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CMHC Surprises Housing Market With New Underwriting Changes…

Allow me to take you back two weeks ago when Evan Siddall (CMHC’s President & CEO) was testifying before the House of Commons finance committee. You may have heard the media report a couple of things…
1) Housing prices with fall 9 to 18%
2) CMHC may get increase the down payment requirement to 10% from the current 5%

Firstly, there is no national housing market! So while markets like Toronto and Vancouver get hit, it doesn’t mean that Saskatoon, Winnipeg, Edmonton or even Calgary will share to the same degree. Real Estate is very much local.

What I found interesting and what CMHC and the Media failed to report, was that CMHC would be driving the 9 -18% decrease they spoke of.

But I digress…

Oh and before I continue, let me say there is one silver lining but you will have to read to the end to find out more about that.

Here are the changes effective July 1, 2020..

1) Limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to 35/42 down from the current 39/44
2) Increase the minimum beacon score requirement from 600 to 680 for at least one borrower (this will likely be the main applicant (higher income earner))
3) No non-traditional sources of down payment that increases indebtedness

So what does this really mean?

Let’s get the non-traditional sources like borrowing down payment from a line of credit, credit card, etc…out of the way first. I couldn’t tell you the last time we had a situation like this come across our desk, but this one will certainly have no material impact.

Reduced debt service ratios on the other hand…

If we look at a household income of $90,000, their max purchase would be $450,000. Come July 1 their purchase power would be reduce to $400,000. And this is assuming no debt!

For us in Calgary, our purchase power may be further reduced by the property tax increase many house holds are reporting.

Lastly, the 680 credit score requirement. I believe this will be impactful given our buy now on credit and pay it off in 10 years mentality…I believe this has to change. I say that because credit reporting agencies are putting more reliance on utilization these days. So someone with a 760 score today who misses one or maybe two payments could see their score drop below 680 and boom, they are no longer eligible for mortgage default insurance.

And what about that person who has two credit cards that are maxed out? Well, they too could see their score drop under 680.

Or what about that person with a $3000 limit on their credit card and found themselves over extend at $3200, for example? They too could find themselves impacted.

But! And this is a big but… there may be a silver lining!

We have yet to hear from the two private insurers, Genworth and Canada Guaranty. They have the ability to maintain status quo as they don’t have to follow CMHC’s lead.

Why?

Because this announcement is not Federal Government or Regulator mandated. So the two privates can continue with business as usual should they feel confident doing so.

I suspect they will be speaking with the Department of Finance next to gain clarity and insight, so stay tuned for that announcement.

I will be sharing the details the minute I hear more.

Should you find yourself asking why these changes are happening now, that will have to be for another post, as I have lots to say on the subject. That said, feel free to give our office a shout and we can discuss further.

In the meantime, give us a call to better understand the impact and how you can best insulate yourself and your family from these changes should they become the industry norm. Time is of the essence as July 1 is fast approaching. If you haven’t done so already, reach out to a Canada Mortgage Direct Mortgage Planner at 403.250.2100, as we looking forward to speaking with you and/or anyone you may know who may be looking to purchase or refinance a home.

Stay healthy!

Jeremy
403.250.2100

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Bank of Canada Benchmark Rate Falls to 4.94%

Finally! Canada’s big banks lower their 5-year posted rates from the artificial highs they have been sitting at for months. Higher posted rates serves to bolster Bank profits as consumer choose to liquidate midterm and take advantage of today’s historic low interest rates.

But enough about the big Banks…

Down from 5.04% yesterday, a 4.94% Benchmark rate (the rate used for mortgage qualifying with the stress test) is welcomed news for those looking to get into the housing market. This 10 basis point drop (0.10%) equates to $3500 in additional purchase power. Not a lot, but great news nonetheless.

What impact might this have for you and your family, give a Canada Mortgage Direct Mortgage Broker today to learn more. 403.250.2100

Let’s chat…

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Conspiracy, Collusion or just a Coincidence…you be the judge!

The mortgage market has certainly had its fair share of Government intervention over the years and everyone from the First-time Homebuyer to the buyer looking to move up and even investors looking to provide affordable housing options for renters. It has been a tough couple of years.

In looking for solutions, I have noticed something very peculiar and it has me thinking something odd is going on…but you be the judge.

Over the past 6 months the wholesale mortgage interest rates have fallen like a rock from 3.69% to 3.04% today and we are evening seeing 2.89% for 5-year money. WOW!! That is a 22% drop in rates.

You might be saying, that’s awesome as it works well for the consumer. Under normal circumstances I would agree, but this is anything but normal.

I’m sure you have heard of the ‘Stress Test’ that home owners have to go through when qualifying for a mortgage. This stress test uses the Bank of Canada Benchmark Rate which is simply the mode average of the big 5 Canadian bank’s posted rate. Today that Benchmark Rate, or Mortgage Qualifying Rate (MQR) as some like to refer to it, is sitting at 5.34%.

Here’s where things get interesting… this would be the time to get a bowl popcorn.

On May 10, 2018 that Benchmark rate increased from 5.14% to 5.34% due to mounting pressure from the bond market. Right after the increase the 5-year bond yield moved from 2.11 to 2.33 hitting a 7 year high before settling back down 2.11 days later.

Fast forward to today, that same 5-year bond yield has fallen to 1.33, yet the Benchmark Rate remains at 5.34%. It was back in June of 2017 when we last saw the 5-year yield at 1.33 and at that time the Benchmark rates was 4.64%.

In my estimation, the Benchmark rate should be around 4.69%, but we are just not seeing that today. Why?

Great question!!

I see one of three possible scenarios.

Scenario #1.

Keeping the post rate high at 5.34% allows the big Banks to offer deeper discounts. For example… a 5-year fixed rate offering to 3.04%, means a discount of 2.30%. Historically speaking, we are use to seeing discounts in and around 1.8% on average.

But as consumers, we want to drive that fixed rate as low as possible. I have already shared that today we can find a wholesale rate of 2.89% and as a consumer we go back to the Bank and demand it. Banker says sure and we walk away laughing. Sound familiar?

But are we really laughing or is it the Bank that is laughing?

By driving the fixed rate down to 2.89%, we have just drove the discount offered by the Bank up from 2.3% to 2.45%. Would it surprise you if I told you that the higher the discount, the higher the potential IRD penalty? That’s right, should you break the term of that mortgage before maturity, that IRD penalty can be massive! The joke may really be on us, the consumer.

So the question I asked myself knowing all this was…

By keeping the Benchmark qualifying rate artificially high, would Canada’s big Banks find themselves more profitable than the profit resulting from more Canadians being able to get into the housing market by simply lowering their Posted Rates, which in turn would lower the Benchmark Rate?

***Important to note… the Posted Rate for a wholesale lender is their wholesale rate. Their IRD penalty calculations are about one quarter this size of a big Bank penalty, on average. Click here for more on mortgage penalty calculations

Scenario #2

Did the Department of Finance reach out to the big Banks and ask them to keep the Bank Posted Rates artificially high to help them achieve their goals

Fueling the economy by limiting home ownership. I won’t get into this as it is another post on its own.

Scenario #3

Or is it just a coincidence that bond yields have fallen 31% in the past 6 months, yet the Bank of Canada Benchmark hasn’t moved?

I have an opinion, but you don’t care about my opinion so I will keep it to myself. This is where I turn to you and ask…

Is it a Conspiracy? Is it Collusion? Or is it all a Coincidence?

In the meantime, what we can expect is that consumers will continue to drive their rate offering as low as possible and banks will gladly oblige knowing they are driving up the discount of their Posted Rate… the larger the discount, the larger the IRD penalty. And for those who are on the cusp of qualifying and could use the help of a lower mortgage qualifying rate, you might have to wait a little longer.

Quick note… at the time this post was written, the big Banks Posted Rate was 5.34%. On Saturday, two days ago, RBC announced that they lowered their 5-year Posted Rate to 5.19%.

Until next time.

Jeremy

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