Source: The Globe and Mail – Rob Carrick
It’s tough to feel financially prudent when buying a house these days.
That’s why an increasing number of first-time buyers are saving a down payment of 20 per cent or more. In doing so, they avoid having to buy mortgage default insurance which, in the case of a house price of $487,095 (the national average) bought with a 10 per cent down payment, would be 3.1 per cent or $13,590. This premium is generally added to the mortgage, which means more interest to pay.
It certainly sounds financially prudent to make a 20-per-cent down payment where possible, but this isn’t always the case. In fact, you may save money both now and in the future by making a slightly smaller down payment and taking on the cost of mortgage default insurance.
Listen up if you’re concerned about the new mortgage lending rules that were announced last week and will take effect on Jan. 1. When making a down payment of 20 per cent or more, the new rules require that you be able to qualify for a mortgage at the greater of the five-year benchmark rate published by the Bank of Canada, or the original contractual rate plus two percentage points. An easier path to a mortgage may be to make a smaller down payment.
To even propose this seems bizarre. “The story has been that you’re just throwing money away with mortgage insurance,” said Mike Bricknell, a mortgage agent with CanWise Financial. What this thinking ignores is the way today’s mortgage market discriminates against people who make down payments of 20 per cent or more. They may pay a fair bit more for a mortgage than someone with a high-ratio mortgage (down payment of less than 20 per cent) both now and on renewal.
A lender dealing with a client who has a sub-20 per cent down payment can take comfort from the fact that the loan is covered by government-backed insurance that is paid for by the borrower. A conventional mortgage (20 per cent or more) can be insured as well, but by the lender. All in all, a high-ratio mortgage is preferable from the lender’s point of view and often results in a lower mortgage rate.
Mr. Bricknell has lately found that rates on five-year fixed rate mortgages are about 0.45 of a percentage point less for high ratio as opposed to conventional mortgages. Maybe your lender can do better than that. If not, consider this example of how a down payment less than 20 per cent can pay off.
We start with a $450,000 house and a buyer with a 20-per-cent down payment already saved. With a conventional mortgage amortized over 25 years, Mr. Bricknell figures this person could get a five-year fixed rate mortgage at 3.29 per cent. That means a monthly payment of $1,758.
Now, let’s see what happens when this borrower makes a 19-per-cent down payment. A smaller down payment means borrowing a bit more, and thus more interest over the life of the mortgage. Also, mortgage insurance will be required at a cost of $10,206. All of this nets out to a monthly payment of $1,743, with the mortgage insurance premium included. How is this possible? Mr. Bricknell said it’s because the high-ratio borrower gets a mortgage rate of 2.84 per cent.
There’s a stress test for high-ratio mortgages as well, but it’s marginally less onerous than it is for conventional mortgages because you only have to be able to handle the Bank of Canada benchmark rate, currently 4.89 per cent. Thus the high-ratio mortgage in Mr. Bricknell’s example would have a qualifying rate of 4.89 per cent and the conventional mortgage would be at 5.29 per cent (the client’s actual rate plus two percentage points).
The two mortgages outlined by Mr. Bricknell are pretty much a wash right now when compared on cost. Looking ahead, the high-ratio mortgage offers the potential for lower interest rates when it’s time to renew your mortgage. This assumes that lenders will continue to look more favourably at high-ratio mortgages.
Mortgage industry data show that even as house prices increased from the early 2000s through the past few years, the percentage of people making down payments of less than 20 per cent has declined to 39 per cent from 54 per cent. If the rationale for this is to save money and be financially prudent, a rethink is required. Depending on the rates offered by your lender, a slightly smaller down payment could save you money in the long run.
Gerry Corcoran is bracing for Oct. 25. That’s when the Bank of Canada will make its next interest rate announcement, on the heels of two consecutive rate hikes. Corcoran said he can’t afford a third.
“A lot of us with variable rate mortgages are on pins and needles because we’re like, ‘Are we going to get hit again?'”
‘It’s kind of smacked my finances around a little bit.’– Gerry Corcoran, new homeowner
Corcoran, 38, signed the mortgage for his two-bedroom condo in Stittsville back in June.
Two weeks later, on July 12, the Bank of Canada announced a rate increase of .25 per cent, the first increase in seven years. It was followed by a second .25 per cent increase in September.
As someone with a variable rate mortgage, Corcoran says those small rate hikes have had a sizeable impact. He estimates they’ll cost him about $65 per month.
While it’s a cost he says he can absorb, as a new homeowner Corcoran only has a few hundred dollars a month in disposable income. It’s also meant he’s had to put on hold his plan to enrol in his employer’s matching RRSP program until next year.
“It’s kind of smacked my finances around a little bit,” he said. “It hurts.”
After years of record-low interest rates, people in the mortgage business say they’ve been waiting for this other shoe to drop.
Erin MacDonell, a mortgage agent with Mortgage Brokers Ottawa, says she saw a spike in calls after the rate hikes. Many callers were eager to buy — or refinance their mortgages — before rates went up again.
“People are in a little bit of a panic mode,” MacDonell said.
But even if interest rates continue to climb, she says a new federal “stress test” will help mortgage holders weather the changes.
Under the safeguard introduced last October, a borrower had to be approved against a rate of 4.64 per cent for a five-year loan — even though many lenders are offering much lower rates. That rate is now 4.84 per cent.
The test applies to all insured mortgages where buyers have down payments that are less than 20 per cent of the purchase price.
“No one should be struggling too, too much,” MacDonell said.
Instead, she predicts future rate hikes will simply mean “people won’t be qualifying for as big of a house as they maybe wanted in the past.”
Gerry Corcoran says despite being forced to tighten his belt, buying was still the right choice for him.
“At the end of the day, even with mortgage and condos fees, I am still paying less to own this place than [I’d pay] to someone else to rent it.”
The national housing agency is exploring ways to make it easier for entrepreneurs and new immigrants to buy a home by cutting some of the red tape required to prove they can afford to pay the mortgage.
“Right now, under our mortgage insurance policies, you have to be able to document income to get mortgage insurance, to a level of specificity that discriminates against new Canadians, because they can’t do that,” Evan Siddall, the CEO of the Canada Mortgage and Housing Corp., said in a wide-ranging interview with The Canadian Press.
“It discriminates against entrepreneurs, as well, because they can’t prove their income as well, so we’re looking at our own policies to try and make sure that there is more equity in our mortgage insurance programs,” he said.
Anyone who wants to buy a home in Canada without a down payment of at least 20 per cent of the purchase price is usually required to get mortgage loan insurance from the CMHC, which requires a smaller down payment of five per cent on a home worth up to $500,000.
A 10-per-cent down payment is required for the portion of the price over $500,000, with $1 million being the maximum property value allowed.
The mortgage insurance comes with a premium, which the lender will then pass on to the person buying the home.
Borrowers need to satisfy lenders they will be able to make their mortgage payments, which usually means providing proof of employment and a few pay stubs. But that can be tricky for people who just started their own business.
It can also be a barrier to those whose employment history has gaps for other reasons, such as having recently immigrated to Canada.
People who are self-employed, for example, usually need to provide notices of assessment for the previous two years. Their income is determined by averaging those two years, although the most recent year can be used if it has increased annually for at least four years.
They also need to have been doing the same type of work for at least two years.
Dan Kelly, president of the Canadian Federation of Independent Business, said more flexibility would be welcome, especially for startups.
“If one starts a business or is self-employed, the lines between their personal and business finances are often quite blurry,” said Kelly.
“Often, their personal assets are required to get financing for the business. But then they also have a challenge getting financing on the personal side, because they don’t have the nice, clean letter of offer from an employer that is often quite convincing in these situations,” he said.
Any relaxation of the rules would naturally increase the risk. So Siddall said the agency is looking at how to manage that, including different ways to document income, and higher premiums.
“Can we charge for that risk? Better to charge that risk than not to make it available,” he said.
Jack Fiorillo, a broker with TMG The Mortgage Group in Woodbridge, Ont., said he expects the CMHC to be fairly conservative on this front.
“It will be a very small sandbox that CMHC will play in, probably at the beginning, and then maybe if once their risk appetite increases, maybe they can expand that box,” said Fiorillo.
He said he expects the potential change to make it easier for a relatively small number of self-employed people to get a mortgage, and they will likely have to pay higher interest rates.
The CMHC said it has been compiling data on how many would-be homeowners have their mortgage applications rejected for these reasons, but cannot disclose those numbers right now because it is based on conversations with commercial lenders.
“We are still doing research and development to move this forward,” CMHC spokesman Jonathan Rotondo said in an email.
Siddall said the Crown corporation has raised the idea with its board and expects to announce something within the next six months.
Source: The Canadian Press
A former MP and popular finance blogger is warning a federal watchdog’s proposed changes to the mortgage qualification process could have a dire impact on housing markets across Canada.
Garth Turner, whose Greater Fool blog has ruffled more than a few feathers, suggests a move to “stress test” all uninsured mortgages, rather than just insured mortgages with downpayments of less than 20 per cent, will curb demand considerably.
“It’s been seven years since we’ve had consistently rising interest rates and we’ve never had this kind of stress test before,” Turner tells BuzzBuzzNews.
“I just can’t in honesty tell people, that ‘Oh, you know, go to Cambridge or Montreal or Halifax or Edmonton for a bargain property because I think properties are going to be feeling a downward tug,” he continues.
Last month, the Office of the Superintendent of Financial Institutions published a draft of its reworked Guide B-20 — Residential Mortgage Underwriting Practices and Procedures, which included the broader stress test proposal.
By stress testing all mortgages, Turner suggests a large chunk of the prospective-homebuyer population will be pushed to the sidelines as they will no longer be able to finance their purchase, thus reducing demand and, ultimately, leading to outright price declines.
It’s a regulatory change that Turner is convinced will take place before the end of the year.
“We all have the same mortgage rates coast to coast, we all have the same mortgage approval regulations coast to coast, so these are universal changes that are going to affect every buyer in Canada,” Turner says.
Currently, a homebuyer can go to an alternative or sub-prime lender or even the Bank of Mom and Dad to borrow money to boost their downpayment to 20 per cent or more, avoiding any stress test. But the new regulations would close this loophole.
“Credit is going to be drying up somewhere between 17 and 20 per cent simply because of the stress test alone, and that’s a pretty significant number of people to take out of the market,” he adds.
“The only workaround is going to be the people who get mortgages from non-bank lenders,” says Turner, citing provincially mandated credit unions as an example.
He refers to some credit unions as “time bombs,” estimating a number of them have 90 per cent of their assets tied up in residential mortgages.
“Talk about risk: it’s flashing red.”
Source: BuzzBuzzHome.com – Josh Sherman
A prolonged regime of low-interest rates along with a steady trend of rising incomes have more than doubled the amount that Canadians are able to borrow for their home purchases, according to the latest report by a public policy think-tank.
In its newest study titled “Interest Rates and Mortgage Borrowing Power in Canada”, the Fraser Institute stated that from 2000 and 2016, interest rates decreased from 7.0 to 2.7 per cent, while household income rose by 53 per cent nationwide. These developments have increased the maximum size of mortgage homebuyers can qualify for by 53 per cent.
In turn, these trends might have contributed to the prevailing environment of elevated housing prices in metropolitan markets nationwide.
“Increased borrowing power, brought about by falling interest rates and rising incomes, is potentially the most overlooked and least understood factor influencing home prices across Canada,” Fraser Institute president Niels Veldhuis said.
Mortgage-borrowing power in Calgary increased by a staggering 161 per cent, the greatest nationwide. Meanwhile, Vancouver saw a 118-per-cent growth in this metric. Montreal posted 115 per cent, and Toronto saw a 100-per-cent rise.
“This increase in borrowing power — in simple terms — means that an average Canadian family, dedicating the same share of their income to monthly mortgage payments, can afford a mortgage that’s more than twice as big now as it would have been in 2000,” Veldhuis explained.
Interested parties can access the full study here.
Source: MortgageBrokerNews.ca by Ephraim Vecina
Formerly frenzied buyers are reconsidering purchases made in the heat of the market.
Barrie teacher Cheryl O’Keefe doesn’t know how she would have survived the stress-induced sleepless nights of July had school not been out for the summer.
O’Keefe is among Toronto region homebuyers and sellers who got caught in the spring real estate downturn.
When the sale on her house finally closed a month past the originally agreed-upon date, it was the end of an expensive nightmare for O’Keefe.
Others who sold their homes in this year’s once frenzied real estate market, are still struggling to complete their transactions.
Lawyers, realtors and mortgage brokers report a surge in calls from distressed sellers whose buyers purchased in the heat of the market, only to find that the subsequent drop in the home’s value is more than the cost of walking away from a deposit.
Others, who bought unconditionally, have discovered they can’t get the financing to meet their purchase obligation. In some cases, the bank appraisal has come in at a value below what a purchaser agreed to pay, leaving the buyer scrambling to make up the difference.
O’Keefe’s real estate agent, Peggy Hill of Keller Williams, says closings have been stalling since the end of June. Barrie home prices may not be as high as some closer to the city, but the drop has been precipitous.
“Our average price for a home in Barrie is $471,822 for July. In March it was $570,199. We’re talking about a $100,000 difference,” she said.
That is still $40,000 above the average price of July 2016. But back then, 208 of the 260 homes listed sold. “This July we have 201 sales so the sales are still there but with 683 active (listings),” said Hill. “That’s the real picture.”
The GTA-wide picture is similar. When the regional market peaked in April, the average home price — including every category from condos to detached houses — was $919,449. By July, it had fallen to $746,216, although prices were still up 5 per cent year over year.
There were 9,989 sales among 11,346 active listings in July of 2016, according to the Toronto Real Estate Board. This July, listings soared to 18,751 listings, with only 5,921 sales.
O’Keefe had lived in her bungalow for only about two years when she decided to sell it in February, about the time property prices were peaking. Her basement apartment was standing empty and she wanted to downsize.
The real estate frenzy in Barrie mimicked Toronto’s and most of the 43 showings of O’Keefe’s house were, in fact, people from Toronto.
Like many homes at the time, O’Keefe’s sold in about a week for more than the listed price. The buyer put down a $25,000 deposit and requested a longer-than-usual four-month closing date of June 28.
“That was fine. It just gave me more time to do what I had to do,” said O’Keefe.
What she had to do was find a new home for herself in the same fiercely competitive market. She lost a couple of bidding wars and turned her back on a century home she loved because she knew it would go at a price she could never justify.
When she happened on an open house that fit her needs, O’Keefe bought it with a May 28 closing — a month ahead of when her own home sale was to be finalized. She arranged bridge financing to cover both mortgages for that month.
It all looked good on paper. But as the spring wore on, O’Keefe grew uneasy. The buyers of her house had not requested the usual pre-closing visit. Usually, excited new owners want a look around.
O’Keefe got her realtor to call. No response.
A week from closing, she had still heard nothing. At 4:50 p.m. on closing day, her lawyer talked to the purchaser, who admitted he was having difficulty with the closing.
By then, O’Keefe had been living in her new place a month and was paying two mortgages.
She agreed to extend the closing to July 14. When that didn’t happen, O’Keefe agreed to a second extension to July 31. The date came and went. Finally on Aug. 2, her lawyer called to say the buyer closed.
“Every step of the way everything that could be a headache has been a headache,” she said.
O’Keefe’s realtor says that so far, in her office, even problematic closings have been finalized. But some have been disappointing.
“There have been deals where we’ve had to take less commission. The seller had to take less money to make it close because at that point they’re euchred.
“It’s usually $40,000 to $50,000 because of our price point. In other areas I know it’s in hundreds of thousands of dollars,” said Hill, referring to areas such as Richmond Hill, Newmarket and Aurora, also hard hit by the market’s downward slope.
Some buyers have requested extensions on new home purchases because their old places didn’t sell, said Hill.
“That’s understandable,” she said. “In March, you wouldn’t dare go in with an offer conditional on the sale of a home. The problem is, in April, when all hell broke loose, everybody started putting their houses on the market fearing they had missed the top.”
Many have arranged bridge financing and moved on. But others haven’t been as fortunate, said Toronto lawyer Neal Roth.
He has been getting about five calls a week since mid-May from home sellers struggling to close on transactions.
“There is this horrendous domino effect going on where people in the spring were rushing into the market for a variety of reasons, committing to prices that in some instances were well beyond their means,” he said.
Most of his callers represent one of two scenarios.
First, there’s someone paid $1.5 million for a house that has since become worth $1.4 million, so they want to get out of the purchase.
“The other type of person says, ‘The bank promised me 60 per cent financing. Now that I’m at $1.5 million I should still get the same 60 per cent, not realizing that you have to come up with the 40 per cent of your own cash, or that the bank said 60 per cent when you were at $1.2 million, not $1.5 million,” said Roth.
While he thinks some sellers got greedy and some buyers should have been more careful, he hasn’t encountered anyone who got caught playing the property market.
“They’re all average people. None of them have been speculators as far as I know,” he said.
It’s not uncommon for mortgage brokers to hear from home buyers struggling with financing, said Nick L’Ecuyer of the Mortgage Wellness Group in Barrie
“But what we’re getting now is people who are in sheer turmoil. They don’t know what to do at all,” he said.
Some sellers, who planned to use their equity to put down 20 per cent or more on another home, don’t realize they can’t get bridge financing from a bank if they don’t have a firm purchase agreement on their old house.
Then there’s the hard truth that the house they’re selling isn’t likely to go for as much as they expected earlier in the year.
They can put down just 5 per cent and apply for a government-insured mortgage, but that’s more complicated and costly, said L’Ecuyer.
The Appraisal Institute of Canada doesn’t have statistics on the number of lender-commissioned appraisals that come in short of the agreed-upon price of a home.
But based on anecdotal accounts, it’s happening more now in the GTA, said institute CEO Keith Lancastle.
“Any time you go into a situation where you make an abrupt change from a seller’s market to a buyer’s market — where you see a slowdown for whatever reason — you can encounter this situation,” he said.
The role of an appraiser is to provide an unbiased opinion of a property’s value at a given point of time.
“A heated market does not automatically translate into a true market value. When you take away the heat, all of a sudden it settles down into something that is perhaps more reflective of what true market value is,” said Lancastle.
He says he’s still surprised by how emotional what is routinely now a million-dollar home buying experience can be.
“It’s arguable that mortgage lending should not be underwriting that emotion and that notion of a sober second thought is really important, not only for the purchaser, but also for the lender,” he said.
Buyers tempted to walk away from a deposit need to realize that they may still face a lawsuit, says L’Ecuyer. If you bought a house for $500,000 and decided to forfeit the deposit, and the seller gets only $450,000 from another buyer, you can be sued for the difference, he said. There is also the possibility of being sued by a realtor who isn’t getting a commission, and for additional legal and carrying costs.
Roth said there are people who don’t even realize that when they back out of a sale, their deposit is automatically lost.
O’Keefe believes that because she priced her home on the low side, it hasn’t lost any value. “You start talking to people and this is happening to so many,” she said. “I’m lucky that my house closed.”
Source: Toronto Star –