What You Should Know About Collateral Charge Mortgages

I recently had clients who were refinancing their mortgage completely reject a very attractive offering from one of the big chartered banks.

Their reasoning? All of this bank’s mortgages are registered as collateral charges, and all of their online research into this topic spooked them completely.

Over the years, dozens of articles have been written on the topic of collateral mortgages, often tending to a negative bias. But as Rob McLister once said, and I agree with him, “collateral mortgages shouldn’t be portrayed as a supreme evil of the mortgage universe, when in fact they offer advantages to some.”

One can present persuasive arguments in favour or against collateral mortgages. But this client’s response compelled me to revisit the topic with fresh eyes and offer an updated perspective.

Mortgage loans are typically registered as a standard-charge mortgage or a collateral charge mortgage. So, let’s explore both types…

What Is a Standard Charge Mortgage?

A standard charge only secures the mortgage loan that is detailed in the document. It does not secure any other loan products you may have with your lender. The charge is registered for the actual amount of your mortgage.

If you want to borrow more money in the future, you’ll need to apply and re-qualify for additional money and register a new charge. There may then be costs, such as legal, administrative, discharge and registration fees.

If you want to switch your mortgage loan to a different lender at the end of your term, you may be able to do so by simply assigning your mortgage to a new lender at no cost to you.

Monoline lenders such as MCAP, First National Financial, CMLS and others default to standard-charge mortgages, unless offering a product such as MCAP Fusion (which has a re-advanceable HELOC component)

What Is a Collateral Charge Mortgage?

A collateral charge is basically a method of securing a mortgage or loan against your property. As explained here previously, “unlike a standard mortgage, a collateral charge is re-advanceable. That means the lender can lend you more money after closing without you needing to refinance and pay a lawyer.”

You can keep re-using this charge, and a new charge will only be required if you want to borrow more than the amount that was originally registered.

Most chartered banks offer both types of mortgages. A couple (TD Bank and Tangerine)  only register their mortgages as collateral charges.

Most chartered banks also offer a type of combination home financing, which consists of a mortgage component and a line of credit component. (Actually there could be several components.) For example, the Scotia Total Equity Plan (STEP) mortgage.

If you have a Home Equity Line of Credit, you have a collateral charge mortgage.

A collateral charge can be used to secure multiple loans with your lender. This means credit cards, car loans, overdraft protection and personal lines of credit could also be included.

Arguments people make in favour of collateral charge mortgages

1) If you wish to borrow more money during the term of your mortgage, you can tap into your home equity without the expense of a mortgage refinance. You can save legal fees. (This is assuming of course, your personal credit and income are sufficient to qualify for more money.)

2) If you have a mortgage and a Home Equity Line of Credit (HELOC), it may be structured such that every time you make a mortgage payment, the amount you pay towards your principal balance is added to your HELOC limit. Large available credit, used wisely, is usually a good thing.

3) Collateral charges are often best suited to strong borrowers with lots of equity. They might readily access contingency funds at no cost down the road. This could be by increasing their mortgage loan amount or adding a home equity line of credit to the mix.

Ironically, our same clients who objected strenuously to the collateral charge actually fit this profile. After refinancing their current mortgage, they will still have $500,000 in equity left in their home. Who knows, down the road they may want a Home Equity Line of Credit or to increase their mortgage. If they register their mortgage today for more than its face value, they could avoid all refinancing costs at that time.

Arguments people make against collateral charge mortgages

1) Some people trash the collateral charge because there is often a cost to switching lenders at renewal. I think that’s overstated and no longer factual.

It’s so competitive out there, if you’re still considered strong borrowers, chances are someone is willing to eat the costs to move you.

Also, some lenders are now offering no-cost switch programs for collateral charge mortgages. That was not the case a few years ago, and the list of such lenders is growing.

And keep in mind the moment you wish to change any material aspect of your mortgage (for example, the amortization period or the loan amount), it is no longer considered a switch, but rather a refinance—so legal and appraisal costs are in play anyway.

2) Others argue you could be offered less competitive interest rates from your current lender at renewal than you will be from a new lender. Again, if you are a strong borrower, someone is going to offer you low rates, and your current lender, under pressure, will often match or beat competitive offers. For that reason I view this as less of a concern.

3) Some lenders register a collateral charge for more than the loan amount—to as much as 125% of the appraised value of your home. Some just do this by default and others may ask you to choose the dollar amount to be registered. The rationale being you will retain the benefits of your collateral charge, even as your home increases in value.

This is where you might pause to reflect.

If, down the road, your personal finances take a U-turn, or you no longer qualify for additional financing with your current lender, then you might find a high collateral charge impairs your ability to seek secondary financing elsewhere.

For example, we are presently working with two Ontario-based clients who need a private second mortgage, but the collateral charge registered against their home is roughly the same as the value of their home. Even if their current mortgage balance is very low, unless a private mortgage lender’s lawyer can cap the collateral charge at that lower balance, these homeowners will find alternate lender sources are unlikely to lend new money.

4) A collateral charge mortgage is not only a charge on your home, but can include other credit you have with that same lender. These lenders have a “right of offset,” meaning they can collect from the equity in your home on any financial products you have (or co-signed for) that are now in default.

There is also the potential that when asked to pay out the mortgage at the time you leave your collateral charge mortgage lender, they can also add in overdraft, credit card and line of credit balances. Resulting in less funds to you than you expected and may need.

That said, it is unclear how often this happens, if ever, to borrowers with spotless records.

Industry insider Dustan Woodhouse points out, “(Even) co-signing a credit card or car loan for somebody (who then stops making payments) carries a risk of a foreclosure action against your property as a remedy for what was perceived to be an unrelated debt.”

The Wrap

Collateral charge mortgages are here to stay. More lenders are adopting them and you should have a good understanding of what type of mortgage you are being offered. Most of the time, it probably will not matter much to you how your mortgage is registered.

For all the arguments about extra costs if you wish leave your lender at renewal, as long as your borrower profile is strong you should be able to avoid any incremental out-of-pocket costs.

But if you want to take a conservative approach, consider the following:

Choose a standard charge mortgage if it really bothers you, and if you have a choice of lenders.

Or, when given the option, just register the collateral charge mortgage for the actual face amount of the mortgage, rather than a much larger amount.

In closing, Woodhouse has some sage advice: “It is perhaps a key consideration that one should in fact not have all their banking, credit cards and small loans with the same institution as their mortgage…mortgage with Lender A, consumer debt/trade lines with Lender B, and perhaps any business accounts with Lender C.”

–ROSS TAYLOR

MORTGAGES ARE LIKE COFFEE

The most common question we get for mortgages is “what is your best rate?” Now imagine we walked into our local coffee shop and asked “what is your best price?” Doesn’t happen. There are all kinds of different coffees and lots of ways to make them. The same goes for mortgages.

Getting a coffee at the lowest price is usually not going to get you the coffee that meets your needs. You want quality beans, flavour, extra features like a shot of caramel, maybe make it a macchiato, froth on the top, an alternative milk option, and the list goes on.

The same goes for mortgages. Lowest rate mortgages may come with a lack of portability, the inability to make extra payments, and they may lock you into a good rate today without the flexibility for better rates in the future. They may be the lowest rate without the lowest monthly payment amount, they may be for term lengths that are too long and have significant penalties when the mortgage needs to be broken.

The lowest rate mortgage may be collateral charge mortgages that allow a bank to foreclose on your property because you were delinquent on your credit card payments while you went on an extended vacation in Europe and forgot to keep track while you were having so much fun drinking coffee at a popular little hole in the wall café in some small ancient village. The 4 strategic priorities that every mortgage needs to balance are lowest cost, lowest payment, maximum flexibility, and lowest risk.

So the next time you need a mortgage, treat it like your coffee order, don’t ask for the best rate, ask how you can get the best mortgage that meets your needs.

–TODD SKENE

HOW TO SAVE MONEY ON A VARIABLE RATE MORTGAGE

A few years ago, I remember seeing a statistic that said that if you took out a variable rate mortgage instead of a fixed rate, you would do better in 95 out of the last 100 years. Often the spread between a 5-year variable rate and a 5-year fixed rate was more than 1% and so you could save thousands over a 60 month term.

More recently, about three years ago, the banks and mortgage companies started shaving the discount rate on these mortgages. While they had been Prime – .70-.80 they were now Prime – .45. That’s quite a change. Earlier this spring, the discount came back and now it’s possible to get into a variable rate mortgage with a discount of Prime – 1.0%!
This isn’t very good news for those people in Prime-45 mortgages. But, there’s something you can do.

Go see your favourite Dominion Lending Centres mortgage professional and ask them to calculate the penalty to break your mortgage and get one with the new bigger discounted rate. As you are in a variable rate, this should be 3 months interest. At this discount you should be able to recover that penalty in just a few months.

–DAVID COOKE

CREDIT REPORTS: YOU’VE SCORED! BUT ARE YOU PLAYING THE GAME?

For most people, your personal credit score and how a credit score is calculated are complete mysteries. How can you be expected to play and be successful if you aren’t even told the rules of the game? There are things borrowers can do to improve their score so they can access better mortgage products and save thousands of dollars, or qualify for their wonderful home when they otherwise might have trouble. Let’s stick handle through just some of the key things you should know about managing your credit score.

Amount owed and utilization accounts for 30% of your score. There are a lot of people that end up with high balances on their credits cards and struggle to meet the payments each month. If they manage to pay off their credit cards without seeing a mortgage broker to consolidate their debts, often the immediate response is to close the accounts. A better response is to cut up the cards and delete the numbers from your computer and devices and keep the accounts open. You want any remaining outstanding balances to be less than 75% of your total combined credit available, and if they are less than 35%, even better, because this keeps your utilization of available credit low and increases your credit score. Types of credit and the number of different credit products accounts for 10% of the score, so this is another reason you want to keep those accounts open. Cell phone providers are now reporting to the agencies that publish credit scores as well.

In some parts of the world where credit products are not well established, a borrower’s credit is evaluated based solely on how they have managed payments on their cell phone bills. It’s important to pay your cell phone bills on time; we’re all busy, so setup automatic payments to ensure a payment is not missed. My last word of advice for today is to monitor your credit score by purchasing your own credit report each year for about $25 so you know your score and to ensure the report is accurate. This will help you stay within the boundaries of the game.

There is a lot more to managing a credit score than I can get into in this short blog. If you would like to know more, contact me or your local Dominion Lending mortgage broker. We can provide advice to help you manage your credit score and put you in a better position to qualify for a mortgage with better rates. Know the rules of the game, plan ahead for your home financing, and play SMART.

–TODD SKENE

4 WEIRD THINGS LENDERS ASK FOR

A number of times I have had people who wonder why they need to provide so much documentation when it comes to arranging a mortgage. Besides an employment letter, you are usually asked to provide a pay stub and your most recent Notice of Assessment (NOA) to prove income. “Why do they need all 3, doesn’t the employment letter satisfy this condition?” I am often asked. No, is the short answer.

A pay stub shows your current income and shows how much you have made year to date. This will also show overtime or any special allowances you receive such as a northern living allowance. This confirms or sometimes does not agree with your employment letter. The employment letter shows what you are going to make this year and your NOA shows what you made in the past. It also shows that you do not owe taxes to the government. This is important to lenders because they don’t want the government to put a lien on your property ahead of their mortgage claim on title.

Your realtor will provide an offer to purchase and sale agreement, so why do they ask for a MLS listing sheet? While the purchase agreement shows the financial agreement and what is included with the house, the MLS describes the size of the house and lot as well as the amount paid for municipal taxes and the size of each room. This allows the lender to establish whether you have a fair market price for your new home.

Finally, a lender will ask for a 90-day bank statement to show your down payment money. The reason they ask for this is due to Canadian money laundering laws which need to show the source for all funds and that you have been saving the funds over the past 3 months. If you get an inheritance, you will need to show documentation that this is the source of your sudden wealth.
Be sure to contact your local Dominion Lending Centres mortgage professional before making an offer on a home. He/She can tell you exactly what documents you will need in advance and make the home buying process go much easier.

–DAVID COOKE

Parents to the Rescue for Young Homebuyers

Following a huge run-up in prices over the last several years, housing has become very expensive in many of the country’s key markets.

Just ask the 24% of Canadian parents who say they’ve had to help their children over the age of 18 buy a home.

And when it comes to renting, 35% of parents with children over 18 say they help with rent payments,  according to the Housing Affordability Study commissioned by FP Canada.

Expectations are high among parents of those under 18 that they’ll also be on the hook when it comes time for their children to buy their first home. Nearly half (48%) say they intend to help their children with their first home purchase, up from 43% in 2017.

“With house prices at unprecedented levels in many regions of the country, it’s nearly impossible for many young Canadians to get into the market without assistance from their parents,” Kelley Keehn, consumer advocate for FP Canada, said in a statement.

“That’s putting pressure on parents to take drastic steps to help their children buy a home, including tapping into their retirement savings or their own home equity.”

Repercussions for the parents

With more cash flow going to support their children’s shelter costs, a growing number of Canadians are finding that assistance is coming at the expense of their retirement plans.

Nearly 4 in 10 (39%) say helping their children to buy a home will postpone their retirement—up from 27% in 2017.

Another 30% say they’ll have to tap into retirement savings in order to help with their children’s home purchase (up from 21% two years ago), while 26% plan to tap into their home equity (up from 23%).

Illustrating the lengths some parents will go to help their children enter the housing market, 34% admit that assistance will prevent them from paying off their own debt (up from 22%).

“Even though it’s natural to want to help your children, it’s essential to carefully consider the impact on your own financial security before helping with such a huge purchase,” Keehn added.

Other key findings:

• Older parents (55+) were more likely to have assisted their children with buying a home (27%) vs. 15% of parents who are younger than 55.
• Those in Atlantic Canada (32%), Manitoba and Saskatchewan (32%) were more likely to have helped.
• Parents living in urban areas are “significantly” more likely to dip into retirement savings or home equity to assist their children than those living in rural areas.

–STEVE HUEBL

BULLYING ENDS HERE UPDATE FOR JULY 2019

‘Well that’s it for another school year….and what a year it was! I am full of joy writing this to you, and a little overwhelmed as well realizing just how effective our charity has become. Once again, we presented in EVERY province across Canada while also going to the US, England and Scotland.

The Scottish Government passed a motion to allow Bullying Ends Here speak in any of their school where a presentation is requested. This is HUGE because we are the first to do so. The main purpose for this was to allow the message around LGBT to be allowed with all of their students. In England, we went four times to speak to tens of thousands of students. The program is an absolute success with dozens of requests still to be actioned. The Metropolitan Police have been working hard to get our message out there and to have schools sign up. A partnership that is truly helping save many lives!

The numbers are what really shocked me. This past school year had me present to over 250,000 students. That brings our grand total to around 985,000 in only six years!!! This November is where we are on target to hit ONE MILLION. The number of emails/social media messages has remained around the 10% level and the total number of lives saved is 57. This past year also had us travel to very remote locations where residents can only be reached by flying in/out.

The information guide that we created for the start of this school year has now been included in many Government projects and school boards use it regularly. Our website had to be upgraded to handle the massive increase in traffic and we also opened the Bullying Ends Here Store. Please visit www.bullyingendshere.ca to see what we have available.

I also feel it important to share that this past school year also brought along many awards for me personally and the charity. The first being the Order of Merit. I also was honoured to receive the Sovereign Medal for Volunteers, Community Policing Award and the City of Calgary International Award. I am truly humbled by the recognition but continue to remain focused on the program and reaching as many as we can.

With the massive increase in requests for presentations and as we continue to grow, our expenses have shot up. This is where I hope you might be able to help. I am thinking a friendly challenge for all offices to partake in. We currently have a GoFundMe page setup to help raise the additional funds required to achieve historic proportions in the 2019/20 school year. The link for the page is at https://www.gofundme.com/f/bullying-ends-here-kindness-world-tour

I will put out the challenge that the office that raises the most money for Bullying Ends Here by August 15th will receive an incredible prize package including BEH wear, coffee cups and signed NHL memorabilia. Donations can be made either through the GoFundMe page, PayPal or directly through me. There are details on how to make a donation outside of GoFundMe on the BEH website on the ‘DONATIONS’ page.

We expect to reach another 300,000 youth this coming year, continue with our International efforts and strive to be one of the most effective anti-bullying program in Canada. Plans to add a primary grades presentation, online learning and a book detailing everything there is to know about bullying is all underway. Needless to say, we are walking the talk!

So, here we go. I leave this with you to do everything that you can to help the program grow and to help those that need it most. We all have a role to play. With a Cross-Canada Kindness Tour starting in Victoria in October leading me across the Country ending in Nfld. in March 2020, we can use all of the help that we can get. I have the locations listed on the website as well so feel free to reach out to book a presentation or two in your community.

As always, I’m here for any questions or thoughts that you may have. Never hesitate to message me. Please have a wonderful and safe summer season.

Your friend,
Tad

–TAD MILMINE

STOP THE AGEIST STEREOTYPE

As a society, we are continually evolving in our acceptance of past stigmas. But while we are evolving, why is ageism still so prominent and accepted. And what can we do to shine a light on this issue?

Overrepresentation of an underrepresented cohort

A recent research study with Brainsights reveals that many of us don’t know how to properly address the Canadian 55+ demographic. In fact, since only 6% of the advertising workforce is 50+, this cohort is highly misinterpreted causing many people to completely miss the mark when advertising or communicating with them. But why is this important? Firstly, this demographic is continuing to grow and is now the largest demographic in Canada (with 11 million Canadians falling into this segment), secondly a Yale University research found that older people with positive perceptions of aging lived seven-and-a-half years longer than those with negative perceptions. Knowing how to properly engage with Canadians 55+ not only make us feel better about aging ourselves, it can also help us live longer.

We’ve heard you loud and clear

Brainsights, in partnership with HomeEquity Bank, analyzed the brain activity of more than 300 Canadians, with an equal split between Canadians under 55 and over 55. These individuals were then showed 117 pieces of video content, including ads targeted at Canadians 55+, news clips, movie trailers etc. Their brain waves were recorded, measuring levels of attention, emotional resonance, connection and encoding.
This research reveals four key actions we can all take to bust the age bias.

1) Old Age Stereotypes alienate Canadians 55+
The media portrays Canadians 55+ as frail and helpless. The reality is, Canadians are living longer and healthier lives than ever before, and Canadians over the age of 55 are just as lively and adventurous as someone in their 30s. We all need to start viewing this cohort as vibrant, educated and enthusiastic.
2) Don’t underestimate the power of nostalgia
Many of the communications targeted at the Canadian 55+ demographic tend to focus on what lies ahead. But research shows that nostalgia can be very powerful especially for Canadians 55+. In fact, ads tagged with nostalgia as a theme worked well overall for the 55+ segment, driving 11% greater attention, 9% greater emotional connection, and was 13% more memorable than the average. Canadians 55+ may be experiencing anxiety or stress of not knowing what lies ahead, but nostalgia can give a sense of comfort by providing certainty and familiarity.
3) Positive recollection
Canadians 55+ have an inherent desire to leave the world in a better place, and they do so through the transfer of knowledge to their children. Leaving a legacy for future generations leads to a 27% increase in attention, 42% increase in connection and 31% increase in encoding. Canadians 55+ like to feel like they made a difference in the world and specifically in the knowledge they leave behind to their children. It’s this type of content that they connect best with.
4) Digestible chunks can go a long way

Science proves that as we age, we require more cognitive resources to process information. So, while the 55+ group likes information, it needs to be presented in smaller chunks. This may require multiple conversations or giving older Canadians time to digest what they heard. Sometimes written in an email can be better than spoken on the phone, since it provides time to review and digest the message.

In summary
By measuring the brain waves of both Canadians over and under 55, we now understand how we can all improve the way we communicate. Through this research study, HomeEquity Bank has also raised awareness to emphasize the prevalence of ageism and that Canadians are not just looking to retire in silence, but rather, retirement is a time to live a vibrant and active lifestyle in the home they love!

Why this matters to us
HomeEquity Bank is a proud partner of Dominion Lending Centres. As a 100% Canadian company working for aging Canadians, HomeEquity Bank has been in business for over 30 years as advocates for the Canadian 55+ demographic. They have been working to not only help empower the 55+ demographic, but they are always at the forefront of pushing back against stereotypes of aging. They are passionate about our aging demographic and what is needed in order to live a well-deserved retirement. It is through this, that they commissioned this research with Brainsights to further understand our aging demographic.
HomeEquity Bank is a proud partner of CARP, a non-profit organization that advocates on behalf of Canadians as we age. Under this partnership, HomeEquity Bank is now officially endorsed and recommended by CARP as a trusted financial solution during your retirement years. As a special offer, CARP members can receive a cash rebate of up to $250 on a home appraisal. Contact your DLC mortgage broker to find out more about this special offer.
Contact your DLC Mortgage Broker to find out if the CHIP Reverse Mortgage solution is the right one for you.

–SUE PIMENTO

Latest in Mortgage News: Stress-Test Rate Drops After a Year of No Change

The benchmark posted 5-year fixed rate, which is used for stress-testing Canadian mortgages, fell yesterday in its first move since May 2018.

The Bank of Canada announced the mortgage qualifying rate drop to 5.19% from 5.34%. This marks the first reduction in the rate since September 2016.

The rate change came as a surprise to most observers, since it’s based on the mode average of the Big 6 banks’ posted 5-year fixed rates. And there have been no changes among the big banks’ 5-year posted rates since June 21.

As reported by RateSpy.com, the Bank of Canada explained today’s move as follows:

“There are currently two modes at equal distance from the simple 6-bank average. Therefore, the Bank would use their assets booked in CAD to determine the mode. We use the latest M4 return data released on OSFI’s website to do so. To obtain the value of assets booked in CAD, simply do the subtraction of total assets in foreign currency from total assets in total currency.”

If that sounds convoluted, RateSpy’s Rob McLister tells us this, in laymen’s terms: “What happened here was that the total Canadian assets of the three banks posting 5.34% fell much more than the total Canadian assets of the three banks posting 5.19%. The 5.19%-ers won out this week,” McLister said.

Of the Big 6 banks, Royal Rank, Scotiabank and National Bank have posted 5-year fixed rates of 3.19%, while BMO, TD and CIBC have posted 5-year fixed rates of 5.34%.

“It’s one of the most convoluted ways to qualify a mortgage borrower one could dream up, McLister added. “It’s almost incomprehensible to think random fluctuations in bank assets could have anything to do with whether a borrower can afford his or her future payments.”

In his post, McLister noted the qualifying rate change means someone making a 5% down payment could afford:

• $2,800 (1.3%) more home if they earn $50,000 a year
• $5,900 (1.3%) more home if they earn $100,00 per year

Teranet Home Price Index Continues to Record Weakness

Without seasonal adjustments, the monthly Teranet-National Bank National Composite House Price Index would have been negative in the month of June. Thanks to a seasonal boost, however, the index rose just 0.5% from the year before.

Vancouver marked the 11th straight month of decline (down an annualized 4.9%), while Calgary recorded its 11th monthly decline (down 3.8%) in the past 12 months.

“These readings are consistent with signals from other indicators of soft resale markets in those metropolitan areas,” the report said.

But while Western Canada continues to grapple with sagging home sales and declining prices, markets in Ontario and Quebec are already posting increases following weakness in the first half of the year.

Prices in Toronto were up 2.8% vs. June 2018, while Hamilton saw an increase of 4.9% and London was up 3.3%. The biggest gains continue to be seen in Thunder Bay (up 9.2%), Ottawa-Gatineau (up 6.3%) and Montreal (up 5.4%).

Don’t Expect Housing Market to Catch Fire Again

Don’t hold your breath for another spectacular run-up in real estate as seen in recent years, say economists from RBC.

“A stable market isn’t a bad thing,” noted senior economist Robert Hogue. “This is sure to disappoint those hoping for a snapback in activity, especially out west. But it should be viewed as part of the solution to address issues of affordability and household debt in this country…It means that signs indicating we’ve passed the cyclical bottom have been sustained last month.”

Home resales in June were up marginally (0.3%) compared to the previous year, which Hague says provides “further evidence that the market has passed its cyclical bottom.”

Meanwhile, the national benchmark home price was down 0.3% year-over-year in June, “tracking very close to year-ago levels.”

Hague says these readings are good news for policy-makers, who he says want to see “generally soft but stable conditions in previously overheated markets.”

–STEVE HUEBL

QUALIFYING MORTGAGE RATE FALLS FOR FIRST TIME SINCE B-20 INTRO

The interest rate used by the federally regulated banks in mortgage stress tests has declined for the first time since 2016, making it a bit easier to get a mortgage. This is particularly important for first-time homeowners who have been struggling to pass the B-20 stress test. The benchmark posted 5-year fixed rate has fallen from 5.34% to 5.19%. It’s the first change since May 9, 2018. And it’s the first decrease since Sept. 7, 2016, despite a 106-basis-point nosedive in Canada’s 5-year bond rate since November 8 (see chart below).

Five-Year Canadian Bond Yield

The benchmark qualifying mortgage rate is announced each week by the banks and “posted” by the Bank of Canada every Thursday as the “conventional 5-year mortgage rate.” The Bank of Canada surveys the six major banks’ posted 5-year fixed rates every Wednesday and uses a mode average of those rates to set the official benchmark. Over the past 18-months, since the revised B-20 stress test was implemented, posted rates have been almost 200 basis points above the rates banks are willing to offer, and the banks expect the borrower to negotiate the interest rate down. Less savvy homebuyers can find themselves paying mortgages rates well above the rates more experienced homebuyers do. Mortgage brokers do not use posted rates, instead offering the best rates from the start.
The benchmark rate (also known as, stress test rate or “mortgage qualifying rate”) is what federally regulated lenders use to calculate borrowers’ theoretical mortgage payments. A mortgage applicant must then prove they can afford such a payment. In other words, prove that amount doesn’t cause them to exceed the lender’s standard debt-ratio limits.

The rate is purposely inflated to ensure people can afford higher rates in the future.

The impact of the B-20 stress test has been very significant and continues to be felt in all corners of the housing market. As expected, the new mortgage rules distorted sales activity both before and after implementation. According to TD Bank economists in a recent report, “The B-20 has lowered Canadian home sales by about 40k between 2017Q4 and 2018Q4, with disproportionate impacts on the overvalued Toronto and Vancouver markets and first-time homebuyers…All else equal, if the B-20 regulation was removed immediately, home sales and prices could be 8% and 6% higher, respectively, by the end of 2020, compared to current projections.”

According to Rate Spy, for a borrower buying a home with 5% down, today’s drop in the stress-test rate means:

• Someone making $50,000 a year can afford $2,800 (1.3%) more home
• Someone making $100,000 a year can afford $5,900 (1.3%) more home
  (Assumes no other debts and a 25-year amortization. Figures are rounded and approximate.)

For a borrower buying a home with 20% down, today’s drop in the stress-test rate means:

• Someone making $50,000 a year can afford $4,000 (1.4%) more home
• Someone making $100,000 a year can afford $8,300 (1.4%) more home
  (Assumes no other debts and a 30-year amortization. Figures are rounded and approximate.)

Bottom Line: Almost no one saw this coming due to the stress test rate’s obscure and arcane calculation method (see Note below). This 15 basis point drop in in the qualifying rate will not turn the housing market around in the hardest-hit regions, but it will be an incremental positive psychological boost for buyers. It should also counter, in some small part, what’s been the slowest lending growth in five years.

Note: Here’s the scoop on why the qualifying rate fell. According to the Bank of Canada:
“There are currently two modes at equal distance from the simple 6-bank average. Therefore, the Bank would use its assets booked in CAD to determine the mode. We use the latest M4 return data released on OSFI’s website to do so. To obtain the value of assets booked in CAD, simply do the subtraction of total assets in foreign currency from total assets in total currency.”

The BoC explains further:

“Prior to July 15th, we were using April’s asset data to determine the typical rate as that was what was published on OSFI’s website. On July 15th, OSFI published the asset data for May, and that is what we used yesterday to determine the 5-year mortgage rate. As a result, the rate changed from 5.34% to 5.19%.”

–DR. SHERRY COOPER