Wednesday Jan 31st, 2018
With rule changes, talk of interest rate hikes, and an improving Canadian economic outlook, there is no doubt that we are headed for an interesting year.
In January there were 3 changes to the Canadian Mortgage market. You have undoubtedly heard of the 2% ‘stress test’, which requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%. So, let’s take a closer look at the other 2 forgotten changes.
Change two: The Office of Superintendent of Financial Institutions (OSFI) is requiring lenders to enhance their loan-to-value (LTV) measurement and limits so they will be dynamic and responsive to risk.
What this means: This rule change will require Federally Regulated Financial Institutions (FRFI’s) to pay close attention to LTV’s with respect to all risk factors. LTV ratios will be required to reflect local area risk and be updated as housing markets and the economic environment evolve. For example, what happens in Canada’s largest and hottest housing markets, Toronto and Vancouver, respectively, is quite different from that in, say recovering areas such as Calgary and Edmonton. With this new rule change, don’t be surprised to see down payment requirements change to suit local geographic markets.
Change three: OSFI is placing restrictions on certain lending arrangements that are designed or appear designed to circumvent lender LTV limits.
What this means: If a borrower had limited down payment resources, a riskier lender could circumvent their lending practices by borrowing the shortfall from another lender. Now, all FRFI’s will be prohibited from arranging a mortgage with another lender, or a combination of a mortgage and another lending product, in any form that circumvents the institution’s max LTV guidelines. This applies more to lenders that specialize in riskier lending practices. OSFI will be watching when lenders are combining mortgages beyond their guidelines to meet the needs of borrowers with limited down payments.
Are rates going up? They might be, but not drastically if wage inflation does not keep up with rate hikes. In today’s mature global economic workforce, the supply of workers is no longer limited to physical location. As a result, wage inflation is nowhere near the levels it was in the 80’s and 90’s when rates were in the double digits. A 2% increase on a $500,000 mortgage would increase the payment by at least $500 a month, causing a serious need for budgeting and lifestyle adjustments. Without wage inflation, raising interest rates would be far too drastic of a measure to control housing. It would force businesses and voters to borrow at higher rates. There are just far too many people who wouldn’t be able to make their payments. With no other tangible government interference tools, the 2% stress test was created to intervene.
To make the most of rates, let’s dive further into their mechanics. Every mortgage is made differently, and it is crucial you understand the type of mortgage you would qualify for to properly project your interest costs. Today, major media outlets would have you trembling in your boots, citing rates in the high 3%-4% range. Is this really the rate that would apply to you? Maybe. Maybe not.
It is crucial to understand how your mortgage application fits into the mortgage market. How will you accurately assess a rate offering if you don’t know how your mortgage application is being assessed? Each application is carefully reviewed as an investment for the lender, and each borrower and property will pose a unique set of risks. Without assessing the application risks (your weaknesses), how can the lender determine the return (or rate) of their mortgage offering to you as a borrower?
Good mortgage brokers will know general standout rates like the back of their hand, as most clients will focus on rate as a factor to doing business. Excellent brokers will offer unparalleled advice, while playing the rate spectrum to present their client’s application strengths in the most favorable light to the lender, thus reducing the risks, and maximize their ability to secure the client with an excellent rate.
A residential mortgage application will generally fall under the following mortgage types: Uninsured, Insured, Insurable, Conventional, Refinance, Switch, Special Program, etc. while each type of mortgage offers a unique set of lending risks and a corresponding rate offering to match.
You might think you would be rewarded for toiling away to save a down payment of 20% or greater (conventional mortgage), but today's lending environment, insured (less than 20% down) 5 year fixed rates can vary from 3.04% - 3.49% and conventional rates can vary from 3.44% - 4.39%. Quite the opposite of a reward! Refinances for existing mortgages can vary from 3.54% - 4.59%, while purchases vary from switches, and there are different forms of switches!
Without talking to a trusted mortgage broker, how will you know what type of rate to expect? Or, if a rate that appears to be competitive is indeed competitive when considering the rest of the terms and offerings? Terms may sound similar from one bank to another but be different in nature.
While rate is important, mortgage products should be considered with a focus on suitability. The importance of staying prepared by choosing the right product is paramount in our consistently changing real estate and lending environment.
The Current Canadian Economic Outlook, taken directly from The Bank of Canada Press release on January 17th, 2018:
“While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.
The next scheduled date for announcing the overnight rate target rate is March 7th, 2018. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on April 18th, 2018.”
KEEPING YOU INFORMED