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Hey Department of Finance... that’s a little too tight! I can’t breathe

The Department of Finance Announces Sweeping Changes to the Mortgage Lending Landscape.

In an attempt to cool hot real estate markets in Vancouver and Toronto, on Monday, October 3, 2016 the Department of Finance once again announced sweeping changes to the mortgage lending landscape.  The full release can be read here.

We were quick to send out the news on our social media but have waited to send out a Mortgage Update until now while we gathered some further insight and ran some numbers (we’re always doing math!)

In the announcement, there are tax implications for foreign investors, but the two big pieces are to the qualification requirements and changes to how lenders can lend.  Both have drastic consequences that are far reaching beyond just cooling of a couple of hot markets.

One of the most significant changes is more stringent qualification guidelines regarding insured mortgages.  Borrowers with less than 20% down will now have to run a “mortgage rate stress test”.  Effectively, regardless of term, a mortgage borrower must qualify at the 5 year Benchmark Rate (currently 4.64%).  The rate the borrower receives on their mortgage would still be the fully discounted rate (Currently under 2.50%).  This same stress test is already in place for any borrower looking for a variable rate or a fixed term less than 5 years.  When this takes effect, the change is further reducing the buying power for Canadians by approximately 20%.

Based on the current Benchmark Price in Calgary of $440,400 (click here for full recent sales stats) here is an example of what these changes mean:

Under the current guidelines:
Minimum down payment: $22,020
Minimum household income: $78,000
With other monthly debt payments not exceeding 7% of gross income

Under the new guidelines:
Minimum down payment: $22,020
Minimum household income: $96,000
With other monthly debt payments not exceeding 7% of gross monthly income

Over a 20% increase in income would be required to qualify for the same mortgage at the same rate.  Looking at it from another angle, the same household income of $78,000 will now qualify for a maximum house purchase price of $354,000-over $86,000 less!  

So the change is big!  This said we have seen similar big changes in the last 8 years.  The reduction from a maximum 40 year amortization to 25 years reduced buying power by about the same margin. However, the layering of these changes has a compound effect and certainly this latest change will further squeeze out buyers.  The biggest impact will likely be on first time buyers, and they are the ones who drive housing markets.   

The change on qualification requirements will come into effect October 17, 2016.  Approved mortgage applications past October 3rd, but prior to the 17th, will fall under the current guidelines, as long as they fund prior to March 1, 2017.  Applications prior to the 3rd that already have insurance approval will be grandfathered and fall under the current guidelines.

The other big change is as follows:

"There are currently different rules in place depending on what proportion of the value of the property is covered by a loan. For example, mortgage insurance criteria for a loan that represents 80 per cent of the value of the property or less (low loan-to-value ratio mortgages) are not as stringent as for high loan-to-value ratio mortgages (loans that represent more than 80 per cent of the value of the property). This could lead to increased risk for the taxpayers who ultimately back insured mortgages. To help ensure that taxpayer support for mortgage funding is targeted towards safer lending, effective November 30, 2016, mortgages insured by lenders through portfolio insurance and other low loan-to-value ratio mortgage insurance must meet the same loan eligibility criteria as high loan-to-value insured mortgages.”
What does this all mean?  A VERY LARGE portion of lending in Canada is securitized.  It allows banks and lenders to sell the loans off their own books to investors.  This securitization has led to a more dynamic lending arena, more choices and better competition.  By further restricting loans that can be securitized, the lending world has just been given an increase to the costs of lending.  The banks and other lenders with stronger balance sheets have gained an advantage based solely on Government policy - not product, service or price.  The banks have become competitive due to the rise of non-bank lenders.  The proposed change is a punch to the gut of competition and ultimately will hurt the Canadian consumer.  You should anticipate higher costs and less choice.  

In David Letterman fashion, here is a Top 10 on what these changes may do (in our opinion):

10) Rates will rise (at least in the short term).
9) Some lenders will leave the lending space.
8) Products on offer from lenders will be reduced.
7) Real estate markets will cool as more buyers are pushed out.
6) Real estate prices will decline or stabilize in many markets.
5) The rental market will heat up and rental rates will increase.
4) Consumers will be forced to stay with existing lenders come renewal (whether these lenders offer competitive options or not).
3) Refinancing will become much more difficult with fewer lenders able to provide options.
2) Non-bank lenders will come out with more dynamic non-cookie cutter lending products to maintain any market share.
1) Banks win, Canadian consumers lose.  

This week it seems like the sky is falling.  In some ways it is, as the environment has been drastically changed with one stroke of the pen.   Every lender in Canada has people in Ottawa trying to digest the news and influence policy makers and adjust for what seems to be unforeseen consequences to these changes that really will hurt Canadians.  Hopefully some of these voices are heard.  

As always, please reach out to Mortgage Connection with any questions as we are here to help you navigate through this myriad of cause and effect outcomes.  If you have friends or family in the market and they have not connected with us, please relay this message - if they think they have a pre-approval, it may no longer be valid. 

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Your team at Mortgage Connection Inc.

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