Blog | Canada Mortgage Direct

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

The 2019 Federal Budget Really Missed The Mark!

Wow! I had time blocked the Liberal Budget Announcement with anticipation of hearing some great news…boy was I disappointed. I was hoping to hear about tax cuts on both the personal and business side to help make Canada competitive yet again…nothing. I was hoping to hear that relief was on the way for those looking to get into the housing market without any strings attached. Not going to lie, I was left a little disappointed.

Anyway, I’m not here to ramble and my opinion really doesn’t matter because you want the facts. You want the numbers. I get it.

I am only going to discuss the announcement as it relates to the housing sector and there are only two:

1. Increase to the First-Time Home Buyer RRSP redemption limit
2. CMHC’s ‘Shared Equity Mortgage’

Before I begin I would like to disclose that for those who don’t know, I am a Mortgage Broker and have been for 16 years. If you feel there is a bias here, you are likely right. I am pro consumer! My fiduciary duty is to the consumer! I am their advocate first and foremost…not the bank’s and certainly not Government’s. As a result, if you are looking for a more balanced approach, you may wish to stop reading at this point and walk away. This is in no way a political rant, simply me providing information based both on facts as well as 16 years experience.

With that out of the way, let’s not waste anymore time.

First order of business, the increase to the First-Time Home Buyer RRSP Redemption limit. The Liberals have proposed an increase from $25,000 to $35,000. We’ll take it! Any increase is great news. In my experience, this will have a limited impact as most First-Time Home Buyers are not sitting on a pile of disposable income that they could 1) stock away into an RRSP knowing they can’t access it in an emergency and 2) borrow against in the future to purchase their new home and afford both the payments that come along with home ownership as well as the annual obligation of now having to pay back the RRSP at a rate of 1/15^th every year. For example… borrowing $35,000 from the RRSP would leave the home buyer having to pay $195 monthly or $2333.33 annually back into their RRSP on top of any obligations that may already exist.

Again, I like it, but the impact is limited.

Next up, CMHC’s ‘Shared Equity Mortgage’. What a bad idea for all concerned, the home owner, CMHC and the tax payer.

Let me take you back a couple of years before we get into the numbers. When all these mortgage policy changes were introduced, both CMHC and the Finance Department were citing that it was necessary to peel back the risk to protect the tax payer by limiting tax payer exposure. Remember hearing about that?

Now they want CMHC to loan qualified first time home buyers, those whose household income does not exceed $120,000, 5% at a 3.1% mortgage insurance premium (90% loan to value) for a re-sale home or 10% at a 2.8% mortgage insurance premium for new home builds. This effectively increases tax payer exposure and goes against everything Evan Siddall (CMHC) and Bill Morneau (Department of Finance) have preached over the past 3 years. I won’t even get into the Government rhetoric about household indebtedness and how both Siddall and Morneau take very seriously, only to have government add to that burden.

I’m confused about this one for many reasons…

1. It is supposed to take affect September, yet brokers, insurers, nor any lenders have any additional details. Stay tuned…
2. How will they track who owes what?
3. Will they register an interest on title?
4. Will there be an additional mortgage insurance premium for Government involvement?
5. How is this ‘Shared Equity Mortgage’ to be paid back…upon sale? I would suspect it would even be repayable upon a refinance?
6. What happens in the event the property value falls and any equity has been evaporated or a client ends up in financial distress and needs to sell the home? The ‘Shared Equity Mortgage’ is percentage based so would CMHC participate in the loss? My fear is that this could force a client into hanging onto the property and if they can’t, a massive CMHC judgment in the amount of the 5 or 10% would be the result.
7. Speaking of CMHC participation…would they participate at the same percentage when the property has been sold at a higher value then the original purchase? Meaning, would CMHC want 5 or 10% of the gain as well?
8. The Liberal Government has set aside $1.25 Billion over three years to facilitate this.

These are a few questions that I am seeking answers for. I will provide clarity as the details unfold.

Let’s get to the numbers already. Okay, I get it!

I chose to chart the numbers from two different perspectives…

1. What do the numbers look like based on a home of $500,000, which would be the max?
2. What do the numbers look like based on an income of $84,000 annually?

This is clearly about buying votes! There is no way the average consumer can understand this. I mean I crunched the numbers and it gave me a headache. Under the ‘Shared Equity Mortgage’ program, the MAX MORTGAGE = 4X annual income + incentive…hence my headache.

Who is going to want to be in business with the Government knowing there is no benefit to them personally?

All that said, any news is good news and our housing market can use as much publicity as possible right now. If there was ever a time where Canadians needed the advice of an independent mortgage professional, that time is now!

In other news, and I will speak to this on Monday, the lack of anything meaningful in this Federal Budget must have the Bank of Canada on edge as rate cut is very much on the table. Markets are reacting and it is not looking good for Canada, however, lower borrowing costs (interest relief) is on the way.

If you haven’t done so already, please share this. Let’s get the word out to help educate all home buyers.

As always, feedback is appreciated.

Jeremy

Two weeks ago I did a presentation at a Real Estate office to discuss the mortgage Stress Test and what the Government might be looking to do. It’s an election year and our industry association, Mortgage Professionals Canada, has been lobbying hard and advocating on behalf of both the consumer as well as industry members and more recently you might have heard the Federal Government say that they are looking at ways to make housing more affordable for Millenials. Of course the Mortgage Stress Test was brought forward as a topic and interestingly enough I came across an article yesterday titled, “Morneau taking close look at return to 30-year insured mortgages, homebuilders’ association says”…click to view. I wouldn’t say I’m psychic, but I would say we are thinking along the same lines.

What would the Government do?

We know the Mortgage Stress Test is not going away, it’s just not. So… the Government has two options as I see it. 1) lower the rates used for Stress Test qualifying rate or 2) bring back the 30-year amortization.

Let’s take an income of $84,000, single income or combined income, for this illustration with 5% down. Based on today’s qualifying rate of 5.34%, the max mortgage would be $415,000.

Scenario 1
Let’s suggest the qualifying rate is lowered from Benchmark rate of 5.34% to contract (rate 3.59% today) plus 1% for a qualifying rate of 4.59%. In this case the max mortgage would increase to $450,000(+/-).

Not bad…but what about a 30-year amortization?

Scenario 2
Let’s take the same $84,000 income, qualifying at today’s Benchmark rate of 5.34% but over 30 years, that would increase the max mortgage amount to $450,000(+/-).

So both scenarios yield the same result, but which works out better for the consumer?

From a monthly payment perspective, the 30-year amortization is the clear winner, as the monthly payment would be significantly less than that in Scenario 1. A lower payment allows for improved cash flow at the end of the month. A person can always shorten their amortization by simply increasing their monthly payment.

Which scenario works out best for our Government?

Scenario 2 would work out the best for Government because to go from a 25-year amortization to a 30-year, CMHC (Canada Mortgage and Housing Corporation) would increase the insurance premium for the privilege…likely somewhere between 0.25% – 0.50%. with 5% down, what would be 4% insurance premium under Scenario 1, would now be 4.25% – 4.50% under Scenario 2.

Now, when I shared this with an industry buddy a couple of weeks ago, he said, “makes sense but there is no way the Government has put as much thought into all this as you have…you’re over thinking it”. Perhaps I am and sometimes I over analyze. But if I am the Government, I’m doing whatever makes the most cents (pun intended) for me and doing it in the name of helping consumers.

When shopping for a mortgage, the majority of consumers ask one question, what is your best rate? True, some ask questions beyond rate, as they should, and today I’m going to help the majority look beyond rate. What if you obtained the lowest possible 5 year fixed rate on day one but two years later the penalty is ten’s of thousands of dollars? Did you really get a great deal? Let’s investigate…

Let’s take a mortgage balance of $375,500 and a 5 year fixed interest rate of 3.49%, which you have had for the past two years. And for whatever reason you have decided to break the term of your contract, maybe it’s to take advantage of today’s lower interest rates, debt consolidation, selling the existing home, etc…

A standard IRD (Interest Rate Differential) penalty would look like this:

Mortgage balance = $375,500
Your contract 5 year fixed interest rate = 3.49%
Number of years remaining on your term = 3 years
Current 3 year mortgage rate (term closest to the term remaining)= 2.89%

Standard IRD Penalty = A x C x (B-D)

$375,500 x 3 x (3.49% – 2.89%) = $6,759

Standard IRD Penalty is $6,759

Standard IRD penalties are typically offered by non-bank lenders available through the mortgage broker channel and are significantly different from that of a big bank IRD penalty calculation. Let’s look at a ‘Big Bank’ IRD penalty (I won’t mention which bank this is, but they are all similar).

Bank IRD penalty calculation:

First, we must determine your ‘discount’. To do this we must look back in time to when you first took out your mortgage 2 years ago…what was the posted rate? If you can’t remember, it should be posted on your original mortgage document. If you still can’t find it, I would suggest you consult your Bank representative. On the same mortgage document should be a break down of the mortgage penalty calculation, if not, you can find the break down below.

Part 1: Find the discount

The Bank 5 year fixed posted interest rate = 5.59% (This is the posted rate at time you took your mortgage out…your bank can let you know what it is)
Your contract 5 year fixed interest rate = 3.49% (this is the rate you were given)

5.59% – 3.49% = 2.1%

Your discount, the difference between the posted rate and your contract rate, is 2.1%.

Part 2: Choose the term closest to the term remaining
To do this, visit your bank website to select the term and corresponding posted fixed rate.

Part 3: The calculation

Mortgage balance = $375,500
Your contract 5 year fixed interest rate = 3.49%
Number of years remaining on your term = 3 years
Current 3 year mortgage rate (term closest to the term remaining)= 2.89%
Your discount (as determined above) = 2.1%
Current 3 year posted rate = 3.44%

Bank IRD penalty = A x C x (B-(F-E))

$375,500 x 3 x (3.49% – (3.44% – 2.1%))

$375,500 x 3 x 2.15% = $24,219.75

Your bank IRD penalty is = $24,219.75

What’s the average annual rate of interest, non-bank vs. big bank?

Bank

Average annual rate of interest: $375,500 x 3.49% = $13,104.95
IRD Penalty per year: $24,219.75 / 2 = $12,109.88

($13,104.95 + $12,109.88) / $375,500 = 6.72%

Average annual rate of interest: 6.72%

Non-bank

Average annual rate of interest: $375,500 x 3.49% = $13,104.95
IRD Penalty per year: $6,759 / 2 = $3,379.50

(13,104.95 + 3,379.50) / $375,500 = 4.39%

In conclusion, when looking at the illustration, it is clear that in the bank example, the lower the interest rate, the higher the discount, which means the larger the penalty. It is critical to do your homework to avoid situations like this where your penalty can double, triple or worse. It is known in the industry that some where between 60% – 70% of mortgage holders do not carry their mortgage to maturity. Make sure you are asking the right questions of you mortgage provider, bank or broker. By virtue of the employee/employer relationship, it is difficult to receive unbiased advice from a big bank and my suggestion would be to speak with a mortgage broker, even if it’s for a second opinion. Oh, and if dealing with a bank, ask the representative how they calculate their penalty.

Lastly, we are committed to helping Canadians save money and become mortgage free faster. To help you with asking the right questions, we have created a ‘Shopping Around’ questionnaire with 5 basic, yet very important questions. If you are interested in learning more, we would encourage you to call us at 403.250.2100.