Connecting the dots...
Recently announced mortgage qualifying changes brought some concerns and confusion to many people including experts in the industry, so it is worthy to spend some time and shed some light on it.
My goal is not to try to explain everything related to these changes in great details, quoting all the government records, but to touch on few points based on the most frequent questions Im getting from clients and friends.
To summarize the recent events, a couple of approaching changes were publicized in the beginning of October this year, amongst which the mortgage qualifying Stress Test got larger popularity, so lets start with it.
Our Ministry of Financeannounced that going forward, for all government-backed insured mortgages, the home-buyers must qualify at the greater of their contract mortgage rate (the actual one that the lender is giving) or the Bank of Canadas conventional five-year fixed posted rate (the Qualifying Rate) which currently is twice bigger. This is the so called Stress Test rule, which by the way was already in place for high-ratio, variable rate, and short term mortgages.
It may be obvious to some but we have to clarify that this rule applies to mortgage loan applications subject to government-backed insurance only, a.k.a. Mortgage Default Insurance, or simply mortgage insurance, which protects the lender not the homebuyer/borrower. Government-backed in this context means that if the borrower defaults on the mortgage payments and for some reason the insurer is not able to pay off the whole outstanding amount to the lender the government will give the money to the insurer. Nice! :) There are three big mortgage insurers in this business a government institution CMHC (Canada Mortgage and Housing Corporation), which is backed by the government 100%, and two private institutions Genworth Financial and Canada Guaranty, which are also backed by the government but 90% (subject to 10% deductible)
With these changes we can say that the government simply restricts the eligibility for mortgage loans to be insured by government-backed insurance by adjusting the criteria for that. In other words the government will not back the insurers for mortgages not matching these criteria, but at the same time requires federally regulated lenders to obtain mortgage default insurance for all high-ratio mortgages. Kind of a deadlock situation, isnt it?
Now, the question comes naturally If I pay 20% or more down why would I need mortgage insurance? or I have an excellent score and dont want to pay extra for insurance, hence Im putting such a big down payment, why would the new rule affect me? The truth is you do not need mortgage insurance (it is not protecting you anyway) but the lender needs it or simply wants it. Now, for a high-ratio mortgage, where the insurance is mandatory, the lenders pass the insurance payments on to you. For a low-ratio mortgage the lenders still can decide to insure it and pay for that themselves without you even knowing.
Thats how you may end up being affected by these rules without expecting it, furthermore as an A client, paying down 20% of the purchase price, and having an excellent credit score and credit history.
In most cases the low-ratio mortgage insurance is a portfolio or bulk insurance, usually purchased by the lender after the mortgage origination. However, there are also single transactional insurance cases for low-ratio loans at lenders discretion, which some lenders may decide to cover themselves and some may pass the payments to you. As you can see, there are many variables in the equation, and many different equations as well. For this reason you always have to consider an independent mortgage consultant help in order to explore your options and secure the right one for you.
All this brings us to the second forthcoming change regarding eligibility criteria for government-backed insured low-ratio mortgages.
Starting with the end of the month all new low-ratio mortgages that the lenders insure using portfolio or transactional insurance must meet the eligibility criteria that previously applied to high-ratio mortgages only.
Some of these criteria are: maximum amortization period of 25 years; maximum property value of $1,000,000; if the property is single unit must be owner-occupied; minimum borrowers credit score 600; maximum applicants GDS ratio of 39% and maximum TDS ratio of 44%, on top of that the calculation for these ratios will be based on the Qualifying Rate, accordingly to the new Stress Test, as this is all about insured mortgages.
If you wonder what GDS and TDS are - these are the calculated ratios that lenders are using to determine the maximum mortgage amount you qualify for. These ratios represent the carrying cost of the home you are planning to buy relative to your gross income.
The difference between them is that GDS (Gross Debt Service) calculation includes only the mortgage payment, taxes, heating, and if applicable, half of the condo fee while TDS (Total Debt Service) calculation includes also some of your payments to additional debts, such as other loans, credit cards, child support, alimony, or generally any monthly payments that, if discontinued, will result in balance owing.
The third pending change, which is still in discussions (or in a public consultation process, to be precise) is about the lenders start sharing the risk of mortgage default in some modest levels, which may look reasonable and relatively mild, but eventually this will be a significant transformation that will affect the mortgage approval process for sure.
The last announced modifications that are not affecting directly the mortgage application are income tax related, mostly regarding the capital gain exception for principal residence (a.k.a. matrimonial home) which briefly are: individuals not resident in Canada in the year they accrued a residence will not be able to claim capital gain tax exception for that year when they sell their property; Canadian residents can designate only one principal property per family for a specific year; and going forward CRA will obligate the Canadian taxpayers to report when they sell their principal residence in their tax return for the year the property is sold, which was not required until now.
I hope my article makes the recent financial government announcements easier to understand.
If you have specific questions regarding this matter or something is not fully clear please do not hesitate to contact me. Ill be happy to discuss further :)
Canadian home sales edge down from December to January
According to statistics released today by The Canadian Real Estate Association (CREA), national home sales were down slightly in January 2017 on a month-over-month basis.
- National home sales declined 1.3% from December 2016 to January 2017
- Actual (not seasonally adjusted) activity in January was up 1.9% from a year earlier
- The number of newly listed homes dropped 6.7% from December 2016 to January 2017
- The MLSHome Price Index (HPI) in January was up 15.0% year-over-year (y-o-y)
- The national average sale price was little changed (+0.2%) y-o-y in January
Sales activity was down from the previous month in about half of all local markets, led by three of Canadas largest urban centres: the Greater Toronto Area (GTA), Greater Vancouver, and Montreal.
Actual (not seasonally adjusted) sales activity was up 1.9% compared to the same month last year. While sales were up from year-ago levels in about two-thirds of all local housing markets including in the GTA, Calgary, Edmonton, London and St Thomas, and Montreal, they were down significantly in the Lower Mainland of British Columbia.
The number of newly listed homes dropped 6.7% in January 2017, the second consecutive monthly decline. New listings were down in about two-thirds of all local markets, led by the GTA and environs across Vancouver Island.
With the monthly decline in new listings surpassing the decline in sales, the national sales-to-new listings ratio jumped to 67.7% in January compared to 64.0% in December and 60.2% in November.
The ratio was above 60% in about half of all local housing markets in January, the vast majority of which are located in British Columbia, in and around the GTA and across southwestern Ontario. A monthly decline in newly listed homes further tightened housing markets that were already in sellers market territory.
There were 4.6 months of inventory on a national basis at the end of January 2017 unchanged from December 2016 and a six-year low for the measure.
The imbalance between limited housing supply and robust demand in Ontarios Greater Golden Horseshoe region is without precedent (the region includes the GTA, Hamilton-Burlington, Oakville-Milton, Guelph, Kitchener-Waterloo, Cambridge, Brantford, the Niagara Region, Barrie and nearby cottage country). The number of months of inventory in January 2017 stood at or below one month in the GTA, Hamilton-Burlington, Oakville-Milton, Kitchener-Waterloo, Cambridge, Brantford and Guelph.
In the Fraser Valley and Greater Vancouver, prices have receded from their peaks posted in August 2016. That said, home prices in these regions nonetheless remain well above year-ago levels (+24.9% and +15.6% respectively).
Meanwhile, benchmark prices continue to climb in Victoria and elsewhere on Vancouver Island together with Greater Toronto, Oakville-Milton and Guelph. Year-over-year price gains in these five markets ranged from about 18% to 26% in January.
By comparison, home prices were down 2.9% y-o-y in Calgary and by 1.0% y-o-y in Saskatoon. Prices in these two markets now stand 5.9% and 4.3% below their respective peaks reached in 2015.
Home prices were up modestly from year-ago levels in Regina (+3.8%), Ottawa (+3.7%) and Greater Montreal (+3.1%). In Greater Moncton, home prices for the market overall held steady (-0.2%), reflecting an increase in townhouse row units prices (5.8%) that was offset by a decline in prices for one-storey single family homes (-1.0%).
The actual (not seasonally adjusted) national average price for homes sold in January 2017 was $470,253, almost unchanged (+0.2%) from where it stood one year earlier.
The national average price continues to be pulled upward by sales activity in Greater Vancouver and Greater Toronto, which remain two of Canadas tightest, most active and expensive housing markets.
That said, Greater Vancouvers share of national sales activity has diminished considerably over the past year, giving it less upward influence on the national average price. The average price is reduced by almost $120,000 to $351,998 if Greater Vancouver and Greater Toronto sales are excluded from calculations.
Canadian Housing Starts Trend Increased in January
The trend measure of housing starts in Canada was 199,834 units in January compared to 197,881 in December, according to Canada Mortgage and Housing Corporation (CMHC). The trend is a six-month moving average of the monthly seasonally adjusted annual rates (SAAR) of housing starts.
CMHC uses the trend measure as a complement to the monthly SAAR of housing starts to account for considerable swings in monthly estimates and obtain a more complete picture of the state of Canadas housing market. In some situations analyzing only SAAR data can be misleading, as they are largely driven by the multi-unit segment of the market which can vary significantly from one month to the next.
The standalone monthly SAAR for all areas in Canada was 207,408 units in January, up from 206,305 units in December. The SAAR of urban starts increased by 1.0per cent in January to 189,688 units. Multiple urban starts increased by 4.2per cent to 125,886 units in January and single-detached urban starts decreased by 4.6 per cent, to 63,802 units.
In January, the seasonally adjusted annual rate of urban starts increased in Ontario and Atlantic Canada, but decreased in British Columbia, the Prairies and Quebec.
Rural starts were estimated at a seasonally adjusted annual rate of 17,720 units.