Growth of asset worth pushes median family net worth to $295.1K – StatsCan
by Ephraim Vecina 11 Dec 2017 MBN
The results of the latest Survey of Financial Security released by Statistics Canada late last week showed that the median net worth of Canadian families stood at $295,100 in 2016, representing an increase of almost 15% from four years ago and nearly two-fold the level seen in 1999.
The report defined “family net worth” as the sum that would remain should a family sell off all its assets and fulfilled its debt obligations.
Real estate is responsible for majority of the gains in the median net worth nationwide, the Statistics Canada study noted.
“Housing is both the largest asset and the largest debt for Canadians,” the report stated, as quoted by CBC News.
As of the end of 2016, 61.7% of the study respondents reported owning their residences. Overall, Canadians held $12 trillion in assets at the end of last year. Family homes accounted for fully one-third of that amount.
Read more: Majority of Canadians see real estate as a good long-term investment
However, along with the increase in value of assets came a similar ballooning in the debt loads associated with financing them. All in all, Canadian families owed $1.76 trillion at the end of 2016, posting a considerable increase of almost 25% from 2012 levels, and nearly three times more than in 1999.
Mortgage debt was a significant portion of that debt. 38.4% of Canadian families polled reporting they had some sort of mortgage last year, with the median value standing at $190,000 (twice that of 1999 levels). The average mortgage rate was 2.94%.
While this might appear troubling, nearly 30% of Canadians were still debt-free last year. 58% of seniors held no debt, while 15% of those in the 35-44 age range reported being debt-free in 2016.
Gov't should stop heaping new policies one after the other – OREA
by Ephraim Vecina 07 Dec 2017 MBN
The federal government’s seemingly insatiable appetite for introducing new measures aimed at moderating Canada’s housing markets is sorely misguided, according to The Ontario Real Estate Association.
“It’s extremely disappointing to see that 40,000-50,000 home buyers, who’ve been carefully saving for a down payment, will [be] punished by the new mortgage lending rules that come into effect in the new year. All levels of governments need to stop the piling on of new policies that will not only have a negative effect on the economy, but also shatter the home ownership dreams of the middle class,” OREA CEO Tim Hudak said.
Read more: Housing strategy offers no help for prospective home owners – academic
The statement came in the wake of a fresh report from Mortgage Professionals Canada, which warned that the recent spate of mortgage policy changes is seemingly contributing to a falling homeownership rate, a trend that has especially harmed younger Canadians’ home ownership prospects.
“This trend is likely to continue as a result of the upcoming implementation of new B-20 underwriting guidelines,” MPC stated in its report. “By the time of the next federal election, 200,000 Canadian families will have experienced the sharp disappointment of failing the newly-implemented stress test, even though they can afford to borrow the amount they need.”
Hudak argued that governments at all levels should consider more avenues aside from tightening measures, which would only end up alienating more and more would-be buyers.
“[OREA] believes the best way for governments to tackle the issue of home affordability is to increase housing supply by cutting the red tape that stalls building, speeding up building approvals process, and putting more shovels in the ground,” Hudak said.
01 January 2018, Where Do We Go From Here?
New mortgage rules recently announced by Canada’s top regulator of federal banks, The Office of the Superintendent of Financial Institutions (OSFI), and will take effect on January 1, 2018. The intent of these new rules were designed to austensibly protect today’s housing market, and help avoid any potential economic risks associated with any increase in interest rates.
You may recall in 2008 the financial crises when, due to large-scale mortgage defaults, the U.S. banks had to be ‘bailed out’ by the Feds. Regulators such as the OSFI and The Bank of Canada havehad ongoing concerns over Canadians’ high level of household debt, and they anticipate these new rules help avoid a financial crisis like the U.S. experienced. It is important to know that Canada has not exceeded a 0.45% default rate in Canada for all the people who own homes in this country. Real Estate is still one of the best investments. It may be a little harder to spend as much or borrow as much when looking to purchase, refinance or change mortgage lenders but we still have options. Time will tell, of course.
Included in the new regulations are:
- Expanded “stress tests” [assessing potential ability to pay by borrowers at increased interest levels] to determine if they would be able to make their payments with increased interest rates.
- Eliminating “alternative lending arrangements” such as co-lending and bundled mortgages. These practices were often implimented when people were high-risk applicants.
Why are people getting stressed about the stress test?
The greatest concern and impact of these new regulations is the expantion of stress-tests to the over 20% downpayment market; the people who want to borrow back funds from their homes and individuals that want to have consumer choice of product and rate when shopping at renewal.
In Canada, anyone with a down payment less than 20% of the purchase price must get mortgage insurance – this gives protection to the lender should the borrower default on the loan. Obviouisly, the lower the down payment, the greater the mortgage loaned and the greater the risk; thus the requirement for a “Stress Test”. Under the new regulations however, everyone applying for a mortgage will have to pass a stress test to prove they would be able to continue to make their payments if (or when) interest rates go up.
This new stress test, designed to simulate a borrower’s financial situation using either the five-year average posted rate, or, a rate that’s two percent higher than the actual mortgage rate being offered — whichever one is higher. They then would only qualify for the mortgage at that higher simulated rate, not the actual current rate.
For example. Our Facebook Page at The Wilson Team gives a mortgage rate comparison what the new household income needs to be come January 1st and how this affects your buying power. You are now looking to have a household income of aprox $70,000 to $80,000 to have a mortgage of aprox $300,000. This is only affecting those who have built the equity in their homes or are putting more than 20% down. If you are putting less than 20% down then the Stress Test already happened in October 2016.
Utilizing the currently existing rules, that family could qualify for a house valued at $706,692. However, once the new rules take effect, they would only qualify for a house worth $559,896 (based on a 4.89% stress test).
Finance experts are saying that the average home-buyer will see their purchasing power diminished by approximately 20%. Obviously, this could have a significantly impact on the housing market across Canada, especially impacting on larger cities where housing prices are highest.
In addition, OSFI’s new guidelines state that borrowers who renew their mortgage don’t have to meet the new stress-test standard if they stay on with their same lender. If someone renews with a new lender, they will have to qualify under the new rules because all new financing and paperwork is required. This has generated concern that the banks won’t offer their lowest rate at renewal time; they know that many customers won’t shop around for lower rates because of their fear of not passing the stress test. That’s why it’s always a good idea to talk to the Wilson Team at renewal time or anytime, because it’s our job to shop around for the best interest rates, and we give you solid advice about your mortgage options.
What if I fail the stress test?
If a mortgage seeker doesn’t pass the new stress test, there are still some very good options and stratagies you can impliment. Such as:
- Improve your application by getting a co-signer who has a solid financial standing
- Improve your debt situation and up your credit rating
- Make a larger down payment to reduce the amount of the mortgag to pass the stress test
- Delay buying a home and rent a little longer in concert with increasing your down payment savings
- Purchase less home – such as a condo or townhome
- Contact a mortgage broker for a guidance consultation on the availability of alternative options such as, private lenders or credit unions to apply to. The new stress-test regulations don’t apply (at the moment) to private lenders or provincially regulated credit unions
- Stay calm and mortgage on in the new ‘stress test’ world
You absolutely don't need to give up your dream of home ownership nor get stuck with your original lender on renewal or re-finance just because of this new legislation. In a worst-case scenario you may have to wait a bit longer to get approved for a mortgage, but the good news is you’ll be saving your hard-earned money and improving your credit and debt situation in the mean-time.
If you are worried about the new stress-test or any of the new regulations and wish to develop a stratgey for 2018 contact an experienced mortgage broker, such as ourselves, who understands the various rules and regulations and the options that you have going forward.
You may contact us, The Wilson Team, at 613-695-9250 or at kelly@wilsonteam.ca. We look forward to meeting with you.
Higher rates might make 5-year mortgages popular once more
by Ephraim Vecina 01 Dec 2017 MBN
The recent interest rate increases might lead to the renewal of the popularity of 5-year mortgage products, according to a veteran industry analyst.
In a recent online piece, MoneySense senior editor Julie Cazzin wrote that such a development would represent a return to the market conditions of two decades ago.
“Twenty years ago, in the mid-1990s, conventional wisdom still held where most home buyers and mortgage holders opted for five-year-closed mortgages, as a hedge against the ominous threat of rising interest rates. The security of locking in a constant, predictable mortgage payment for the long term was more valued than hunting for the lowest possible variable rate mortgage,” Cazzin stated.
Read more: Mortgage borrowers at risk of ‘payment shock’ after BOC’s rate hikes
“Times changed, of course, as everyone piled into short rates that floated,” Cazzin added. “Super-low-rate variable mortgages became the preferred salve for new homebuyers and helped drive the boom in real estate prices because buyers could afford more house and carry more debt.”
With this era drawing to a close, 2018 is promising to be an especially difficult one for borrowers and mortgage holders alike.
“Not only will a more stringent stress test be put in place for those seeking or renewing a mortgage, but the Bank of Canada’s November Financial System Review … raised another complicating factor: that being, nearly one in two Canadian mortgage holders is set to renew their mortgage in the next 12 months and will face higher rates,” Cazzin explained. “Some forecasters are expecting several additional rate hikes during 2018, and it could all add up to a shock for consumers, the real estate market and the broader economy.”
This might very well prove the trigger of the resurgence of the 5-year mortgage, the analyst concluded.
“More rate hikes could close the gap between short-term and longer-term mortgages and start to push consumers away from variable and into fixed mortgages where they would be insulated from the immediate impact of further increases.”
Government meddling in real estate will not fix it – analyst
by Ephraim Vecina Nov 2017 MBN
The Liberals’ latest plan to fix the Canadian housing market’s problems might prove to be a valiant but ultimately futile attempt, according to veteran markets analyst Don Pittis.
Writing for CBC News, Pittis noted that despite the noble intentions, the newly introduced plan should not be expected to serve as the panacea that its proponents are hoping it to be.
“While the new government strategy makes a welcome political gesture toward solving problems created by the high cost of housing, there is evidence that the problem is bigger, more complicated and more intractable than any government can handle, even with this latest decade-long multi-billion-dollar plan,” Pittis wrote.
Read more: Former budget watchdog warns gov’t to be careful in its new housing spending
“The criticisms [of the plan] could be grouped into four general categories. It wasn’t enough. It was too late. It didn’t do the right things. And it didn't help the right people,” Pittis explained. “All those critiques may be fair. But what no one, including the federal government, was going to admit was that solving the housing crisis is simply impossible.”
Also, while some quarters are proposing that the government keep its hands off entirely and let the free market regulate itself, “voters don’t like the idea of some Canadian families living in cardboard boxes and others in mansions. And the government knows it.”
In a bitter irony, a solution will come in the form of a sudden crash that will come about once the property bubble bursts – and by then, “the complaint that federal spending plan is too late will become a virtue.”
At the moment, the best choice that Canadians can go for is a brutal realism that eschews previous generations’ ideas of the perfect home.
“Canada is going through a difficult transition that others have gone through before. There is no longer room for every family to have its suburban picket fence,” Pittis concluded.
Down payment gifts growing
by Justin da Rosa 2017 MBN
Chances are your first-time buyer clients are relying on parents to purchase a home – and that’s an opportunity for brokers to provide some strategic planning for those home buyers.
A massive percentage (76%) of Canadian parents gift their adult children with money to help with achieving big ticket life goals, including buying a home.
"The poll findings show that while many parents are thinking about giving their kids a financial boost to leave the nest, there are a lot of misconceptions about gifting," Jamie Golombek, managing director, tax and estate planning with CIBC Wealth Strategies Group, said in his new report, entitled Give a Little Bit… "Unlike in the U.S., we don't have any kind of gift tax, which means if you have what's called 'never money' – money you'll never spend in your lifetime – it's worth considering making a financial gift while you're alive to help your kids get started in life."
The study, which was based on a CIBC poll of 3,021 Canadian adults, found 47% of parents would provide a gifted downpayment to their children; an additional 25% would act as a guarantor.
Of those polled, 65% said they would prefer to give a financial gift to their children rather than have them continue to live at home.
The national average gift size if $24,125 and those with household incomes above $100,000 provide an average of $40,558 – nearly double the overall average amount.
One interesting note found in the study is that the majority a majority of Canadians (68%) either misunderstand or don’t know what the tax implications of gifting are.
That means brokers have an opportunity to position themselves as experts when they explain that gifts are not subject to any tax.
Read More: With B20 Around The Corner...
Majority of households still manage finances responsibly
by Ephraim Vecina 22 Nov 2017 Mortgage broker News
While the OSFI’s decision to tighten insured mortgage lending qualifications by stress-testing applicants at the 5-year posted mortgage rate (rather than the contract rate) appears to be necessary to cool down outsized price growth, Dr. Sherry Cooper of the Dominion Lending Centres observed that the overall risks to the national financial system remain manageable.
“With so much attention paid to the imprudent borrower, I think it is important to note that the vast majority of Canadians manage their finances in a responsible manner,” Cooper wrote in her latest analysis posted on the DLC’s online portal.
“For example, roughly 40% of homeowners are mortgage-free and one-third of all households are totally debt-free. Another 25% of households have less than $25,000 in debt, so 58% of Canadian households are nearly debt free. Hence, mortgage delinquency rates are extremely low,” Cooper explained.
“In addition, two-thirds of outstanding mortgages are fixed rate, which mitigates the risk of rising mortgage rates over the near term.”
Read more: Mortgage borrowers at risk of ‘payment shock’ after BOC’s rate hikes
This is despite housing no longer being the strongest driver of growth in the national economy.
“It has been widely expected that home sales would jump before yearend in advance of the new ruling and indeed they have. Even so, activity remains well below peak levels earlier this year and prices continue to fall in the Greater Toronto Area (GTA) for the sixth consecutive month. Indeed, national home sales were down 8.6% year-over-year in October, led by a whopping 18.4% plunge in Ontario,” Cooper stated.
“National sales momentum is positive heading toward year-end,” according to CREA chief economist Gregory Klump. “It remains to be seen whether that momentum can continue once the recently announced stress test takes effect beginning on New Year’s day. The stress test is designed to curtail growth in mortgage debt. If it works as intended, Canadian economic growth may slow by more than currently expected.”
Ten ways the new mortgage rules will shake up the lending market
Robert McLister Special to The Globe and Mail
Count down continues until Canada's banking regulator launches its controversial mortgage stress test. It'll be squarely aimed at people with heavier debt loads and at least 20 per cent equity – and it will be a tide turner.
Given where Canada's home prices and debt levels are at, this is easily the most potent mortgage rule change of all time. Here are 10 ways it's going to shake up Canada's mortgage market for years to come:
1. It's like a two-point rate hike: Uninsured borrowers can qualify for a mortgage today at five-year fixed rates as low as 2.97 per cent. In a few months that hurdle will soar to almost 5 per cent. If you're affected by this, you could need upward of 20 per cent more income to get the same old bank mortgage that you could get today.
2. Quantifying the impact: An OSFI spokesperson refused to say how many borrowers might be affected, calling that data "supervisory information" that is "confidential." But at least one in six uninsured borrowers could feel the blow based on the Bank of Canada estimates of "riskier borrowers" and predictions from industry economists like Will Dunning. Scores of borrowers will be forced to defer buying, pay higher rates, find a co-borrower and/or put more money down to qualify for a mortgage.
3. Why OSFI did it: Forcing people to prove they can afford much higher rates will substantially increase the quality of borrowers at Canada's banks. OSFI argues that this will insulate our banking system from economic shocks, and to the extent it's correct – that's good news.
4. A leap in non-prime borrowing costs: Many home buyers with above-average debt, relative to income, will resort to much higher-cost lenders who allow more flexible debt ratio limits. At the very least, more will choose longer amortizations (i.e., 30 years instead of 25 years) and take longer to pay down their mortgage. Non-prime lenders will also become pickier. Why? Because they'll see a flood of formerly "bankable" borrowers getting declined by the Big Six. That could force hundreds of thousands of borrowers into the arms of lenders with the highest rates. If you have a higher debt load, weak credit and/or less provable income, get ready to pay the piper.
5. A safer market or riskier market? The shift to expensive non-prime lenders could boost mortgage carrying costs and overburden many higher-risk borrowers, exacerbating debt and default risk in the non-prime space. "We're very aware of the potential migration risk [from banks to less regulated lenders]," Banking superintendent Jeremy Rudin told BNN on Tuesday. "It's not something that would be a positive development." If rates keep rising, non-prime default rates could spike over time. Albeit, keep in mind, we're talking a single-digit percentage of borrowers here. The question people will ask is: Does growing debt risk in the non-prime mortgage market, combined with home price risk and a potential drop in employment and consumer spending truly lower banks' risk?
6. Provincially regulated lenders win: Unless provincial regulators follow OSFI's lead (if history is a guide, they won't), it'll be a bonanza for some credit unions. Many credit unions will still let you get a mortgage based on your actual (contract) rate, instead of the much higher stress-test rate. That means you'll qualify for a bigger loan – if you want one. We could also see a few non-prime lenders charge lower rates to help people qualify for bigger mortgages, while tacking on a fee to mortgage for that privilege.
7. Trapped renewers: Lenders are thrilled about one thing: customer retention. As many as one in six people renewing their mortgage could be trapped at their existing bank because they can't pass the stress test at another lender. And if a bank knows you can't leave, you can bet your boots they'll use that as leverage to serve up subpar renewal rates.
8. A short-term spurt: Expect a rush of buying in the near term from people who fear they won't qualify after Jan. 1. The question is, how much of that short-term demand will be offset by people selling, as a result of the rule change's perceived negative impact. In the medium term – other things equal – this is bearish for Canadian home prices. Period. That said, borrowers will likely adapt within two to five years. And prices will ultimately resume higher.
9. The stress test could change…someday: While few credible sources expect OSFI's announcement to trigger a housing crash, the higher rates go, the more this will slow housing. Financial markets expect another rate hike by January, with potentially two to four – or more – to come. Mr. Rudin says OSFI may "revisit" the restrictiveness of the stress test if rates surge, but will the regulator act in time to prevent diving home values? That's the trillion-dollar question. The good news is that rates generally rise with a strengthening economy, which is bullish for housing – for at least a little while.
10. Questions abound: Tuesday's news will undoubtedly spark contentious debate over whether this was all necessary, given already slowing home prices, provincial rule tightening, rising rates and the fact that uninsured default rates are considerably lower than for people with less than 20 per cent equity.
OSFI says its responsibility is to keep banks safe and sound. Overly concerning itself with the side effects of its mortgage stress test is not its mandate, it claims. Well, in a few years we might be either congratulating OSFI, or asking if that mandate needs to change.
How will private [mortgage] channel fare in 2018?
by Neil Sharma15 Nov 2017 Mortgage Broker News
With the OSFI rules slated to take effect at the beginning of next year, the private lending channel is expecting business to boom.
Recent Teranet data estimates 10% of new mortgages in Ontario are provided by the private channel, with mortgage investment corporations leading the way.
Wasah Malik, a private lender with Mortgagepedia Inc., agrees with that estimate and says many buyers will have few options but the private channel.
“Firstly what happens when people do not get qualified on the A side is they go to the B side,” he said. “If that doesn’t work, then I think private lending money is going to become even bigger, and I personally think it will become bigger next year.”
Malik doesn’t see the market slowing down in the long run. While its players will pull back, he believes they’ll come back with gusto.
Frances Hinojosa, a mortgage broker and managing partner of Tribe Financial, believes the market will be resilient, thanks to strong demand.
“Immigration will continue to be strong, so there’s still going to be enough demand out there,” said Hinojosa. “I believe it’s going to come from population growth.”
Hinojosa doesn’t believe the OSFI rules are necessarily a bad thing. Even though Canadians’ buying power is expected to be drop—it’s been speculated by much as 20%—Hinojosa says there’s nothing wrong with staying within one’s means.
Purchasers might have to trade in the detached house for a condo, or the short walk to work for a commute, but at least they’ll be protected.
“Ultimately the rules I feel are there are to protect consumers from overleveraging themselves, not slowing down the market,” she said. “Those who can still qualify will still go out and purchase a property for shelter. People need to live somewhere, so it’s a decision of, ‘Do I rent or do I purchase, and what’s more cost effective for me at the end of the day?’”
She isn’t entirely sold on the private channel. She says it’s incumbent upon brokers to adapt and cover all of their clients’ options.
“Maybe privates aren’t the right fit for some clients if they’re looking for long-term solution. Private mortgages should really be put in place, in my mind for short-term strategies to get them from A to B, not from A to forever with the financing of their homes.”
Brokers fielding panic calls ahead of January 1
by Neil Sharma 13 Nov 2017 Mortgage Broker News
With new mortgage lending rules about to kick in, brokers’ phones are ringing off the hook with frenzied queries about refinancing—and even purchasing—homes before January 1.
Steve Garganis, a mortgage broker with Mortgage Intelligence, began reaching out to clients who are due for renewals in the near future immediately upon hearing about the mortgage rule changes.
But as it turned out, he was receiving just as many calls as he was making. While Garganis says this is the busiest he’s ever been, he’s become weary about why.
“The clients that are calling me right now are the ones always thinking about borrowing money, and this is triggering them to make sure they qualify,” he said. “There are people who are taking action and it’s good to see. However, as with earlier, the vast majority of Canadians don’t have a clue what these rules mean.”
Garganis says that many prospective homebuyers have been sitting on the sidelines, waiting for prices to drop, but now they’re rushing to buy before being subjected to 200-basis-point stress tests.
“What’s happening right now is there’s a panic going on,” he continued. “I call it panic buying. People buying because they’re thinking about purchasing homes, waiting for prices to fall, and now they’re saying, ‘Wait a minute, I better jump in because I may not qualify.’ These are people with 20% down payments or more.”
Garganis began client outreach after the Office of the Superintendent of Financial Institutions made its announcement a few weeks ago because, he says, whether clients’ mortgages come due next week, month or year, getting a review is crucial.
Many consumers aren’t aware of the new lending rules’ magnitude because they think they’re exempt, but Garganis says they’re in for a rude awakening.
“Next year we’ll have a big problem where Canadians get up in arms, and it may be too late,” he said. “They’ll say, ‘Wait, I’ve been able to qualify for the last 10, 15 years, so why can’t I qualify now?’”
That’s why during client reviews, Della Dwyer, an Invis mortgage broker and team lead, hammers home the importance of debt reduction. A starting point, she says, is to get rid of surplus credit cards.
“People typically have more than three credit cards, and they need to concentrate on condensing their credit cards from five to one,” said Dwyer. “We have always overspent. I know having credit out there is wonderful, but condense and manage, and don’t leverage so high.”
Dwyer emphatically stated that Canadians need to learn to say ‘no’—especially when banks dangle lines of credit in front of them.
“What you’ve done is just allow that person who has three credit cards to have a fourth, and a line of credit,” she said. “Stop it. If people can refrain from the want-to-have things and stop feeling like they need to have something today, and that it’s okay to save for it and get it in two years, maybe we wouldn’t have problems with credit cards and we wouldn’t have the rules tightened on us.
“If banks could stop increasing credit and lines of credit, and the government could leave the rules alone, we’d be far better off. Let them meddle with the banks instead.”