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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To help make homeownership more affordable for first-time home buyers, Budget 2019 introduces theFirst-Time Home Buyer Incentive.
The Incentive would allow eligible first-time home buyers who have the minimum down payment for an insured mortgage to apply to finance a portion of their home purchase through a shared equity mortgage with Canada Mortgage and Housing Corporation (CMHC).
It is expected that approximately 100,000 first-time home buyers would be able to benefit from the Incentive over the next three years.
Since no ongoing payments would be required with the Incentive, Canadian families would have lower monthly mortgage payments. For example, if a borrower purchases a new $400,000 home with a 5 per cent down payment and a 10 per cent CMHC shared equity mortgage ($40,000), the borrowers total mortgage size would be reduced from $380,000 to $340,000, reducing the borrowers monthly mortgage costs by as much as $228 per month. Terms and conditions for the First-Time Home Buyer Incentive would be released by CMHC.
CMHC would offer qualified first-time home buyers a 10 per cent shared equity mortgage for a newly constructed home or a 5 per cent shared equity mortgage for an existing home. This larger shared equity mortgage for newly constructed homes could help encourage the home construction needed to address some of the housing supply shortages in Canada, particularly in our largest cities.
The First-Time Home Buyer Incentive would include eligibility criteria to ensure that the program helps those with legitimate needs while ensuring that participants are able to afford the homes they purchase. The Incentive would be available to first-time home buyers with household incomes under $120,000 per year. At the same time, participants insured mortgage and the Incentive amount cannot be greater than four times the participants annual household incomes.
Budget 2019 also proposes to increase the Home Buyers Plan withdrawal limit from $25,000 to $35,000, providing first-time home buyers with greater access to their Registered Retirement Savings Plan savings to buy a home.
Bank of Canada maintains overnight rate target at 1 ¾ per cent
The Bank of Canada today maintained its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 per cent.
Recent data suggest that the slowdown in the global economy has been more pronounced and widespread than the Bank had forecast in its January Monetary Policy Report (MPR). While the sources of moderation appear to be multiple, trade tensions and uncertainty are weighing heavily on confidence and economic activity. It is difficult to disentangle these confidence effects from other adverse factors, but it is clear that global economic prospects would be buoyed by the resolution of trade conflicts.
Many central banks have acknowledged the building headwinds to growth, and financial conditions have eased as a result. Meanwhile, progress in US-China trade talks and policy stimulus in China have improved market sentiment and contributed to firmer commodity prices.
For Canada, the Bank was projecting a temporary slowdown in late 2018 and early 2019, mainly because of last years drop in oil prices. The Bank had forecast weak exports and investment in the energy sector and a decline in household spending in oil-producing provinces. However, the slowdown in the fourth quarter was sharper and more broadly based. Consumer spending and the housing market were soft, despite strong growth in employment and labour income. Both exports and business investment also fell short of expectations. After growing at a pace of 1.8 per cent in 2018, it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January.
Core inflation measures remain close to 2 per cent. CPI inflation eased to 1.4 per cent in January, largely because of lower gasoline prices. The Bank expects CPI inflation to be slightly below the 2 per cent target through most of 2019, reflecting the impact of temporary factors, including the drag from lower energy prices and a wider output gap.
Governing Council judges that the outlook continues to warrant a policy interest rate that is below its neutral range. Given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook. With increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets, and global trade policy.
The next scheduled date for announcing the overnight rate target is April 24, 2019. The next full update of the Banks outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.