Impact of Mortgages changes
Impact of Mortgages changes.
Before I explain how all the changes had impacted consumers I believe it is important to clarify and explain those changes.
Previously, mortgages were divided into two major categories
1) High ratio mortgages- down payment was lower than 20%, borrower will be charged for mortgage insurance in case of default. This provided banks the option to offer good rates to borrowers with low down payments.
2) Low ratio mortgages- down payment was grater than 20%.
Mortgage insurance in Canada is backed by the federal government through the Canada Mortgage and Housing Corp. Insurance is sold by the CMHC and two private insurers, Genworth Financial Mortgage Insurance Company Canada and Canada Guaranty Mortgage Insurance Company. This creates the federal government responsible to cover the cost of 100 per cent of an insured mortgage in the event of a default.
Oct- Nov, 2016
In consequence, Mortgages are now being differentiated as Insured and Non- Insured.
Insured: (by Federal Mortgage Insurance)
High ratio owner occupied Only.
Borrowers need to qualify at benchmark of 4.64%
Maximum Amortization of 25 years
Purchases under $ 1 Million dollars
Non-Insured: (by Federal Mortgage Insurance)
Income properties purchases and refinances with less than 20% down payment.
Low ratio mortgages
Borrowers qualify under contract rate not stress test
Amortization can exceed 25 years
Interest rate increase of 0.25 %, it will impact services associated with mortgages, such as lines of credits and bank services associated with prime rates.
All these changes were established by the Liberal Government to freeze housing prices in Toronto and Vancouver area mostly, avoid consumers going into mortgages that cannot be afforded, and subsidized the low prices on petroleum.
It has been almost 10 months that these changes had been applied and it did not help to stop prices to sky rocket or consumers to not be in debt. On the other hand, now interest rate increased which it was most likely to happen and it complicates even more the financial situation of most home owners.
I read many articles this past week, but I was surprised by one in which it was trying to give consumers the idea that a small interest increase it wasnt such a big impact on mortgages on a monthly basis. It is very unreal to believe that interest rates are not going to go up even more. This will complicate the financial situation of average Canadians to access a mortgage in the future or keep the current one. It is going to become harder to pay off debts because interest rates and living expenses are getting more expensive.
Investors cannot offer affordable rentals because the cost for a mortgage for them have changed. Many lenders do not offer investment products due to the additional cost of having to buy private insurance in consequence of the changes implemented by the Government. This as well increases the cost of living for Canadians and makes it even harder to save for a purchase of a home.
All these changes intend to solve an issue but they create new ones even more complex to resolve.
A fitting example is the increase on minimum wage as is planned for 2019 of $ 15.00; this will bring a lot of consequences, prices are going to go up in general items because businesses are going to have to recap those amounts, small businesses are not going to be able to have employees because of the cost increase, therefore less demand for workers.
All these changes intend to patch or give quick solution to most concerns on society.
Realistically, it has been a wrong move from the government. It affected first time buyers, middle class families, private banks (some of them are out of business because they cannot compete with prices, therefore less options for borrowers); most of these individuals do not contribute to have prices for over 1 million dollars.
As a mortgage professional, I mostly see the debate of buyers that do want to have an affordable mortgage but in their areas are not possible. I try to advice to move further from the city, but they encounter the lack of employment opportunities on those border cities.
The real problem is that big cities such as Toronto and Vancouver are collapsing, employers need to start moving away from the big cities to be able to make surrounding cities prosper as well. There are a lot of commuters and consequently creates traffic problems, big monthly expenses on gas, car maintenance and so on. Because all the changes rents are more expensive and consumers are not able to save money for a down payment.
I believe some changes are good but they cannot be applied to all Canada, they need to be enforced for buyers on the big cities. We need opportunities for first time buyers, buying a home is slowly becoming a luxury and we all have the right to own our home.
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CREA Updates Resale Housing Market Forecast
The Canadian Real Estate Association (CREA) has updated its forecast for home sales activity via the Multiple Listing Service (MLS) Systems of Canadian real estate Boards and Associations in 2018 and 2019. Housing market fundamentals remain strong in many parts of the country. Nonetheless, many housing markets continue to struggle in the face of policy headwinds.
The new mortgage stress test announced last October had been expected to cause homebuyers to rush purchases in advance of the new rules coming into effect in January and for the pull-forward of sales activity to result in fewer transactions in the first half of 2018.
Evidence suggests the policy response was stronger than expected, with seasonally adjusted national home sales last December having surged to the highest level ever recorded before dropping sharply in early 2018.
Actual (not seasonally adjusted) national sales figures for March, April and May are typically among the most active months in any given year. Combined sales fell to a nine-year low for the three-month period. The seasonally adjusted trend suggests sales momentum has not yet begun to rally.
Interest rates are widely expected to rise further this year and next. Home sales activity is nonetheless still expected to strengthen modestly in the second half of 2018 as housing market uncertainty diminishes.
Taking these factors into account, the national sales forecast has been revised downward and is now projected to decline by 11% to 459,900 units this year. The decrease almost entirely reflects weaker sales in B.C. and Ontario amid heightened housing market uncertainty, provincial policy measures, high home prices, ongoing supply shortages and this years new mortgage stress test.
Bank of Canada maintains overnight rate target at 1¼ per cent
The Bank of Canada today maintained its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1 per cent.
Global economic activity remains broadly on track with the Banks April Monetary Policy Report (MPR) forecast. Recent data point to some upside to the outlook for the US economy. At the same time, ongoing uncertainty about trade policies is dampening global business investment and stresses are developing in some emerging market economies. Global oil prices have been higher than assumed in April, in part reflecting geopolitical developments.
Inflation in Canada has been close to the 2 per cent target and will likely be a bit higher in the near term than forecast in April, largely because of recent increases in gasoline prices. Core measures of inflation remain near 2 per cent, consistent with an economy operating close to potential. As usual, the Bank will look through the transitory impact of fluctuations in gasoline prices.
In Canada, economic data since the April MPR have, on balance, supported the Banks outlook for growth around 2 per cent in the first half of 2018. Activity in the first quarter appears to have been a little stronger than projected. Exports of goods were more robust than forecast, and data on imports of machinery and equipment suggest continued recovery in investment. Housing resale activity has remained soft into the second quarter, as the housing market continues to adjust to new mortgage guidelines and higher borrowing rates. Going forward, solid labour income growth supports the expectation that housing activity will pick up and consumption will continue to contribute importantly to growth in 2018.