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The changing landscape for Canadian Home buyers

Starting in 2008, The Government has steadily reduced the maximum amortization rate from 40 years to 25 years. A 5 year amortization reduction has the equivalent effect on the amount of money a client qualifies to borrow as does a 1/2% interest rate hike.

1. Here’s the effect;

  • in 2007 a buyer with 10% down and a $100,000 gross annual income could get a maximum mortgage of $630,000 (at 4.99% amortized over 40 years) – payments of $446.26 per month.
  • In 2008 with the 5 year interest rate falling to 4.14% and the amortization period reduced to 35 years – that buyer would qualify for the same amount of mortgage, with payments of $449.08 per month.
  • In 2010 when interest rates dropped to 3.49% – the amortization maximum was reduced to 30 years with that same buyer still only qualifying for the same amount of mortgage – with payments of $447.09
  • In 2016, PRE October – that same buyer with a maximum amortization period of 25 years and an interest rate of 2.49% STILL only qualifies for a $630k mortgage.

2. In 2012, the feds introduced legislation impinging on the almost 3 million self-employed workers’ ability to get a ‘stated income’ mortgage. Under this law (B-20) they can borrow only 65 per cent of the purchase value – without requiring default insurance from Canada Mortgage Housing Corp., Genworth Canada or Canada Guaranty. If you have less than 35-per-cent down, your mortgage now has to be insured under specific guidelines. And here’s another twist – CMHC will allow a stated income application as long as you have been self-employed for less than three years. More than three years and you have to qualify according to your net taxable income. Line 150 on your tax return – which despite the ability to carry a large mortgage payment, accountants cleverly work the numbers – legally – to show a lower income with the objective of reducing the already too large income tax load.

3. 2014 additional tightening of rental income calculations – basement suites and additional properties)

4. New rules are in place now regarding the ‘portability’ of your mortgage. If you are attempting to escape the sometimes criminal payout penalty banks charge, by porting your mortgage to a new property and combining that with an additional mortgage to meet the purchase price, you may now have to re-qualify under the new tougher mortgage guidelines.

Government Says It Has Concerns About Their Role With CMHC

Canada Mortgage and Housing (CMHC) may be one of the most profitable crown corporations we have in Canada. They guarantee the lender won’t lose money if they finance a buyer/property more than 75% of its value.

Our government says it has concerns about their role with CMHC  ( essentially a mortgage insurance company) – a role in which taxpayers are technically liable for the borrowers’ actions and behaviour. Yet CMHC currently has premium reserves on hand to withstand up to a 40% market devaluation).

Their average insured loan amount is $173,120 and the average Loan to (current property) Value = 53.1%.  Not much of a risk so far.

The average credit score of the borrowers is 733 (good) and the average Gross Debt Service ratio (GDS) is 23.7%. Note that banks will qualify you for a mortgage with up to a 45% GDS

The Federal government (CMHC) backs these mortgages through two sorts of lenders – Traditional lenders (Banks) and Mortgage Finance companies (‘monoline lenders’).

It has been the Monoline lenders that have driven the interest rates down as they had lower overhead and were smart enough to ‘bulk insure’ their non-high ratio mortgages, resulting in substantial savings that they passed on in the way of lower interest rates.

This advantage has been eliminated by the Federal government by creating policy to heavily restrict the monoline lenders competitive edge. It is curious that when the government decided to enact stiffer regulations and restrictive legislation that they called only on the banks for consultation. Of course it is not a stretch to imagine that the result of this consultation and deliberation is a set of new regulations which threaten the very existence of monoline lenders.

The ‘Nanny State’ reasoning is to protect us from ourselves – at least that is what we are told. Part of the excuse for doing this is that the average Canadian’s debt to income ratio is way too high at 167%.

Federal regulators, and most mainstream media, would have us believe that at 167% it could effectively destroy households.

Dustan Woodhouse gave a great example of the reality of Canadian finances if interest rates double;

1.      The average household debt figure is largely irrelevant to the financial success of our individual household(s)

2.      What is my own debt-to-income ratio? And am I worrying about it at, say, 500%?

Would it sound reasonable to take on a $2,000 mortgage payment with a household income of $100,000?

Is it fair to say that the same $100,000 per year household income could support a $2,600 monthly housing payment?

The $2,000 per month payment represents a monthly payment at today’s interest rates on a $500,000 mortgage balance. The $2,600 per month payment represents a monthly payment at double today’s rates (when that $500,000 mortgage balance comes up for renewal). this household with their $500,000 mortgage balance and a $100,000 household income has a debt-to-income ratio of 500%.

The 500% debt-to-income household has things under control; they know that ~$1,000 of that ~$2,000 payment is principle reduction, a forced savings plan. Although few in Canada actually have a debt-to-income ratio this high; in fact, Bank of Canada research shows that just 8% of Canadians have a debt-to-income ratio above 350%.

But how do things look for the federal government’s debt-to-income ratio?

Let’s have a peak at your (or our collective) “house’s” debt to income ratio. And since the metric does not factor in equity, net worth, savings, or any assets at all when applied to us, we’ll leave them equally absent from this conversation.

Federal Gross income: $291.2 Billion
Federal Gross Debt: $1.056 Trillion

This appears to be a 363% debt-to-income ratio.

Why that’s twice our individual household debt-to-income ratio. And isn’t my mortgage debt capped for complete payout at 25 or 30 years – the maximum amortization allowable. Tell us again about the actual amortization timeline of the current national debt.

Is it the monoline lenders that have driven the interest rates so low that now the Canadian population can afford a $500,000 to $900,000 mortgage? They are actually more prudent than the banks.

Between 2013 and 2016, the characteristics of Median borrowers look like this;

Traditional lenders (*1) Mortgage Finance companies (*2)
Credit score 739 742
90-day arrears rate (%) 0.28 0.14
Household income (annual) $80,912 $84,404
Loan-to-income ratio (%) 304 357
Total debt-service ratio (%) 35.3 37.2


Despite the research clearly indicating a more prudent approach to the business by Company #2 than that of their competition (Company #1).

Taking into account the relative youth of Company #2 (about a decade) vs the age of Company #1 (~150yrs) the variation of the equity (loan-to-income) held by each of its clients is more than reasonable and understandable. The narrow difference in total debt-to-service reflects the generally conservative nature of Canadians and further supports the prudent processes in place at Company #2.

Why is our government effectively trying to legislate Company #2 out of business?

Why is our government consulting only with Company #1 when the government’s own research demonstrates the people at Company #2 are doing twice as good a job when it comes to avoiding problem clients?

Yet despite all of the recent government interference in the real estate market, in British Columbia after a momentary slowing last fall, the market is in full throttle once again.

CMHC Premiums Increase March 17, 2017

Effective March 17, 2017, CMHC’s standard mortgage loan insurance premiums will be changing as follows:

Loan-to-Value Ratio Standard Premium (Current)       Standard Premium (Effective March 17, 2017)
Up to and including 65% 0.60%                      0.60%
Up to and including 75% 0.75%                      1.70%
Up to and including 80% 1.25%                      2.40%
Up to and including 85% 1.80%                      2.80%
Up to and including 90% 2.40%                      3.10%
Up to and including 95% 3.60%                      4.00%
90.01% to 95% – Non-Traditional Down Payment 3.85%                      4.50%

Interesting to note that during the first nine months of 2016

    • Nearly 50% of CMHC’s transactional mortgage loan business were for loans of less than $300,000
    • Nearly 95% of CMHC’s transactional mortgage loan business were for loans of less than $600,000
    • Less than 1% of CMHC’s transactional mortgage loan business were for loans of more than $850,000

As at 30 June 2016, the rate of arrears (loans that are more than 90 days past due over the number of outstanding insured loans) was 0.32% , a decrease from year-end 2015.

Claims paid during the second quarter of 2016 totalled $91 million, an increase of $2 million (2.3%) from the same quarter last year primarily due to the transactional homeowner product.

An interesting comparison is the United States’ delinquency rate for all residential real estate loans. In the first 3 quarters of 2016 it was 4.84%, 4.56%  and 4.30% (3rd quarter), respectively.

In the U.S. 3.1% of home owner loans were “seriously delinquent” in March, 2016 (defined as loans that are at least 3 months delinquent or in foreclosure proceedings). It was expected that this rate would be reduced further by the end of 2016.

The seriously delinquent rate was below 2 % in the US from the 1950’s up to the Great Recession (Dec. 2007 to June 2009 – where it rose to 20%!)

 

However, even the 2% rate is over 6 times higher than CMHC’s  0.32% rate. At this low delinquency rate, it makes one wonder if the 2017 increase in premium rates is just another tax revenue stream.

BC’s New First Time Buyer No Interest Loan Support

Effective January 16, 2017 the province of British Colombia will provide a Home Owner Mortgage and Equity Partnership Program to support first time homebuyers with the purchase of their first home. As part of the program, the B.C. government will match the down payment being contributed by the new homebuyers (up to 5% of the purchase price to a maximum of $37,500). This will be in the form of a 25 year BC Government administered loan with no interest or payments required for the first 5 years.

Some other points to be aware of:

1)  the applicants will need a pre-approval letter from either their bank or their mortgage broker in order to              apply for the loan.  Loan approval is expected to take approximately 5 days;

2)  minimum of 14 days (10 business days) required to fund the loan after final approval (subject removal);

3)  gifted funds for the applicants portion of the down payment will be allowed;

4)  there is no interest for the first five years, but immediately at year six the applicant will be required to either      pay the loan in full, or make monthly payments to a maximum of 20 years.  The interest rate is re-set every        five years.

The following criteria must be met in order to proceed with this program:

  • First time home buyers only. EVERY person on title must be a first time home buyer.
  • Combined annual income for all parties on title cannot exceed $150,000;
  • The closing date on the purchase of the home must be on or after February 15, 2017.
  • The mortgage must be high ratio default insured by CMHC, Genworth or Canada Guarantee;
  • A monthly loan payment will be included in the Total Debt Service (TDS) ratio to calculate the approval amount. The payment will be calculated using the Bank of Canada rate and a 20 year amortization;
  • All applicants must be a Canadian Citizen or permanent resident;
  • Must have been a resident of BC for at least one year;
  • Property must be the applicants principle residence;
  • Applicants must remain in the property for five years.  If they sell the property within the first five years the loan must be paid out;
  • Maximum purchase price of $750,000;
  • The program will end on March 31st, 2020.

Some other points to be aware of:

1)  the applicants will need a pre-approval letter from either their bank or their mortgage broker in order to              apply for the loan.  Loan approval is expected to take approximately 5 days;

2)  minimum of 14 days (10 business days) required to fund the loan after final approval (subject removal);

3)  gifted funds for the applicants portion of the down payment will be allowed;

4)  there is no interest for the first five years, but immediately at year six the applicant will be required to either      pay the loan in full, or make monthly payments to a maximum of 20 years.  The interest rate is re-set every        five years;

5)  due to government regulation enacted two years ago, all non spousal applicants who’s income is being            used to qualify the mortgage must be on title.  On this program, all members on title have to be first time          buyers.  So for purchasers who have parents etc. who are co-signing the mortgage, they will not qualify            for this program unless the parents are also first time buyers and will be residing in the property.

The loan applications can be done on-line at  https://www.bchousing.org/housing-assistance/bc-home-partnership/program-overview-applicant-information . You will be required to provide their pre-approval letter along with other supporting documents at the time of the application.

 

Once the application is approved (approximately 5 business days) you will receive an approval confirmation.

The loan will be funded directly to the solicitor and registered as a 2nd mortgage on title.

 

New BC Government help for First Time Buyers

BCREA Applauds the New BC HOME Partnership Program

Vancouver, BC – December 15, 2016. REALTORS® and the British Columbia Real Estate Association (BCREA) welcome the announcement by Premier Clark and Minister Coleman of the new BC Home Owner Mortgage and Equity Partnership program.

“The introduction of this program will address the affordability gaps that, as a REALTOR®, I hear about every day,” says BCREA President Deanna Horn. “We thank Premier Clark and Minister Coleman for introducing this valuable program to assist first time home buyers in entering the marketplace.“

The province has taken steps to address housing affordability by investing in affordable rental housing and transitional and emergency housing. The BC HOME Partnership will address the impact on the first-time homebuyer with matching dollars and an extended period of time to begin paying back the down payment loan. Many first-time homebuyers struggle to achieve the down payment required to enter the housing market, and BCREA believes this program will help them overcome that barrier.

In fact, enabling home ownership benefits the entire BC economy. A 2015 study by Altus Group Economic Consulting found that the average housing transaction on the Multiple Listing Service® generates approximately $63,000 in additional expenditures.

BCREA believes additional opportunities exist to help existing homeowners, particularly those looking to buy their second or third homes to accommodate families or significant life changes. Doing so will help to ensure balance in the continuum of housing affordability.

For more information on the program: https://news.gov.bc.ca/releases/2016PREM0154-002782