What's New!

THE NEW NORMAL

’Tis the season… this was no surprise here! The latest round of mortgage guidelines has been announced by OSFI, or Office of the Superintendent of Financial Institutions. As of January 1, 2018, all conventional or uninsured mortgages will have to qualify at the Bank of Canada 5-year fixed rate or the contractual rate + 2%, whatever is greater.
What does this mean? Nothing for anyone wanting to renew or buy real estate with less than 20% down.
But anyone wanting to access their equity might just have to consider a slightly lower amount. And those wanting to purchase real estate with 20%+ down may need to adjust their expectations or relocate their search area.
Regardless of your scenario, there will still be options to exercise.
Next question on many people’s minds is how this will affect prices. Based historical data, I predict that there will be very little decrease in prices. Most people thought the ‘bubble’ was going to explode. Most comments were, “It just has to, how can prices continue to increase?” Well guess what… prices have continued to increase. Some market segments will experience a slight softening, but nothing drastic.
Here is a list of changes issued by OSFI since 2006. Did any of them bring prices down?

2006
Maximum amortization 40 years
100% financing, 0% down payment

2008
Maximum amortization 35 years
Maximum 95% financing, minimum 5% down payment required

2011
Maximum amortization 30 years
Refinance maximum 85% of the market value

2012
Maximum amortization 25 years
Refinance maximum 80% of the market value
If mortgage insurance is required, then the maximum purchase price of the owner-occupied home is $1,000,000

2015
Minimum down payment – 5% of the first $500,000 and 10% on the portion remaining

2016
Qualification rate increases to Bank of Canada benchmark rate for all insurable files (less than 20% down)

2017
Conventional (20% down or greater) stress test increases to contract rate plus 200 basis points (2%) or the Bank of Canada benchmark rate, whatever is greater

2018
What will happen in 2018?

There is no need to slam your fist on the panic button. This is simply the new normal for mortgage finance consumers. The sun will still rise in the east and set in the west. The earth will continue to rotate in a counterclockwise direction. People will still buy and sell real estate. Those consumers with available equity will still have access to it and borrowers will still renew existing mortgages. If you are receiving or buying into “the world is ending” type information, please look away… it’s wrong and misleading.
Nothing changes.
If you are worried about things you cannot control, stop it! If you are going to put any energy into something, I would recommend building a bulletproof personal borrowing profile. More than ever it’s vitally important to have AAA credit, minimal-to-zero consumer debt and strong reliable income and savings. If you start with that, I can assure you everything will be OK!
If you have any plans to become an active mortgage consumer, start looking at your options now as some lenders will adopt the new rules before January 1, 2018. If you have any questions, feel free to contact us today!

 

HOW TO GET A MORTGAGE AFTER BANKRUPTCY

Bankruptcy is always the last resort-and it’s never easy or comfortable. However, sometimes it is the only option to turn to when life throws you something unexpected. The lasting impression it can have on one’s financial profile though can be overwhelming.

If you have bankruptcy in your past, don’t fear-we have 6 steps to take to help get you back on track and qualifying for your mortgage!

Step 1: Get official discharge quickly.
The quicker you are discharged from your bankruptcy, the quicker you can start rebuilding your credit. This starts with finding a good bankruptcy trustee. You can contact the BBB or Chamber of Commerce to find out recommendations, but we can also provide you with connections to complete your discharge in the shortest time possible.

Step 2: Review your most recent credit score.
You will need to pull from Equifax and TransUnion Canada. They are the two governing credit bureau organizations that manage credit reports in Canada. Look over both reports carefully and make sure there are no surprises and that your debts have been paid off completely. As a general guideline, getting a credit report yearly is a good rule of thumb. You’re managing your credit-if you see a mistake on the report it is up to you to follow the steps to get the mistake corrected.
If you find a mistake, you do have the right to dispute or explain ‘situations or mistakes’ to your bureau. Contact the credit reporting agency immediately and ask about their dispute resolution process. If you still do not agree with an item following the agency’s investigation, visit this link for TransUnion or this link for Equifax to find out how you can add an explanation statement to your report.

Step 3: Re-establish your credit
Mortgages are much easier to get with good credit. You will want to start to rebuild your credit as soon as you possibly can. To do this you will want to open up 2 tradelines (credit cards) through a secured institution such as Capital One, Home Trust, Peoples Trust, etc. They start with putting as little as $500 down with your credit being based on your deposit. Next, follow the 2-2-2 rule. This means you will want to keep those 2 lines of credit with a max limit of $2000 for 2 years. Keeping in mind that you must pay your bill on time each month (even if it is just the minimum payments).

Step 4: Pay any outstanding taxes to revenue Canada
This is probably one of the most important things to remember when you are getting a mortgage! If your taxes are unpaid then there is nothing we can do to help! You won’t qualify for any mortgage until any owing debts to Revenue Canada are paid off.

Step 5: Start Saving!
With all of the mortgage regulations in place now it is important to understand how much you will need to save to put down on a home. This will vary from person to person and situation to situation. Your personal history, credit score, etc. will have an effect on this as well. There are literally 100’s of ways that you can start saving money. Remember, every little bit helps!

Step 6: Put budgeted savings into an RRSP for the down payment
One of the easiest ways to make money on your savings, is to keep them in an RRSP fund. If you are a first-time home buyer in Canada you can borrow up to $25,000 from your RRSP’s to use towards the down payment on your new home. The beautiful thing about keeping it in an RRSP fund is the larger tax refund you will receive—for every $1,000-dollar contribution you will get $400 back! Now that’s smart saving!

In addition to these 6 steps, we recommend that you keep all bankruptcy documents on hand. Even though your bankruptcy has been discharged, the lender which you are applying for a mortgage with may ask you to provide a copy of the statement of discharge, along with copies of the bankruptcy papers. Keep them safe and on hand as this is a key piece of information to help you get a mortgage faster and easier.

Declaring bankruptcy is one of the life events that no one wants to face. But if that is part of your history, we will walk you through the mortgage process and go above and beyond to make sure that you acquire the mortgage you are looking for!

   

TIME TO LOCK IN A VARIABLE RATE MORTGAGE?

Approximately 32 per cent of Canadians are in a variable rate mortgage, which with rates effectively declining steadily for the better part of the last ten years has worked well.

Recent increases triggers questions and concerns, and these questions and concerns are best expressed verbally with a direct call to your independent mortgage expert – not directly with the lender. There are nuances you may not think to consider before you lock in, and that almost certainly will not be primary topics for your lender.

Over the last several years there have been headlines warning us of impending doom with both house price implosion, and interest rate explosion, very little of which has come to fruition other than in a very few localized spots and for short periods of time thus far.

Before accepting what a lender may offer as a lock in rate, especially if you are considering freeing up cash for such things as renovations, travel or putting towards your children’s education, it is best to have your mortgage agent review all your options.

And even if you simply wanted to lock in the existing balance, again the conversation is crucial to have with the right person, as one of the key topics should be prepayment penalties.

In many fixed rate mortgage, the penalty can be quite substantial even when you aren’t very far into your mortgage term. People often assume the penalty for breaking a mortgage amounts to three months’ interest payments, which in the case of 90% of variable rate mortgages is correct. However, in a fixed rate mortgage, the penalty is the greater of three months’ interest or the interest rate differential (IRD).

The ‘IRD’ calculation is a byzantine formula. One designed by people working specifically in the best interests of shareholders, not the best interests of the client (you). The difference in penalties from a variable to a fixed rate product can be as much as a 900 per cent increase.

The massive penalties are designed for banks to recuperate any losses incurred by clients (you) breaking and renegotiating the mortgage at a lower rate. And so locking into a fixed rate product without careful planning can mean significant downside.

Keep in mind that penalties vary from lender to lender and there are different penalties for different types of mortgages. In addition, things like opting for a “cash back” mortgage can influence penalties even more to the negative, with a claw-back of that cash received way back when.

Another consideration is that certain lenders, and thus certain clients, have ‘fixed payment’ variable rate mortgages. Which means that the payment may at this point be artificially low, and locking into a fixed rate may trigger a more significant increase in the payment than expected.

There is no generally ‘correct’ answer to the question of locking in, the type of variable rate mortgage you hold and the potential changes coming up in your life are all important considerations. There is only a ‘specific-to-you’ answer, and even then – it is a decision made with the best information at hand at the time that it is made. Having a detailed conversation with the right people is crucial.

It should also be said that a poll of 33 economists just before the recent Bank of Canada rate increase had 27 advising against another increase. This would suggest that things may have moved too fast too soon as it is, and we may see another period of zero movement. The last time the Bank of Canada pushed the rate to the current level it sat at this level for nearly five full years.

Life is variable, perhaps your mortgage should be too.

As always, if you have questions about locking in your variable mortgage, or breaking your mortgage to secure a lower rate, or any general mortgage questions, contact us at 613-612-2111 or 613-203-2030.

   

NEW MORTGAGE CHANGES DECODED

 

This week, OSFI (Office of the Superintendent of Financial Institutions) announced that effective January 1, 2018 the new Residential Mortgage Underwriting Practices and Procedures (Guidelines B-20) will be applied to all Federally Regulated Lenders. Note that this currently does not apply to Provincially Regulated Lenders (Credit Unions) but it is possible they will abide by and follow these guidelines when they are placed in to effect on January 1, 2018.

The changes to the guidelines are focused on
• the minimum qualifying rate for uninsured mortgages
• expectations around loan-to-value (LTV) frameworks and limits
• restrictions to transactions designed to work around those LTV limits.

What the above means in layman’s terms is the following:

OSFI STRESS TESTING WILL APPLY TO ALL CONVENTIONAL MORTGAGES

The new guidelines will require that all conventional mortgages (those with a down payment higher than 20%) will have to undergo stress testing. Stress testing means that the borrower would have to qualify at the greater of the five-year benchmark rate published by the Bank of Canada (currently at 4.89%) or the contractual mortgage rate +2% (5 year fixed at 3.19% +2%=5.19% qualifying rate).

These changes effectively mean that an uninsured mortgage is now qualified with stricter guidelines than an insured mortgage with less than 20% down payment. The implications of this can be felt by both those purchasing a home and by those who are refinancing their mortgage. Let’s look at what the effect will be for both scenarios:

PURCHASING A NEW HOME
When purchasing a new home with these new guidelines, borrowing power is also restricted. Using the scenario of a dual income family making a combined annual income of $85,000 the borrowing amount would be:

Current Lending Guidelines

Qualifying at a rate of 3.34% with a 25-year amortization and the combined income of $85,000 annually, the couple would be able to purchase a home at $560,000

New lending Guidelines

Qualifying at a rate of 5.34% (contract mortgage rate +2%) with a 25-year amortization and the combined annual income of $85,000 you would be able to purchase a home of $455,000.

OUTCOME: This gives a reduced borrowing amount of $105,000…Again a much lower amount and lessens the borrowing power significantly.

REFINANCING A MORTGAGE

A dual-income family with a combined annual income of $85,000.00. The current value of their home is $700,000. They have a remaining mortgage balance of $415,000 and lenders will refinance to a maximum of 80% LTV.
The maximum amount available is: $560,000 minus the existing mortgage gives you $145, 0000 available in the equity of the home, provided you qualify to borrow it.

Current Lending Requirements
Qualifying at a rate of 3.34 with a 25-year amortization, and a combined annual income of $85,000 you are able to borrow $560,000. If you reduce your existing mortgage of $415,000 this means you could qualify to access the full $145,000 available in the equity of your home.

New Lending Requirements
Qualifying at a rate of 5.34% (contract mortgage rate +2%) with a 25-year amortization, combined with the annual income of $85,000 and you would be able to borrow $455,000. If you reduce your existing mortgage of $415,000 this means that of the $145,000 available in the equity of your home you would only qualify to access $40,000 of it.

OUTCOME: That gives us a reduced borrowing power of $105,000. A significant decrease and one that greatly effects the refinancing of a mortgage.

CHANGES AND RESTRICTIONS TO LOAN TO VALUE FRAMEWORKS (NO MORTGAGE BUNDLING)

Mortgage Bundling is when primary mortgage providers team up with an alternative lender to provide a second loan. Doing this allowed for borrowers to circumvent LTV (loan to value) limits.
Under the new guidelines bundled mortgages will no longer be allowed with federally regulated financial institutions. Bundled mortgages will still be an option, but they will be restricted to brokers finding private lenders to bundle behind the first mortgage with the alternate lender. With the broker now finding the private lender will come increased rates and lender fees.
As an example, we will compare the following:
A dual income family that makes a combined annual income of $85,000 wants to purchase a new home for $560,000. The lender is requiring a LTV of 80% (20% down payment of $112,000.00). The borrowers (our dual income family) only have 10% down payment of $56,000.. This means they will require alternate lending of 10% ($56,000) to meet the LTV of 20%.

Current Lending Guidelines
The alternate lender provides a second mortgage of $56,000 at approximately 4-6% and a lender fee of up to 1.25%.

New Lending Guidelines
A private lender must be used for the second mortgage of $56,000. This lender is going to charge fees up to 12% plus a lenders fee of up to 6%

OUTCOME: The interest rates and lender fees are significantly higher under the new guidelines, making it more expensive for this dual income family.

These changes are significant and they will have different implications for different people. Whether you are refinancing, purchasing or currently have a bundled mortgage, these changes could potentially impact you. We advise that if you do have any questions, concerns or want to know more that you contact us at info@ottawashometeam.com or call us direct 613-612-2111 or 613-203-2030. We can advise on the best course of action for your unique situation and can help guide you through this next round of mortgage changes.

   

FINAL GUIDELINE B-20 ANNOUNCED

Today, the Office of the Superintendent of Financial Institutions Canada (OSFI) published the final version of its Guideline B-20. The revised Guideline, which takes effect January 1, 2018, applies to all federally regulated financial institutions.

We were pleased that OSFI agreed with our recommendation not to create a prohibition on all co-lending activities and instead clarified that the restrictions only apply to arrangements that are designed to circumvent existing laws or policies.

We are however disappointed with the decision to implement a new stress test at a 200 basis points level. We expect this will encourage more people to take shorter term mortgages, putting more borrowers at risk should interest rates rise dramatically. We believe the new qualifying rate will have negative implications for the Canadian mortgage finance market and the national economy as a whole. Following this announcement, will continue our discussions with the Ministry of Finance and the Bank of Canada about the methodology used to set the 5 year bench mark.

OSFI will be holding information seminars later this fall to discuss implementation expectations. 

Overview of Changes effective January 1, 2018

A new minimum qualifying rate (stress test) for uninsured mortgages will be set


The minimum qualifying rate for uninsured mortgages will be the greater of the five-year benchmark rate published by the BoC or the contractual mortgage rate +2%.

Lenders will be required to enhance their LTV measurement and limits to ensure risk responsiveness

Federally regulated financial institutions must establish and adhere to appropriate LTV ratio limits that are reflective of risk and updated as housing markets and the economic environment evolve.

Restrictions will be placed on certain lending arrangements that are designed, or appear designed to circumvent LTV limits

A federally regulated financial institution is prohibited from arranging with another lender: a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law.

As always we will continue to keep you updated on the latest developments as they are announced.
   

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