour market cycle, so if this weakness is the start of something bigger, wages gains are likely to slow.

The monthly moves were soft, no matter how you slice them. Both full-time (-38.4k) and part-time employment (-32.8k) were down. Similarly, private sector employment (-50.2k) led the way, but self-employment (-18.7k) and the public sector (-2.3k) also saw net losses.

Until last month, we saw a long string of robust job reports in what is usually a very volatile data series, so a correction is not surprising. But this report appears to be more than a statistical quirk and belies the Bank of Canada’s statements this week that the Canadian economy remains resilient. Employment is still up 26k per month in 2019 to date consistent with a 1.6% y/y gain, and most of that comes from full-time work. And some of the drop in November reflected a decline in public administration jobs retracing October’s gain that might have been related to the federal election. Nevertheless, the 0.4 percentage point uptick in the jobless rate is the largest since the financial crisis in early 2009, and manufacturing jobs were down more than 50k over the past two months.

By industry, job declines were widespread in the month, with only 5 of 16 major sectors posting improvement. Net losses were shared across both the goods and service sectors. Manufacturing (-27.5k) shed jobs for a second month, and notable declines were seen in public administration (-24.9k, likely a reflection of post-election adjustment) and accommodation and food services (-11k).

By region, Ontario and PEI were the only provinces to manage job growth last month, with all others deeply in the red. Quebec stands out, shedding 45.1k net positions in a second monthly employment decline and pushing the unemployment up to 5.6% (from 5.0%; the largest monthly increase in nearly eight years). Quebec’s jobless rate is now equivalent to that in Ontario. Things were not much better out west: Alberta and B.C. both lost 18.2k net positions. In the case of the former, this was enough to send the unemployment rate up half a point, to 7.2%. Ontario bucked the trend, adding 15.4k net positions, just shy of erasing the prior month’s drop. Still, the unemployment rate in the province rose to 5.3% (from 5.0%), as more people joined the labour force. (See the table below.)

Job growth slowed in the second half of this year. Over that period, the average monthly job gain has been a paltry 5.9k compared to an average monthly gain of 24.4k over the past year. For private sector employment, the equivalent figure flipped into negative territory (-4.3k) for the first time in more than a year.

Bottom Line: Today’s report means that the Bank of Canada will be keeping an even more watchful eye on the jobs report. The year-on-year pace of net hiring has decelerated for three straight months now, driven in large part by a slowing pace of private-sector hiring. It seems a safe bet that even if we see some recovery in the coming months, the substantial gains of recent years are unlikely to be repeated.

The Bank of Canada has been emphasizing Canada’s economic resilience in its recent communications. One month of soft jobs data will hardly break that narrative, but coming after a modest October, it is not hard to imagine a hair more worry about the durability of growth. The bigger question is whether this weakness persists, and more importantly if it feeds into consumer spending behaviour and housing activity, the Bank’s key bellwethers.

We continue to believe that the BoC will cut rates in 2020, owing mainly to Canada’s vulnerability to trade uncertainty. The loonie sold off sharply on the employment news, particularly so because of the stronger-than-expected labour market report released this morning in the US.

–DR. SHERRY COOPER

2019 Closes Without a Bank of Canada Rate Cut

The Bank of Canada’s overnight lending rate will end the year exactly where it started—unchanged at 1.75%.

As was widely expected, the Bank of Canada decided once again to leave rates on hold as it continues to assess the need for monetary policy easing given a strong domestic economy against a background of global headwinds.

The BoC’s Governing Council noted that the Canadian economy continues to perform well, with growth in the third quarter of 1.3%, moderately expanding consumer spending, along with rising wages and investment spending. Additionally, inflation remains right around the Bank’s target of 2%, “consistent with an economy operating near capacity,” the council added.

“Future interest rate decisions will be guided by the Bank’s continuing assessment of the adverse impact of trade conflicts against the sources of resilience in the Canadian economy—notably consumer spending and housing activity.”

The BoC is bucking a global trend of central banks that have been easing monetary policy within the last quarter—more than 40 to date, the most notable being the U.S. Federal Reserve, which has cut rates three times this year.

Some believe the longer the Bank resists a rate cut, the more risk that it may need to act more aggressively at a future date.

“I continue to believe that at some point the BoC will have to drop rates to weaken the Loonie and stimulate our moribund rates of economic growth, but the Bank remains determined not to cut until inflation materially weakens,” mortgage expert Dave Larock wrote in a blog post prior to the BoC decision. “Of course, if and when this happens, the BoC may then have to lower by more than it would have done had it acted preemptively. That, however, is a risk it appears willing to take.”

BoC Rate Cut in Store for 2020?

Earlier this summer, a rate cut (or two) from the Bank of Canada seemed all but guaranteed. But current economic conditions are causing many economists to constantly re-write their forecasts. Some now foresee another full year of no rate movement.

“While we can’t predict developments in the U.S.-China trade war with any real confidence, the resurgence of the housing market—with the sales-to-new listing ratio now pointing to house price inflation accelerating to over 10%—suggests that the Bank will keep policy unchanged throughout 2020 and probably longer,” wrote Stephen Brown, senior economist at Capital Economics.

Market expectations are for at least one quarter-point rate cut by mid-2020. Overnight Index Swap markets are currently pricing in a roughly 70% chance of a rate cut by July, according to Westpac.

Some, however, are calling for monetary policy easing earlier in the year.

“Our assumption has been that the BoC’s patience will eventually run out, with persistent trade uncertainty and below-trend growth around the turn of the year prompting a rate cut in early-2020,” economists at RBC Economics wrote in a research note. “Rising odds of a U.S.-China trade deal has pared back market expectations for a rate cut.

–Steve Huebl

BANK OF CANADA HOLDS STEADY AMID CONTINUED TRADE UNCERTAINTY

The Bank of Canada maintained its target for the overnight rate at 1.75% for the ninth consecutive policy announcement, keeping the key interest rate stable for all of 2019. Today’s decision was widely expected as members of the Governing Council have signalled that the Bank is satisfied with the performance of the Canadian economy.

The Bank of Canada is one of a shrinking number of central banks that has not eased interest rates this year. Roughly 40 central banks have cut interest rates, most notably the US Federal Reserve, which has cut rates three times this year.

The statement was undoubtedly less dovish (i.e., consistent with a rate cut) than in October, noting that there are signs that the global economy is stabilizing, though trade remains the most significant downside risk to the outlook. On inflation, the expectation is for a continued run around the target 2% rate, though gasoline prices will cause some headline volatility over the coming months. Finally, “Governing Council judges it appropriate to maintain the current level of the overnight rate.”

While the risks to the outlook for the BoC remain skewed toward a rate cut, it doesn’t look like policymakers are in any hurry to move at this point.

The BoC does remain concerned about the global backdrop and potential risks for the domestic economy. In recent days, stock markets have sold off sharply as President Trump opined that a US-China trade deal is not likely any time soon.

The White House has lately threatened a new round of tariffs on many countries, including Canada, and warned of a possible reinstatement of steel/aluminum tariffs on Brazil and Argentina. The United States threatened tariffs on US$2.4-billion of French imports in retaliation against a French digital services tax, raising concerns in Canada that Justin Trudeau’s minority government will also face backlash from Washington if it proceeds with a campaign promise to impose a similar levy. US businesses have complained that the Canadian tax proposal would violate the intentions of the new North American Free Trade Agreement — called the U.S. Mexico Canada Agreement or USMCA — which allows for digital levies but prohibits discriminatory tax treatment. The deal is currently awaiting ratification in the US, where Congressional Democrats have been demanding changes to labour and environmental provisions.

On the domestic front, the central bank believes that the underlying details of the as-expected slowing in Q3 GDP were decidedly more positive than the headline 1.3% growth rate suggested and highlighted the stronger than expected rise consumer spending, housing and business investment. The press release stated that “housing investment was also a source of strength, supported by population growth and low mortgage rates. The Bank continues to monitor the evolution of financial vulnerabilities related to the household sector.” Housing was robust in Q3, accompanied by a re-acceleration in mortgage credit. While the BoC seems comfortable with this evolution, it will be monitoring credit growth.

Labour markets have been robust, inflation has been locked right around the 2% target range, and wage growth has strengthened. While growth headwinds remain, the bank is balancing these risks against those associated with re-inflating household credit growth (mostly via recovery in housing markets) from levels that the BoC has argued are already worryingly high.

“Fiscal policy developments will also figure into the Bank’s updated outlook in January.” Tomorrow’s Throne Speech is vital for the Bank of Canada. Governor Poloz said in October that $5 billion in fiscal stimulus is roughly equivalent to a 25 basis point rate cut. It looks as though the BoC would prefer that fiscal rather than monetary policy do the heavy lifting to offset the headwinds from the global trade war.

Bottom Line: Governor Poloz appears to be satisfied with his stand-pat policy with only six months left in his term as Governor. Today’s statement was much more sanguine than the more cautious tone struck in October. The risks around the economic outlook remain skewed to the downside and, while the same can be said for policy rates, some anticipated fiscal stimulus will likely provide the Bank of Canada with some breathing room. Barring a negative shock to the economy, it looks like the BoC could be on hold for some time yet.

–DR. SHERRY COOPER

Can You Qualify For A Mortgage After A Consumer Proposal?

After you file a consumer proposal, the last thing on your mind might be a new mortgage, but you may be a lot closer than you think.

Maybe you wish to buy a home, or you own a home and are interested in refinancing your mortgage. Let’s first talk about purchasing a home.

When Can You Buy A Home After A Consumer Proposal?

Actually, this question comes up often. People want to know how soon can they buy. Sometimes they ask right after they file their consumer proposal, and other times it’s more than five years later, after they’ve paid it off in full.

First things first: pay off your consumer proposal completely before you take on major new mortgage debt.

If you have at least a 20% down payment, you may even be able to buy as soon as you complete your consumer proposal! As in, immediately.

You will almost always be working with either a B-lender or a private lender, but it is doable. But it’s more than just a matter of having finished your consumer proposal. Make sure you have been rebuilding your personal credit history—with new credit facilities and by cleaning up reporting errors. (There are ALWAYS reporting errors after you file a consumer proposal.)

If you have less than 20% down payment, you will be looking for a high-ratio mortgage, which has default insurance, from one of CMHC, Genworth or Canada Guaranty.

In that case, you will need at least two years of clean, new credit since you completed your consumer proposal. But it’s best if you have at least two tradelines (credit card, loan, line of credit, etc.) with limits greater than $2,000.

Worst case scenario, three years after you completed your proposal, or six years after you filed your proposal (whichever comes first), it will fall off your credit report and whether or not you qualify for a mortgage to purchase a home will depend on the usual mortgage qualification criteria we all face.

When Can You Refinance Your Home After A Consumer Proposal?

This, too, can happen very quickly—in fact, we have helped numerous homeowners refinance their homes so they could complete their consumer proposal early. In some cases, it was as soon as the terms of their proposal were ratified in court.

This is what we call a lump-sum consumer proposal, and can be a very attractive way to settle your debts if you are a homeowner.

Should You Pay Off Your Consumer Proposal When You Refinance?

Actually, there are a few private lenders who will allow you to leave your proposal unpaid while you extract equity from your home. But unless there are specific, logical reasons to doing this, it’s not something I recommend.

I prefer refinancing to completely pay off the remaining balance owing on the consumer proposal. There may also be other things you need money for at the same time—like a home improvement project or a child’s higher education, or other family debts.

CRA debt crops up quite a lot too, particularly for those who are self-employed. You can take care of all these at the same time, provided you pay off the consumer proposal.

Why Would You Pay off Your Consumer Proposal Early?

1) Fear of the mortgage renewal. This concern is very real if your mortgage lender had a credit card or loan product included in your consumer proposal. They might have no interest in offering you a renewal when your current mortgage matures. So, you need to get in front of this issue as soon as you can, if your situation allows for it.

2) A strong desire to rebuild your personal credit history. Once you file your CP, your credit score is going to take a major beating. All debts included in the proposal will be reporting as R7s on your personal credit report.

Worse than that, some of them will be erroneously reporting as R9s—written off completely.

And some credit cards may say they were included in a bankruptcy, even though that is not true.

A few credit cards even report ongoing late payments after the proposal was filed. And sometimes even after the proposal is completed!

If you want to fix the damage to your personal credit report resulting from your consumer proposal, you are going to have to wait until it is paid in full and you have a completion certificate from your trustee. Here is additional information on rebuilding credit after a consumer proposal.

3) Wish to be normal. When you have bad credit, everything in life seems tougher and more expensive. Even if you wish to rent a home, not buy one, the landlord will usually ask for a copy of your credit report.

And if you want a new smartphone, or lease or finance a new car, bad credit will make it all that much harder.

If you allow your consumer proposal to run the full five years, that means it could be in your credit history six years altogether. It falls off three years after you complete, so keep that in mind. You can significantly shorten the waiting time by paying the consumer proposal off early.

4) Improve cash flow. In nearly all cases when we refinance a home where the owner is paying off a consumer proposal, they see an improvement in their monthly cash outflows. In a society where half of us are living paycheque to paycheque, this is attractive.

How Do You Refinance To Pay Off A Consumer Proposal?

First, your mortgage broker will do a thorough assessment of whether or not this is even doable. They will assess the marketability of your property, the amount of untapped equity, the reasons behind you filing your consumer proposal, as well as all the normal stuff lenders look at when reviewing a mortgage application.

An important consideration is your current first mortgage. Was it just renewed, or is it nearing maturity? Which lender is it with, and what might the prepayment penalty be if you were to break it and refinance to a new first mortgage with a B-lender?

Another consideration is whether or not your first mortgage is registered as a collateral charge, and if so, to what amount is it registered? We wrote about this a few months ago—it can make things difficult.

If refinancing the current mortgage makes sense, your broker will present your application and a presentation to the B-lenders most likely to entertain a file like yours. And they will bring back quotes for your consideration. If you choose to proceed, most of the time the entire process can be wrapped up in four to six weeks.

We actually see that happen less often than the other approach, which is to first apply for a private second mortgage.

In this scenario, the first mortgage is left intact and a new lender is found who will lend enough money to cover the proposal balance, any other debts and needs, and all the expenses associated with the mortgage.

During the term of the second mortgage (usually one year), we take the opportunity to cleanse all the reporting errors from the credit report, and also to strengthen the borrower’s credit profile with new healthy credit.

After a year (longer if that makes sense), we then refinance the two mortgages into a single first mortgage.

It would be normal to expect this new replacement mortgage to be with a B-lender, since the consumer proposal is still fairly fresh. Here are some insights into how to do this.

The Wrap

Ultimately, the goal is to take the homeowners back to the world of A-lenders. That is usually possible after three years, but we have seen instances where it happened much sooner.

But it was never going to happen if the clients didn’t first make the decision to pay off the consumer proposal ahead of schedule.

How Your Cell Phone Can Keep You From Getting the Lowest Mortgage Rate

Despite what you may have heard, your cell phone payment history does affect your credit score.

Cell phone accounts work differently than a credit card or a line of credit. A cell phone is an open or “O” account, which means the balance has to be paid in full at the end of each month.

There is no such thing as a minimum payment with an “O” account like there is with credit cards and lines of credit. You can’t just pay a portion of your bill. The amount that you see on your statement has to be paid in full otherwise your credit score will suffer.

Unfortunately, many Canadians don’t view paying their cell phone bill in full or on time as being as important as other payments. Lenders disagree. The bank underwriters (the people who review your application) are thinking, “If you can’t make or keep track of a cell phone payment, what are the chances that you are going to be responsible with your mortgage payment?”

Costly Missed Payments

Let’s take a look at one borrower, John, who was declined for best-rate mortgage financing on the purchase of a new house because he had three late payments on his cell phone bill during the last two years. His argument wasn’t unique.

“I called (the phone company) before the payment was due and asked if I could pay half of the bill this month and the remainder of the outstanding balance the following month,” he said. “The customer service rep told me that it was okay to take a couple of months to get caught up.”

Susan and Frank found themselves in a similar situation. They were approved for mortgage financing but were then declined at the last minute due to a recent late payment showing up on their report in the same week they were supposed to be moving.

Arranging a mortgage and preparing for a move is stressful enough without having a financing issue in the eleventh hour. In the end they were able to find a resolution, but it resulted in a delayed closing. They had to get approved by a different lender at a higher rate. In addition to all the stress and time, this small mistake ended up costing them $3,459.28.

Despite what they tell you, late payments will continue to be recorded until your account is caught up. Underwriters will look at an applicant with an outstanding balance as someone who is not in control of their finances. It will drop your score and hurt your chances of being approved for best rates and terms.

A Matter of Principle

It’s common for consumers to not make a payment because they were unfairly charged or they found a mistake on their bill. On principle, I understand that you might not want to make the payment, however, even if you are disputing the charge, it will not stop the negative item from showing up on your credit report.

And keep in mind that one late payment can be enough to negatively impact your best rates and terms for future financing. Your cell phone company will start the collection process if an overdue balance is not paid within 60 to 90 days.

As you can guess, a collection appearing on your report does not help your credit score. Many of my clients echo my caution, and in hindsight wished they had simply paid the bill in the first place. If you find yourself in this situation, my suggestion is to clear the amount owing first, and then dispute the charges. That way it doesn’t lower your score or cause you to get charged higher rates just because of one account.

Warning…Warning

If you have paid out or closed your cell phone account, make sure you get something in writing to confirm that there is no outstanding balance owing.

The same goes for an outstanding amount or settled collection. Don’t take anyone’s word for it or assume that it will be updated on your credit report. Are you starting to see a trend? Whatever you do, get confirmation in writing! If you don’t, it will make trying to correct the error even more difficult.

The only way to avoid having your cell phone report on both Equifax and TransUnion is to go with a pay-as-you-go contract. If you are on any other type of plan, keep your fingers crossed. You don’t want to be one of the unlucky ones to have a cell phone error or problem tarnishing your credit. To improve your chances of avoiding any issues, ensure you pay the full amount owing each month and keep good records.

–Richard Moxley

Debt on the Minds of Canadians

Debt is hanging over the heads of a growing number of Canadians, with two in five saying they don’t expect to get out of debt in their lifetime. But mortgages—typically the largest debt of all—are the least of their worries.

A new survey from Manulife Bank confirms concerns over the growing non-mortgage debt loads of Canadians.

Most concerning, perhaps, is the fact that 45% of Canadians say their spending is increasing faster than their incomes. This is up from 33% since Manulife’s spring survey.

Gen-Xers, those aged roughly 40 to 54, are the most likely to be in this financial spiral downward. More than half (54%) of them say their spending is rising faster than their income.

“There is a financial wellness crisis, and it’s affecting Canadians of all demographics,” said Rick Lunny, President and CEO, Manulife Bank.

Millennials too are struggling, given that they are experiencing the most difficulty in entering the workforce (14% vs. 9% for those ages 41-69).

The positive for millennials, however, is that they are the most likely to report their income is rising faster than spending (14% vs. 10% for those aged 41-69).

This precarious debt situation isn’t news to most Canadians. In fact, 94% of them say they think the average household is carrying too much debt.

Mortgage Stats

When it comes to mortgage debt, Canadians actually feel most comfortable with that obligation compared to their other forms of debt, even if it is the biggest debt they’ll see in their lifetime.

• 73% feel “somewhat or very” comfortable with the amount they owe on their mortgage
  • 22% said they feel “very” comfortable
• 82% feel “somewhat or very” comfortable with their mortgage payments
  • 28% feel “very” comfortable
• 72% feel “somewhat or very” comfortable with their home equity line of credit (HELOC)
• Other forms of debt, on the other hand, are causing Canadians a great deal of anxiety:
  • Just 42% are comfortable with their student loan (21% say they are “not comfortable at all”)
  • 42% are comfortable with their credit cards that carry a balance (21% say they are “not comfortable at all”)

Millennials Want Advice Through Tech

Another key finding is that younger Canadians are increasingly seeking financial advice through non-traditional means. Take a look:

• More than half of millennials (53%) want their financial advisor to be a mobile app
  • By comparison, only a third (31%) of those aged 41 to 69 share that desire
• Of the nearly one third (31%) of millennials who say they use a financial advisor, 7% admit they use a Robo Advisor
  • Just 1% of those among the older generations do so
• Six out of 10 millennials (60%) are focused on building their credit scores, compared to 40% of those between the ages of 41 and 69.

Types of Debt

Credit cards are the fastest-growing form of debt, according to the Manulife survey.

• 60% of Canadians have credit cards that carry a balance, up sharply from 48% in the spring
• 48% of Canadians have mortgage debt
  • 62% for gen-Xers, 48% for millennials and 38% for baby boomers
• 39% have an auto loan
• 36% have a line of credit
• 22% have a personal loan
• 16% have a home equity line of credit (HELOC)
• 11% have a student loan

Other Findings

The Manulife survey, which surveyed 2,001 Canadians with a household income of $40,000+, also found that:

• On average, Canadians save 14% of their after-tax income (down from 14.7% in the spring survey)
• 19% of Canadians say they are saving nothing, up from 4% in the spring
• 42% own a house or condo and are paying a mortgage
  • 58% for gen-Xers, 46% for millennials and 30% for boomers
• 67% of those in debt assume everyone else is as well
• 60% are carrying balances on their credit cards (up from 48% in the spring survey)
• 55% say they have “considerable” non-mortgage debt (up from 46% since the spring)
• 66% of Canadians in a relationship say they combine their finances
  • Of those who don’t, 15% say it would cause tension in their relationship, while 11% say they don’t because their spouse is a spender while they’re a saver

–Steve Huebl