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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Housing Market Digest by Will Dunning, Economist for Mortgage Professionals Canada
The Office of the Superintendent of Financial Institutions (OSFI) now requires that all residential mortgages by federally-regulated lenders must be stress-tested, at two percentage points above the contract interest rate (or the 5- year posted rate, if that is higher). In combination with the requirements for mortgage insurance, about 90% of all new mortgages will be tested.
This can be expected to reduce housing activity by 10-15%. It is on top of the impact from recent rises for mortgage interest rates (another 5-10% drop in activity). The combined 15-25% drop in housing activity will affect the broader economy.
In two years, employment could be 150,000-250,000 lower than it would otherwise be. There is a risk that house prices will fall. In a modern economy, a sustained drop in house prices is one of the most dangerous things that can happen: as happened in the US a decade ago, falling house prices can turn into widespread economic decline.
Resale activity recovered a bit more in September, to 492,900, due to partial rebounds in BC and Ontario. Activity is flat in most other areas.
CREAs House Price Index was flat in September. The year-over-year change is now 10.7% (down from the peak of 19.7% that was seen in April).
The sales-to-new-listings ratio (SNLR) was 55.7% in September, slightly above the balanced market threshold of 51%. This indicator points to an outlook for stable prices (at worst). But, as noted, OSFIs stress test policy creates a risk of falling prices.
We should, in general, expect that resale activity will trend upwards over time, because the population is growing and the housing inventory is expanding. Therefore, it is useful to look at sales on a per capita basis. Recent activity is below the long-term average.
Employment increased by 35,000 in October
In October, employment rose for youth aged 15 to 24, while it was little changed for the core-aged population of 25- to- 54 year-olds, and for people 55 and older. The largest employment increase was in Quebec, followed by Alberta, Manitoba, Newfoundland and Labrador, and New Brunswick. At the same time, there was a decline in Saskatchewan.
Employment rose in several industries, led by other services; construction; information, culture and recreation; and agriculture. Employment declined in wholesale and retail trade.
The number of private sector employees increased in October, while public sector employment and self-employment were little changed.