Rising Rates and More Emphasis on Debt May Impact Borrowers and their Mortgage Options

September 19th, 2013

Reposting a report I found. The mortgage rules, they just keep changing.

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When purchasing a home, the key areas that impact whether you qualify for a mortgage at all and for how much, are based on your income, credit and debts including your new mortgage payments and available down payment.

In July 2012 there were some significant mortgage legislation changes that impacted qualifying for a mortgage including using a higher interest rate to qualify depending on the term you select, more income verification and down payment for the self-employed as well as lowering the amortization to 25 years.  All these changes impacted mostly those that have less than 20% down payment and therefore require default insurance (CMHC, Genworth or Canada Guaranty).

Unfortunately, there is more to come that has already taken effect with some lenders now, and others by December 31st, 2013.  All these changes are intended to curb consumer debt accumulation over and above income levels and to reinforce the importance of ensuring that borrowers do not over extend themselves financially with more debt than they can handle.

Overall, these changes are a good thing to ensure consumers don’t overspend and become “house rich and cash poor”; meaning being a home owner but living pay cheque to pay cheque with so much debt (including credit cards, loans, lines of credit etc.) that there is no extra cash for savings to build a financial cushion should there be an income loss in the future.

The downside is that these changes are impacting the ability for many to qualify to purchase a home, especially impacting first time home buyers who are struggling to find an affordable property that they qualify for close to where they live and work.

So what are the new changes coming into effect by December 31st, 2013 and how will they affect your borrowing and purchasing power?  The changes fall into three categories which are focused on your debt to income ratios and this will determine how much of a mortgage you qualify for;

Debt; The payment that must be considered when calculating how much you qualify for is now a minimum of 3% of the outstanding balance on all unsecured lines of credit and credit cards that you have.  Even if you have a lower minimum monthly payment required by the creditor, this will no longer be used.

For secured lines of credit that are registered against real estate, a minimum monthly payment that is to be factored into your qualifying is now the outstanding balance calculated over a 25 year amortization using either the benchmark rate (5.34% as of Sept 12th, 2013) , or the actual interest you are paying.  Even though your secured line of credit might only have a minimum payment of interest only, you now have to qualify using a much higher payment.  Some lenders are taking this one step further and using the “credit limit” instead of the outstanding balance.

How to overcome this challenge; if you pay your entire balance off each month, and can provide confirmation of this, then you will not be impacted by this change.  Work with me on your personal household budget so we can create a plan to pay down your existing debt to a point where you qualify for the mortgage you require

Guarantors; if you can’t qualify for a mortgage on your own, often a guarantor can be added to your application.  The guarantor is not on title but is on the mortgage and typically doesn’t live in the property with you.  The new changes mean that you can no longer use the income of the guarantor to help qualify for the mortgage unless they will be living in the property with you.  You will now be required to prove you can afford the property without using your guarantors income as well.

How to overcome this challenge:  Ensure that you purchase a home and obtain a mortgage that you can actually afford to pay back on your own without any financial contribution from a guarantor.   You may have to adjust your wish list a bit, or purchase a more affordable home to get you onto the property ladder.

Heating Costs; using about $75 to $100 per month to calculate the cost of heat in your qualifying has been the norm til now.  Changes now require that a higher amount than this be used as determined by the lender and will be based on the the purchase price, size of the property and location.

How to overcome this challenge:  The reality is you are most likely going to be paying more than $100 per month on heat and utilities anyway so ensuring you can afford these bills is a good thing before you buy the home.  When you find a property you want to buy, ask the existing home owners for copies of the utility bills over the last twelve months so you can see what it will actually cost to heat your home thru the entire year.  Of course, your usage might change from the existing home owners but at least you will have an idea.  Again, ensuring you can actually afford to pay the utility bills before you purchase the home is good.

These changes, along with recent rising interest rates, are impacting the amount borrowers qualify for which in turn determines the purchase price of a home.

So what happens next?  Firstly, don’t panic as these changes may not impact your particular situation at all.  If you are considering either moving and purchasing a bigger home or purchasing your first home, call me for a free consultation to see exactly how these changes may impact your qualifying for a mortgage.  There are many strategies we can discuss together to make your dreams of home ownership an affordable reality.

Be prepared for these changes so you we can create a clear plan and path to home ownership for you.

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And beyond that there are still more changes in the rental investment world that continue to make it harder and harder for folks with more than 2 properties to purchase with today’s low residential rates. DCR spreadsheets (for those with multiple properties) is, with 1 exception, a thing of the past.

More and more the trend is to move towards non-traditional or “B” lenders, who seem to be the only ones willing to take on the risk. Their simplified view is, does the overall portfolio cashflow (i.e. positive)? If so, then they focus primarily on the subject property.

Unless your rental income is more than double plus 30%, it’s likely you won’t get todays super low residential rates. Start thinking in the 4-5% rates for you calculations.

Any questions? You know where to find me.

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Mortgage News

June 4th, 2013

I’ve been watching various blog posts and emails go by commenting on what people are trying to predict in the residential home mortgage space.

I’ve seen everything from Flaherty wont touch the mortgage rules… as far as being in control of CMHC is concerned, but no where did it state explicitly that he wont put pressure on lenders for non-insured deals. Lenders need to “beef up” their book (or on balance sheet) of lending, i.e. non-CMHC insured mortgages.

If you believe the media reports, the sky is falling and we’re in the biggest housing bubble since the beginning of time. They keep talking about national averages being down. Who lives in a national average town? Ottawa for example, showed a slight increase in price year over year in April. Yet I wouldn’t want to be trying to sell a home in Vancouver any time soon. Boom & bust what seems like quarterly in that city.

Then I hear talk of a “softening” market. I’ll assume this is the PC way of saying that listings are up (way up), but no one is buying. I think everyone is STILL trying to figure out the rule changes from last year. “do I qualify or not?”

Even heard from a few major developers that condo sales in Toronto aren’t as brisk as they had anticipated. They are focusing now on developing anything BUT condos in the GTA. The condo frenzy appears to be over for the time being.

Mr. Flaherty said he was “happy” with the slow down in real estate… i.e. in Toronto and Vancouver. Unfortunately for the rest of the country, we all have to suffer the slow down even more so, because that’s what the media is reporting. The mind set wont change until the local media starts to report that, “hey look at us, we’re beating the national average. OUR market is HOT.”

The latest rumblings in my world are concerning folks who are self-employed. They are usually the first ones to be picked on (right in there with rental owners) whenever there is any talk of “reducing risk” in the market.

To that end, there have been at least 3 lenders that have announced that due to, from what I can figure, increased scrutiny from CMHC, the lenders have decided that this segment of the market is “too risky” and have pulled back.

If you are, like me, self-employed, then this means you can forget about using any “stated income” product out there until someone deems the backbone that drives the Canadian economy is no longer considered high risk.

In God we trust, but all you non-salaried, self-employed people, please pay cash for your houses.

Enjoy.

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Should Flaherty Interveen In A Rate War?

March 20th, 2013

Oh my, this has certainly sparked a debate.

Let capitalism be capitalism and the government shouldn’t interfere in the business of big business?

Except of course when greed takes over and they almost destroy then entire global economy, then it’s OK for government to step in… in a major way… and try and recover the situation. That’s a whole other topic unto itself.

All I can say is that Flaherty and the BoC have been doing all they can with all the tools they have at their disposal. The BoC used to be able to control the economy with that big leaver called the “overnight lending rate”. That lever lost its leverage when it dropped below 1%. I think Flaherty realized this and then started his tinkering with the mortgage rules as it was deemed a “potential” exposure if all mortgages were to default and CMHC (i.e. the government) had to cover all these loans.

It did serve to almost stall the economy last year and it remains to be seen if that will carry over to this year or the demand will simply push through one way or another.

They twiddled with the mortgage rules and all the while the rates just kept slowly dropping. Why? Well the bond market that keeps buying the mortgage securities kept buying our bonds. The more bonds purchased, the lower the the value of the bond (yield). The lower the yield, the cheaper it becomes for lenders to borrow money and make money on the spread. When the spread is large enough, rates drop. When the spread is less, the rates rise.

It’s basic economics of supply and demand.

Now the BoC has indicated no rate change (up) in the near future (I think the US Fed said 2015 recently) and the bond market (yield) keeps dropping on this kind of news (or anticipated news) and thus borrowing for the banks/lenders becomes less. So what do the banks naturally do? Lower their rates to “stay” competitive with the market.

Does massive advertising that you have the lowest rate really bring in business? Just ask BMO, they didn’t necessarily gain a massive mortgage share, but their other lines of business sure saw an up tick from people coming in to discuss mortgages, which lead to other “opportunities”.

Now I found it amusing that Manulife got the call from Flaherty, because they “opted” to advertise their low rate of 2.99%, yet several other lenders just quietly changed their rates (and some lower than 2.99) and yet none of them were reported to have been called. One has to assume they didn’t get the call as their rates are still unchanged at 2.89%.

(So good news for us brokers? We’ve got rates available lower than what the government thinks it should be for the banks)

So does the minister want to call ALL mortgage lenders and ask them to change? Only ones who actively advertise? The ones that are not in the ministers good books? Change CMHC rules to dictate that 3% is the absolute minimum a fixed mortgage rate can be?

Then there’s the variable mortgage bond market (different set of funds for this security). They have seemingly finally had some sanity restored to their market and are now looking at 30, 40 and likely soon 50 bps off prime. Is the minister also going to step in and regulate how variable mortgages are set too?

Seems to be an uneven playing field in the bank world thanks to Mr. Flaherty. Will it continue? Can it? Will it cause ripples in the bond market? Fed gov’t dictates to Canadian banks that they MUST make more profit on their mortgages.

Wont the world be asking instead what is Flaherty so nervous about that he has to meddle? Rates are low around the world. Why are you keeping yours artificially high? I know Quebec went all NDP federally, but not the whole country.

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