New Mortgage Rules 2023: Expanding the “Stress Test” to Everything?
This is from the Desk of Dr. Cooper, our Economist, and this data is 1 of the reason we are at Dominion Lending – to get this data.
Below is the details of the government expanding the STRESS TEST, or other mechanisms, to make it harder to buy a home.
OSFI Is Concerned About Federally Insured Lender Exposure to Mortgage Risk.
Late last week, the Office of the Superintendent for Financial Institutions (OSFI) announced it was concerned about the risks associated with the large and rising number of highly indebted borrowers, especially those with floating-rate mortgages, which stands at a record proportion of outstanding mortgage loans.
With the economy in danger of entering a recession and the Bank of Canada warning of potentially more rate hikes to counter persistent inflation, the housing market may face continued pressure in the coming months.
A record number of buyers used floating-rate debt for purchases during Canada’s pandemic-era real estate boom. Those borrowers may come under increasing strain if mortgage costs remain high. Job losses from an economic slowdown also would make it harder for people to keep up with loan payments and stay in their homes.
Superintendent of Financial Institutions Peter Routledge said a review of the country’s mortgage-underwriting rules that starts later this week would look beyond its current main measure — a stress test requiring borrowers to qualify for higher interest rates than what their banks are offering.
“The question in our minds is, is it sufficient?” Routledge said of the current stress test. “So we will look at a broader range of debt-serviceability tools, including debt-to-income constraints, debt-service constraints, as well as the current interest-rate stress test tool.”
The proposed rules—subject to public consultation—include loan-to-income and debt-to-income restrictions, new interest rate affordability stress tests and debt-service coverage restrictions.
Highly Indebted Borrowers
OSFI is particularly concerned about the rise in mortgage originations to households with a loan-to-income ratio of 450% or more, which the Bank of Canada has long asserted is the sector most at risk of delinquency and default. This risk has repeatedly been highlighted in the Bank’s financial risk analysis–the Governing Council’s Financial System Review. The latest report says, “Those with high debt are more vulnerable to a decline in income and will face more financial strain when they renew their mortgages at higher rates.”
This vulnerability relates to households’ ability to continue servicing their debt if incomes decline or interest rates rise without significantly reducing their consumption. The Bank staff estimate that the most highly indebted households have generally seen the smallest increases in liquid assets. At the same time, alongside higher house prices, many households have taken out sizable mortgages to purchase a house, adding to the already large share of highly indebted households.
The chart below shows that the average share of high loan-to-income borrowers before the pandemic was 23.8%. The average since the pandemic onset has risen to 33.7%.
Proposals for Comment
To date, mortgage delinquency rates at federally regulated financial institutions (FRFIs) are at a record low. The large FRFIs have worked closely with borrowers who have reached their trigger points. TD, CIBC, and BMO have allowed some negative amortizations until renewal. As a result, the proportion of their mortgages having remaining amortizations has risen sharply (see second chart below). Questions remain regarding how they will deal with this at renewal time. Will the new mortgage be amortized at 25 years at renewal, raising the monthly payments dramatically and increasing the risk of delinquency or default, especially among highly indebted households?
Earlier last week, CEOs of the Big 5 banks weighed in on vulnerable mortgage clients. None were quite as forthcoming as Scotiabank’s new President and CEO, Scott Thomson, who said the bank has about 20,000 borrowers that it considers “vulnerable.” These are borrowers with a high loan-to-value (LTV) mortgage, a low credit score, lower deposits in their checking accounts and those with home valuations that are susceptible to market conditions.
“So, as you think about the tail risk, we have about 20,000 vulnerable customers, which would be 2.5% [of the total portfolio],” he said Monday during the RBC Capital Markets Canadian Bank CEO Conference.
However, he added this represents a “manageable-type situation for us on mortgages.” Scotiabank’s floating-rate mortgages are not fixed payment. They adjust monthly payments every time the central bank changes the overnight rate.
According to Steve Huebl at Canadian Mortgage Trends, RBC President and CEO Dave McKay said that his bank is “keeping a watchful eye on its mortgage clients, turning to AI and various types of modelling to forecast clients’ cash flow.”
“We look at incomes, we look at the stress of inflation on expenses in a household, and we monitor cash flow to interest payments, as you would in any corporation,” McKay said during the conference. “We do that [for] every single consumer in our portfolio because over 80% of our clients have their core checking and core cash management with us.”
Looking at the bank’s variable-rate mortgage portfolio, which totals between $100 and $120 billion, McKay said the bank has been able to segment that group of clients, keeping tabs on when they reach their trigger rates and when they’ll be coming up for rate resets in the next several years.
Through modelling, the bank can then predict which clients with upcoming renewals “will or will not have a cash flow challenge” should the economy enter a moderate or severe recession, he said. “We have a pretty clear view of that.”
For clients who have difficulties making their payments, mortgage lenders have several options to try and assist borrowers before the situation progresses to the point of them needing to sell their homes.
“You have skip-a-payment deferrals, you have maturity extensions, whatever it happens to be, you have a lot of ways to work with that client,” McKay said.
In terms of clients with cash flow challenges in addition to a collateral problem, where the property sale wouldn’t cover their mortgage and could result in default, McKay said it’s a much smaller group but one the bank is actively monitoring.
“That bucket, I can tell you, is in the low single-digit percentages of our portfolio,” he said. “And that’s the bucket we’re managing”.
Bottom Line
To the extent these measures are implemented, further pressure on mortgage growth is likely. Mortgage brokers can access lenders not impacted by OSFI B-20 rule changes. More than ever, brokers could add value to borrowers turned away from the banks. In these uncertain times, existing and new clients need advice from a trained and caring professional.
Nov 2021; Mortgage Rates & Inflation Report
This just in data is when mortgage interest rates are expected to rise.
DATA JUST IN
Canada’s latest employment and inflation numbers have triggered new expectations about the next steps by the Bank of Canada and the arrival of interest rate increases.
BoC Governor Tiff Macklem continues to offer soothing words about inflation, which is current running at 4.1%. That is an 18 year high and more than double the central bank’s 2.0% target.
Macklem has repeatedly said high inflation is temporary; the result of low prices during the pandemic lock-downs, and supply chain problems that have cropped-up as the economy reopens.
Macklem points out that a key factor in long term inflation – wage growth – has not materialized. That is despite Canada returning to pre-pandemic employment levels with the addition of 157,000 jobs in September. It should be noted that the growth of Canada’s labour force during the pandemic means the country is still 276,000 jobs short of full employment. Last week however, Macklem did concede that this temporary inflation may linger for longer than initially expected.
Several prominent economists have weighed-in. Benjamin Tal cautions that inflation is a lagging economic indicator. He says the risks for long-term inflation are present and the Bank of Canada would be better to start raising rates earlier to help mitigate those risks. Doug Porter says there is a growing chance rate increases will come earlier. He expects they will happen quarterly rather than every six months. And, Derek Holt would like to see a rate hike by the end of the year, given that emergency levels of stimulus are in place while inflation is well above target.
Look for mortgage interest rates to start going up close to the end of 2021 and continue until they are back close to PRE-Covid Rates of about 3.35% for the 5-year fixed.
Mortgage Mark Herman, best Calgary mortgage broker for the masses!
UPDATE: NHBI Canada
Here is an UPDATE to the Canadian New First Time Home Buyer Incentive Program
A Calgary lawyer recently had an opportunity to review the program and attend a basic seminar. He said he would not recommend the “down payment equity share” program to a first time home buyer for the following reasons – BUT here are our replies … and the Program DOES make sense to do.
NEGATIVE POINTS and the reasons FOR the program are below:
- It will take much longer to be approved for this program than for a normal mortgage loan and sellers may not accommodate the longer condition time.
- We normally pre-approve buyers with these files and this program in advance so there is no extra time needed at the lenders for conditions.
- The math for this program is complicated and buyers that use this program need to be pre-approved as they need the mortgage to match the affordability guidelines and to shop in the right price range.
- The extra time is at closing when 2 sets of documents are needed by the lawyer. As long as this is known in advance, the closing date can be long enough to allow for the extra paperwork to be requested and completed.
- Higher legal and appraisal costs will result as two separate mortgages have to be prepared and registered (one for the lender and one for the equity share) and an extra appraisal will have to be obtained and paid for by the owner if paying out the incentive mortgage prior to the ultimate sale of the property.
- A 1st and 2nd mortgages go on title at the same time as closing.
- Appraisal on purchase is not involved as it has to be a CMHC approved mortgage (CMHC is responsible for the appraisal in this case) and the program is based on the purchase price.
- If the owner wants to pay it off / back sooner, then an appraisal is needed at buyer cost ~$350.
- This would happen if the owner wanted to do extensive renovations to the home.
- An appraisal should not be needed on a bonafide sale, to a 3rd party, via a realtor, and when listed on MLS.
- An appraisal MAY be needed – as the owners cost – if the sale if it is a “private sale” and/ or believed to be below market value.
- (This is to stop the owner from selling the home to a family member for $1.00 and then attempt to repay the loan with $0.05.)
- The buyer has already saved many times the extra costs, savings are about $100 – $150/ month, from day 1. Paying-out at 10, 15, 20 years later … they have already saved $100 x 12 x 10 years = $12,000, in the bank, already.
- A disincentive to improve/renovate the property will exist as any appreciated value is shared with the government notwithstanding that they don’t contribute to the renovation costs.
- True.
- Upon repayment, improvements will be included when determining the market value, therefore the Homebuyer will have to consider the cost and benefit of the planned renovations, and decide whether to repay the Incentive prior to making any home improvements.
- IMPORTANT: It may be beneficial to the Homebuyer to repay the Incentive prior to conducting any major renovations to the home.
- A potential trap is being created for non-permanent residents who are legally authorized to work in Canada who can qualify to buy under this program but will have extreme difficulty in selling when their work permit expires as they will not have sufficient equity to satisfy the required withholding requirements under the Income Tax Act
- We have been the largest Mortgage Alliance brokerage in Canada for 6 years in a row, and we do about 20 deals a year for 9xx SIN buyers; 99% of our customers are unaffected by this.
- Again, this program is surgical in for who it works for. The program is not for everyone.
- It may be more difficult to refinance the property (it is not clear whether the Government will permit refinancing of the first mortgage and postpone their security to the new financing)
Updated rules have been released:
- The home CAN be refinanced without triggering repayment of the incentive, however, the shared equity mortgage will only be postponed to the outstanding balance that would otherwise be owing under the first ranking mortgage (i.e. no equity take-out will be permitted ahead of the shared equity mortgage).
Note:
- The combination of all charges on a refinance must not exceed 80%.
- This program DOES allow Assumption of the mortgage. Standard rules apply: full requalification by the parties assuming the mortgage directly with the lender. The standard on-going ramifications to the seller still apply.
- This program does NOT allow a PORT of the mortgage to another property. It would have to be paid out at that time.
- If refinancing of the first mortgage will not be possible without paying out the government’s equity share, then the first mortgage lender will have a captive borrower. The lender will have no incentive to reduce posted mortgage rates on renewal resulting in substantially higher interest rates in the second and subsequent mortgage terms for the homeowner.
- As above, the rules do allow the home to be refinanced without triggering repayment of the incentive.
- The renewal rate offered by the lender is independent of the 2nd charge on title.
Side note: We see that lenders are already applying the “Stress Test” under-the-covers on renewals when calculating the renewal rates. More on my blog here: http://markherman.ca/2019/06/
We love this New Home Buyer Incentive Program – NHBI
Mortgage Mark Herman; Best, Top Calgary Mortgage Broker
History of Economic Bubbles
This is a most interesting info graphic
https://fortunly.com/infographics/historical-financial-bubbles-infographic/
Economic Bubbles: The History, Causes, and Effects
You don’t need to be an expert to understand what economic bubbles are and how they happen. The simplest definition is the rapid and unrealistic inflation of asset prices without any basis in the intrinsic value of the given asset.
Despite the fact that financial bubbles (also known as speculative bubbles) are not rare, people repeatedly fail to recognize speculative trading as it’s happening. Too often, those involved only identify these risky activities in the autopsy. Once the bubble bursts, it’s already too late.
One of the crucial reasons for this is that bubbles are often driven by strong emotions, blurring people’s ability to make rational decisions. When gung-ho traders who are willing to take huge risks start operating in that environment, you have a recipe for disaster.
Investors’ greed (believing that someone will pay more for something than they paid themselves) is accompanied by strong feelings of euphoria (“wow, this investment will be so profitable, let’s buy!”), but also anxiety. Buyers go into denial when prices start to fall (“this is just a temporary reversal, my investment is long-term”). Then, finally, panic sets in, causing a domino effect: everyone starts to sell, ultimately leading to a crash.
A bubble burst can have a devastating effect on the economy, even on a global scale. The most recent example is the Great Recession after the market crash in 2008. However, depending on the economic sector or industry, bubbles can also have some positive effects.
Just consider the dot-com bubble, which forced the information technology industry to consolidate. Although people lost a lot of capital at the time, that money has since been invested many times over in infrastructure, software, servers, and databases. Pretty much every American house and business is now connected to the internet, which has changed how we live and work for good.
The best way to prevent an asset bubble from happening is strategic, common-sense investing. Unfortunately, humans don’t always act sensibly. Bearing that in mind, chances are economic bubbles will continue to occur in the future.
To help you notice these patterns early, we at Fortunly have created an infographic detailing how some of the biggest financial bubbles in history have formed and then burst. Check it out to make sure you don’t fall victim to the hype of “the next big thing.”
Very coolMark Herman, Best Calgary Alberta Mortgage Broker
Updates to CMHC First Time Buyer Incentive Program
In March the federal government unveiled changes to the budget that included an interesting opportunity for prospective first time home buyers through an enticing program that they called a “shared equity mortgage”. This program could see Canada’s housing agency (CMHC) kicking in up to 10% of the purchase price of a home if certain conditions are met, therefore bringing down the mortgage load and monthly payment for first time home buyers.
In June, the federal government released further details for the new CMHC program. Under the fine print for the First Time Home Buyer Incentive Program, which will officially launch in September, the program is limited to first time buyers who earn under $120,000 annually. The CMHC would kick in up to 10% of the purchase price of the home, as long as the borrower comes up with the minimum down payment for an insured mortgage, which is currently 5%.
An additional stipulation is that the total value of the mortgage, plus the kick in from CMHC don’t exceed $480,000. According to government officials, this means the program will really only aid those shopping for properties worth a maximum of about $565,000, regardless of whether or not they have met the other requirements.
The “loan” from CMHC would be interest free, meaning no compounding costs to pay down, like a mortgage does. In exchange for its stake, the government says CMHC would get to participate “in the upside and downside of the change in the property value” – meaning they would be entitled to any corresponding increase in the value of a home when the buyer sells. On the other hand, CMHC would also be responsible for any share of the loss if the property depreciates.
This means on a home costing $500,000, if the buyer contributes $25,000 (5% down payment) and CMHC kicks in the same amount, CMHC would own 5% of the home. If the home were to appreciate to $600,000 when the home owner wants to sell, they would have to pay 5% of the sale price – in this case, $30,000 – not the original $25,000 CMHC contributed to begin with. Therefore, there will always be a bill to pay down the line. With that said, the kick in from CMHC would reduce the mortgage load and monthly payments, therefore making it easier for first time buyers to save over the life of the loan.
This table from CBC News shows the impact of a borrower of CMHC’s program. On the left is the cost if they went it alone. On the right shows how qualifying for CMHC program makes the same house more affordable:
Savings Over Time
While many are in support of the new program because it will help first time buyers and families across Canada, some financial advisers are not so sure. Rajiv Bissessur says “the program will likely help some people, but ultimately it amounts to just another form of debt for over leveraged borrowers.” It is an interest free loan, but a loan that will need to be paid back nonetheless.
Bissessur also said the cap of $480,000 won’t do much to help people who are shopping in more expensive markets, who are ultimately the people who need it the most.
The program must be paid back within 25 years, or whenever the buyer decides to sell. There is no financial penalty for buying CMHC out of its stake at any time, however homeowners will have to pay CMHC the fair share of the value of the home at the time.
We have yet to see if this program will prove to be “worth it” or if it is election promises.Mark Herman, top Calgary Alberta mortgage broker
How the US may start to raise interest rates
This bite of an article is as interesting and as funny as US interest rate increase articles can be.
See why it is better to have your mortgage broker follow this stuff for you then to read it yourself!
Mark Herman, Top Calgary Alberta mortgage broker for home purchases and mortgage renewals
Bill Gross, the former Pimco “bond king” … believes the Federal Reserve could – and should – raise interest rates in September and then hold off on another rate hike for at least six months, a strategy he calls “one and done.”
The strategy adheres in principle if not specifics to numerous messages conveyed recently by influential Fed policy makers, including Fed Chair Janet Yellen, who have said rates will rise “gradually” after the initial rate hike is announced.
“The Fed … seems intent on raising (short-term interest rates) if only to prove that they can begin the journey to ‘normalization,’” Gross wrote in his September Investment Outlook. “They should, but their September meeting language must be so careful, that ‘one and done’ represents an increasing possibility – at least for the next six months.”
Gross, who has been calling for higher interest rates for months, suggested the Fed may have missed its opportunity to raise rates earlier this year when markets were rising steadily and the U.S. economy seemed to be humming along nicely.
In recent weeks, global turmoil has rocked U.S. markets, leading to volatility that pushed all three U.S. stock markets into correction territory last week. A strong bounce-back this week has raised optimism that the downturn was temporary but also led to concerns that markets could be in for a volatile run.
Any mention now by the Fed of returning interest rates to a more normal level of say 2% “cannot be approached without spooking markets further and creating self-inflicted ‘financial instability,’” Gross wrote.
from Fox Business – I know it’s Fox but it’s true: http://www.foxbusiness.com/economy-policy/2015/09/03/bill-gross-fed-likely-eyeing-one-and-done-hike-strategy/
New to Canada Mortgage Program and Stats
Below are some interesting numbers of New to Canada residents.
We specialize in New to Canada programs as there are many in’s and out’s with the details.
Because New to Canada people do not have the standard 2 years of Canadian credit history here to buy a home, there are special programs that help them buy as soon as they have a full-time, perminant job.
The Short Version of what is needed:
- a full time permanent job position and either
- 5% down payment from your own savings if you have a foreign credit report OR
- 10% down from own savings if you do not have a foreign credit report
Give us a call to discuss the details of how this program may work for you!
Mortgage Mark Herman, Top Calgary Alberta Mortgage Broker, 403-681-4376
Facts and figures 2013 – Immigration overview: Permanent residents
Canada – Permanent residents by source country
| Source country | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
| People’s Republic of China | 36,620 | 42,584 | 33,518 | 27,642 | 30,037 | 29,622 | 30,391 | 28,503 | 33,024 | 34,126 |
| India | 28,235 | 36,210 | 33,847 | 28,742 | 28,261 | 29,457 | 34,235 | 27,509 | 30,932 | 33,085 |
| Philippines | 14,004 | 18,139 | 18,400 | 19,837 | 24,888 | 28,573 | 38,617 | 36,765 | 34,314 | 29,539 |
| Pakistan | 13,399 | 14,314 | 13,127 | 10,124 | 8,994 | 7,217 | 6,811 | 7,468 | 11,227 | 12,602 |
| Iran | 6,348 | 5,837 | 7,480 | 6,974 | 6,475 | 6,580 | 7,477 | 7,479 | 7,533 | 11,291 |
| United States of America | 6,990 | 8,394 | 9,613 | 9,463 | 10,190 | 8,995 | 8,142 | 7,675 | 7,891 | 8,495 |
| United Kingdom and Colonies | 7,533 | 7,258 | 7,140 | 8,216 | 8,979 | 8,876 | 8,724 | 6,204 | 6,195 | 5,826 |
| France | 4,391 | 4,429 | 4,002 | 4,290 | 4,532 | 5,051 | 4,646 | 4,080 | 6,280 | 5,624 |
| Iraq | 1,796 | 2,226 | 1,788 | 2,406 | 3,543 | 5,450 | 5,941 | 6,196 | 4,041 | 4,918 |
| Republic of Korea | 5,352 | 5,832 | 6,215 | 5,920 | 7,294 | 5,874 | 5,537 | 4,589 | 5,315 | 4,509 |
Interest rate predictions are tough
I found this in a retirment planning post ….
Every year since 2009, experts have predicted that “rates have nowhere to go but up,” only to be confronted with what seems to be perpetually low rates.
Most pundits predict rates will finally start to rise again in mid 2015, but the recent surprise rate cut by the Bank of Canada (from 1% to 0.75%) suggests how futile trying to predict the timing of such a change can be.
Central banks’ zero interest rate policies have resulted in “real” (net of inflation) returns of zero or even less-than-zero after income tax, except for outliers like Russia.
In December, Switzerland even began charging savers for the right to deposit funds!
This post from 2013
http://blog.markherman.ca/2013/07/11/how-low-are-interest-rates-really-here-is-the-big-picture/
Now for the big picture…
Short version: rates are the lowest of all time … like a 496 year low. Is that low enough?
“in July 2012, 10-year yields in the US thus reached with 1.39% the lowest level since the beginning of records in the year 1790.
In the Netherlands – which provide the longest available time series for bond prices – interest rates fell to a 496 year low.
In the UK, ‘base rates’ are currently at the lowest level since the founding of the Bank of England in 1694.
In numerous countries (Germany, Switzerland), short term interest rates even fell into negative territory.”
Mark Herman, Mortgage Alliance, Top Calgary Alberta Mortgage Broker, and #1 mortgage brokerage in Canada for 2013 AND 2014!!!
Variable rate mortgage – how payments will change for the new rate
We are getting many calls on this so here is how it works for MOST of the banks.
The Bank of Canada (BofC) reduced their Prime rate by 1/4 % or .25% last week to 0.75% from 1% where it has been for about 3 years.
The banks took a while to decide ifthey were going to lower their rates as well. 3 times before the banks have either not passed on the entire rate reduction to customers or not moved at all and kep the savings to themselves.
Now that most banks have lowered their rate by .15% this is how payments are impacted:
a. If they have an Adjustable Rate Mortgage – ARM mortgage – then the rate will be the new rate starting on the “effective date.”
b. The payment after the next payment will change to reflect this new rate. (So if you pay monthly on the 1st, the Feb 1st payment will be your current payment, but the March 1st Payment will be the new payment, If you pay weekly every Friday, this Friday will be the same payment but the next Friday will be the new payment)
c. Because the rate has gone down, your payment will decrease.
d. Because the interest rate has gone down, the next payment that is still at your existing payment amount will apply a little more to your principal.
e. Customer will receive a letter with their new payment amounts in the snail-mail.
Hope that clears things up a bit.
Call if you have questions.
Mark Herman, Top Calgary Alberta Mortgage Broker.
ATB = collateral mortgage registrations too
ATB – Alberta Treasury Branches – is registering their mortgages are collateral mortgages.
Are you sure you want one of these?
- Have a look at the previous articles showing why the banks want you to have this, and you do not want it: http://blog.markherman.ca/?s=collateral
- And – what if you move out or are transfered out of Alberta? ATB can only lend in Alberta so your mortgage is not PORTABLE to move to any other province – like with most lenders we work with. You will have to pay it out and pay the payout penalty. 🙁
Calgary, Alberta Mortgage Broker, Mark Herman