Are interest rates going to remain low?
The global economy is still very uncertain. Tariffs, global trade, Brexit, "populism" and slow growth in Canada are all reasons that contribute to today's continuation of low-interest rates.
In its 2020 outlook, the Bank of Canada has reinforced this stance on interest rates with many other economists sharing a similar view.
Although the last Bank of Canada meeting did not lead to any change in the overnight lending rate, there is some speculation that the overnight lending rate will be reduced in 2020. This means that interest on variable rate mortgages will also be reduced.
Is a recession coming?
The market moves in cycles of both booms and busts. Circumstances contributing to low-interest rates today are not permanent which means consumers need to be cautious about taking out too much debt in low-interest-rate environments.
One of the main problems with having a personal debt level of 177% (StatsCan 2019) is a rise in increasing debt levels due to a low cost of borrowing.
In situations where the Government is forced to keep interest rates low, a later, sudden rise, can trigger payment shock, delinquency, bankruptcy and even foreclosure of real estate.
What should be a borrower's plan in 2020?
Generally, borrowers should always try to be proactive in reducing their cost of borrowing by not overpaying on credit products and minimizing their use.
There are many different ways a borrower can use financial tools to their advantage including debt consolidation through refinancing, balance transfers to low-interest cards, and better budgeting.
It's also important to consider that in times of a recession, property value tends to diminish and to refinance, the property value must be supported.
Try a free debt restructuring analysis for free! Contact me today.
Sarah A. Colucci, Mortgage Agent
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
Mounting credit card debt is an expensive problem for many credit card users all over Canada, and despite most Canadians having credit card balances, many are still unsure about how their credit card’s interest gets calculated.
Unfortunately, because different financial institutions calculate interest in various different ways, a borrower can be under informed about the process and end up paying much more interest than desired instead of switching to a cheaper credit card.
TD Bank recently sent out a notice to customers advising that effective March of this year, it will begin charging “interest on unpaid interest” which will then get compounded daily.
As a reference, Royal Bank of Canada and Canadian Imperial Bank of Commerce do not not charge interest on interest; they both only charge compounded interest on the daily outstanding balance. Scotiabank does have some products such as the Momentum MasterCard Credit Card that it charges interest on interest on, however, it does not calculate charges this way for most of its other credit products.
To avoid paying credit card interest, cardholders must make a payment within 21 days of their purchase which is the interest-free grace period. Cash advances do not have a grace period.
If a cardholder cannot pay their entire balance in full, interest begins to accumulate from the day of their transaction to the day the balance is paid off. Interest then gets calculated on the daily balance and is divided by the number of days in the statement period. The credit card’s specified interest rate is then applied to the equation.
TD Bank has decided to add any unpaid interest charges to the outstanding balance and compound that amount ultimately making the minimum monthly payment more costly.
Time to consolidate? Try our refinance program to pay less interest each month and save money.
The government is now entering a new market. Instead of encouraging homeownership like it’s been doing for the past 74 years, and creating new ways for Canadians to have autonomy over the real estate they own, it’s now publicly discouraging homeownership as it gears itself up to excel in low-cost loans only available to developers and landlords.
Since Canada Mortgage and Housing Corporation (CMHC) announced its rental financing initiative in 2017, it has generated immense attention and a “high number of quality applications.” The interest it has received has enabled CMHC to increase its operating budget for its lending initiative from $2.75 billion to $13.75 billion in just two years. It will now sit back and encourage 42,500 new purpose-built rentals to get built across Canada. The initiative to create more affordable rental accommodations shows just how monetarily invested the government is in the acceleration of purpose-built rentals.
And not only will it open the doors to exceptionally competitive interest rates and incentives to those that have experience with property ownership or development but it will also allow loan amortizations of up to 50 years, making it more enticing for the seasoned to construct rentals. The program is also helping the rich get richer from the renters who can't afford a home or even pass the mortgage stress test.
But since Evan Siddal, its CEO tweeted that Canadians need to “end the glorification of homeownership,” many Canadians will buy into bad advice and ultimately never pursue real estate ownership, getting out of the way for the wealthy to continue to deepen their pockets.
For the first time since 1946, Canadians are now being discouraged to own property by CMHC, which has built its name, power and vision through its homeownership programs and the dream of homeownership itself. The vision is now, according to Siddal, that municipalities should encourage developers to "build upwards and not outward so that people can live in 100-200 unit purpose-built rentals in a condensed metropolis instead of an upper-middle-class subdivision of just ten homes."
CMHC’s launch of RCFi, which stands for Rental Construction Financing initiative, reflects and reinforces its vested interest in promoting rentals and long term tenancy arrangements. And, Evan Siddal's comments further emphasize the growing interest in persuading Canadians to stay away from the concept of wealth creation through real estate.
Unfortunately, since foreign investment and money laundering have artificially propped up real estate valuations in Toronto and Vancouver, and the mortgage stress test has removed 30 percent of aspiring purchasers, most will never get the opportunity to own real estate. Instead, perhaps Siddal wants to shift the conversation away from the obvious - that real estate is a good investment many Canadians can't get it on- so that they will believe that financially savvy people rent even despite the overwhelming reality that income to rent ratios doesn’t allow room for savings.
Even still is the most puzzling initiative that CMHC introduced in 2019 with its Shared Equity Program. The need to help with affordable housing in major cities has been mounting and the government decided to offer soft loans of up to 10 percent of the purchase price. The loan cannot be repaid in partial payments and must get repaid in full or in 25 years, and the Government will share in the ownership of the property for the same percentage that it lends.
Therefore, when purchasers end up selling their home or choose to refinance at any point before the loan is due, the government collects its share of the profit.
While purchasers, for the most part, consider the program to be assisting them with a minimal reduction to their monthly mortgage payment, very few will see the reality that they will be sharing in property ownership with the Government, ultimately losing autonomy over their asset. In the end, it's very possible they will have to pay far more in accumulated profits through value appreciation than they would have saved on mortgage payments.
It's also very difficult for a purchaser interested in the program to make an informed decision about applying for the loan since CMHC does not publicly appreciate or explain the disadvantages of the program on its website which can include excessive paperwork and red tape when switching and refinancing, for example.
Therefore, how will CMHC’s initiatives that appear to contradict and undermine the dream of homeownership, affect the next generation and even those who hang on to every word the government tells them in the midst of the housing crises?
Since the 1990s, Canadians have found an abundance of financial security through real estate. Property owners that purchased pre-stress test and even when they didn’t require a down payment have reaped major profits which have allowed them to pursue other investments or grow impressive real estate portfolios. They’ve also been able to use their equity to put their children through school, for example, and even leave their real estate for generations after them. In fact, 76% of Canadians hold their wealth in real estate assets.
But with many people losing their class status through the disparity of income levels between themselves and CEOs that employ them in addition to the cost of living, how will the next generation build wealth without the ability to own real estate? Not many can imagine a world where property ownership is not a reality like it was for their parents.
The new “brand” of CMHC, the one that is increasing its budget to support large rental units and the construction of high-rise rental apartments and discouraging homeownership, may inadvertently force the next generation into becoming lower-class citizens who may have no choice but to keep paying landlords (that may or may not use CMHC Rental Construction Financing).
And when the cost of rent sky-rockets because the demand is too great and the income to rent ratios are no longer acceptable to landlords, where is the next generation to go?
Housing has become one of the most highly sought investments in Canada and despite the pressure this desire causes for better policies like a change of the stress-test, for example, CMHC still feels it needs to “de-stigmatize” being a renter instead of promoting better homeownership initiatives.
In the housing market, existing property owners, foreign investors and yes, money launderers will continue to buy real estate. Some, like the government, will invest in purpose-built rentals to accommodate everyone else who simply couldn’t get in.
While our government tries attempts at implementing new “initiatives” that make more profits for itself and those who can afford a home or a 200 unit rental development, they haven’t considered better ways to help those who can’t. Realistically, the government can promote both affordable rentals and homeownership simultaneously. It doesn’t have to be one or the other - black or white.
The government’s answer to the housing crisis shouldn’t be to end the dream of homeownership but to give Canadians an alternative, and to offer initiatives that truly help Canadians to continue prospering from homeownership.
Despite unaffordability today, young people still want to carry on the tradition. But with foreign investors now owning a large percentage of real estate in Toronto and Vancouver, what happens going forward? Who will help the next generation become homeowners?
If high paid executives like Evan Siddal keep ignoring the wants and the needs of the next generation which also includes those that naturally can't keep up with artificial inflation, then Canadians will quickly develop into lower class citizens with little to no wealth. Therefore, good government policy and initiatives are the only hope.
It’s not uncommon for primary borrowers to require a cosigner to purchase their desired property. If you have recently bought a home and are trying to qualify for a mortgage, you may require a cosigner.
Whether you are a borrower considering a cosigner or you are a cosigner considering helping a borrower, here’s what you need to know.
There are a few different reasons cosigners exist which include the inability for borrowers to pass the mortgage stress-test that makes qualifying harder and skyrocketing property prices in Canada’s major cities that most of the younger generation can’t afford. There are other, more personal and specific issues such as having bad credit, limited credit history, employment criteria and so on. The most likely individuals to require a cosigner are between the ages of 20 and 34.
Cosigners may strengthen a mortgage application because they may have a stronger credit report, more assets and “qualifiable” income that can service the loan. For example, adding a cosigner’s yearly gross income to the mortgage application may help borrowers qualify for a greater purchase price in the event they don’t earn enough to qualify on their own.
A cosigner is responsible for the loan if the primary borrower defaults which is why they must have:
Many first time home buyers can become hesitant at the thought of their parents being responsible for their debt or loan payments in the event they default on their mortgage. They may not want to compromise autonomy over their personal finances by involving their parents. It’s perfectly normal to postulate about what a cosigner can mean but fortunately, cosigners are not only popular but often necessary for the short-term.
When borrowers think "co-signers”, they think “forever.”
For many people who have built real estate portfolios - meaning they own multiple properties- they’ve had to adopt various strategies to accomplish their goals.
Many times, the strategies don’t appear favourable at the onset, but get managed successfully and turn into a rewarding and lucrative investment. For example, someone with bruised credit may have to borrow from an alternative lender temporarily until they pay off outstanding loans and their credit score increases. Even though they’ve borrowed at a higher interest rate and are not saving as much interest as they could, they are still enjoying property ownership, and paying into their own asset.
Similarly, cosigners are not permanent. A cosigner can be removed from the mortgage contract at any point at which the main applicant can service the mortgage requirements independently.
For example, first time home buyers may go on to earn a larger salary within a year or two years from their purchase date and can apply with their financial institution to have their cosigner discharged from the loan obligation. In this way, the borrower still gets to purchase his or her first home, paying into a mortgage instead of renting and also gets to build equity.
In most cases, the mortgage term need not get broken to remove the cosigner from the liability. The lender will simply complete an internal application and make the changes, provided the borrower qualifies.
Cosigners On Title
There are essentially two different ways cosigners can interject to help with property ownership.
In the first way, a cosigner can remain off of title, meaning they do not get registered as an owner of the property through the Land Titles System. They merely guarantee the loan in case of default.
In the second way, the cosigner will be a partial owner of the property and will get registered on title together with the borrower. Some mortgage lenders require that cosigners be on title, therefore, the amount of ownership and the capacity of ownership itself (i.e. Joint Tenants or Tenants In Common) should be discussed with a real estate lawyer.
For example, a cosigner may have a 1% interest in the property as a “Tenant in Common” while the main borrower keeps a 99% interest.
The Dangers of Cosigning For Family
If you're considering cosigning a mortgage loan or you want to know more about the risks, it’s important to know that you will be responsible for the debt should the borrower default. Also, adding more liability to your credit profile can impact your credit score and limit you financially if you require other loans in the future.
Benefits of Cosigning
There’s little argument about prosperity in real estate. Since real estate values are increasing exponentially, it’s still considered a sound investment. As a parent or family member who gets asked to cosign, consider that your help may assist your relative with a chance at home ownership. And as a parent, if you're cosigning, it may finally get your children out of the house and give them a place of their own.
Alternatives To Consigning
If you’re on the fence about cosigning, it may relieve you to learn there are other options, that include:
1. Down Payment Help
If cosigning is not for you, then you can help your family member by gifting a down payment or helping out with the closing costs that can include land transfer tax and lawyer fees. One of the most common reasons most people can’t get a mortgage is because they don’t have an adequate down payment.
2. Buy The Home Yourself.
Some parents decide it’s beneficial to purchase a home and rent it out to their adult children until they can qualify for a mortgage. Later, the children can buy the home back from the parents by taking out a mortgage and completing a transaction called a “transfer and refinance.”
If you want to learn how much mortgage you can qualify for, complete a mortgage pre-approval today. CLICK HERE to get started.
How To Avoid The Mortgage Stress Test.
The Mortgage Stress Test is a qualifying measure put in place to encourage borrowers not to overextend themselves on mortgage credit and to secure financial institutions from potential mortgage default.
The Stress Test applies to all federally regulated financial institutions although other lenders have likewise embraced the stress test as part of their mortgage qualification process. Multiple regulators supervise major banks in Canada including Office of the Superintendent of Financial Institutions (OSFI) that oversee judicious supervision and Financial Consumer Agency of Canada (FCAC) which regulates consumer protection. The Stress Test applies to major banks or any financial institution that complies with the Bank Act.
Credit unions are lenders that establish their banking system separately from major banks. What makes credit unions different from major banks is instead of having clients and earning profits, credit unions have “members” and redistribute their revenue throughout the credit union, making it better for everyone. Therefore, they are not-for-profit corporations. Regulation of credit unions take place at the provincial and territorial level in Canada, which is why they don’t have to comply with the Mortgage Stress Test although some of them still do. In Ontario, the Ministry of Finance, the Financial Services Commission of Ontario (FSCO) and the Deposit Insurance Corporation of Ontario (DICO) regulate most credit unions, although some get regulated federally.
So, how to avoid the Mortgage Stress Test?
If you are purchasing a property with less than a 20 percent down payment, it doesn’t matter which financial institution you apply with. Both credit unions and major banks have to follow Federal Law when the mortgage requires high-ratio mortgage insurance, which means all applications of this nature will be stress-tested. However, if you have over 20 percent available or are refinancing the mortgage on your primary residence, you can apply with select credit unions to avoid the stress test. You will only need to qualify at the contract rate and not 2 percent higher.
I work with large and reputable credit unions that do not adhere to the stress test and that can use a 30-year amortization period (instead of 25) to qualify borrowers which reduces monthly mortgage payments and ultimately makes qualifying easier.
If a major bank has turned you down for mortgage financing, why not explore an approval through your local credit union? I can help. Call today or submit an application online!
Evan Siddal, the CEO of Canada Mortgage and Housing Corporation (CMHC), has recently made various Tweets about his present stand on homeownership. According to Siddal’s judgment, Canadians need to “end the glorification of homeownership” and recognize that renting is acceptable. Siddal has also publicly encouraged municipalities to favour “100-200 unit purpose-built rentals instead of 10 single-family homes” on parcels of land available for development.
Siddal appeared compelled to start a discussion about renting and focus on the reality that it’s become impossible for many to own real estate. However, despite his intentions to raise awareness about an issue he sees as significant, his comments beg the question: Is his opinion against wealth generation through real estate admissible? Should everyone who can’t qualify for a home stop “glorifying real estate”? Is this CMHC’s answer to the housing problem?
CMHC has many roles. It promotes initiatives that help Canadians get into the market through high ratio mortgage insurance. Through its National Housing Act Mortgage-Backed Securities it allows lenders to pool their mortgages together and sell them to third party investors. It also helps landlords and developers build purpose-built rentals through mortgage insurance and mortgage loans that have exceptionally competitive interest rates and amortization periods of up to 50 years. CMHC also conducts a fair amount of impartial research about the housing market and presents it to Governments and just about anybody else involved in the industry.
Therefore, it’s paradoxical that the chief of CMHC is promoting renting as superior to owning when the Crown Corporation’s very prosperity has been because of real estate. It continues to collect billions of dollars in revenue through its expensive premiums, application fees and exclusive mortgage financing available to select developers and qualified landlords. In 2018, “CMHC declared $4.175 billion in dividends, owing to its shareholder, the Government of Canada.”
CMHC exists because of real estate and therefore Siddal’s message is not just incompatible with reality but it is not convincing.
Let us consider real estate ownership from two unique viewpoints. The first one through the views of an ordinary first time home buyer and the second, through the views of individuals in the many groups I will clarify who’ve once (or many times) had a large effect on the housing market and have since profited from owning real estate.
Most first time home buyers who apply for mortgage financing have completed school and work in stable jobs. They have a satisfactory credit score and have saved up a small down payment. They’ve also shown no issues with credit delinquency. Yet, the Government recognizes them as “high risk” borrowers since they don’t have a down payment of 20 percent or more. When qualifying, they still have to pass a Mortgage Stress Test which considerably reduces their pre-approved purchase price and for most of them, there is scant inventory available within their budgets.
They’ve had no sort of impact on the real estate market except to help landlords create wealth and due to their lack of significant down payment and subjection to unrealistic qualifying measures, they’ll probably continue to be renters. Their disqualification puts a significant amount of pressure on the rental markets because of an already low vacancy rate.
In comparison, existing homeowners who have built up equity through price realization, concerned foreign investors from China, Taiwan, Japan, East India and Singapore who want to park their money in Canada and money launderers who use Canadian real estate to wash their drug money do not have to trouble themselves with the stress test. They normally encounter no issues purchasing a property.
A homeowner who has amassed capital and purchased pre-stress test and pre-inflation may access funds to expand his or her portfolio with no need to pass the stress test. He or she can qualify for financing on a mortgage with a 30-year amortization, which is 5 years more than the high-risk category, to curtail mortgage payments. They can also apply with many financial institutions who do not have to comply with stress test criteria. He or she can apply for considerably more mortgage products tailored to helping them grow their rental portfolios by allowing “extended ratios” and using rental worksheets to cancel out higher costs making qualifying easier.
Foreign real estate investors have a profound passion for owning real estate overseas. For illustration, the Chinese have always had their roots established in real estate. But in places like Beijing, for example, the Government doesn’t allow civilians to own homes. Therefore, the Chinese consider Canada a perfect place to engage in arbitrage. In Vancouver, as much as 20 percent of its population identifies as ethnic Chinese. Many foreign investors have also used real estate in Canada’s major cities to park their money waiting for stronger economic years in their respective countries.
Unfortunately, for Canadians, foreign investment has artificially and drastically propped up real estate values.
When the Chinese invest here, money doesn’t seem to be an issue since China’s economic revolution has produced a record number of millionaires that outnumber Canadian ones. To present this in context, there are 200,000 households in Canada that have $1M in assets and there are over four million Chinese millionaires. It’s easy to recognize why Canadians cannot contend with foreign investors in their own country’s real estate market.
So, when Evan Siddal downplays homeownership, who exactly he is speaking to as it doesn’t appear the individuals in the second group have issues with owning property and are, in fact, very clear about their view that real estate is a sound investment?
It seems aspiring homebuyers, the ones who want a shot at homeownership for the first time, are told to take up renting and abandon the “dream of homeownership”, instead. Since CMHC epitomizes homeownership, could there be another industry that Siddal is inadvertently promoting?
What many people don’t realize is CMHC also supports landlords and developers who wish to build purpose-built rentals. For example, CMHC offers flexible mortgage loans for new and existing real estate projects meant for standard rentals, single-room occupancies, supportive and retirement housing. For developers or landlords to be eligible for its mortgage loans, they must own at least a five-unit building and the property must be at least 70 percent residential.
CMHC also offers mortgage insurance on construction loans with a premium of up to 5 percent and an application fee of up to $55,000. Even if mortgage applications get declined, CMHC still takes a fee for the underwriting work completed.
Not every purpose-built rental uses or needs CMHC, however, since 2017, its Rental Construction Financing (RCFi) has received a lot of interest and consideration by developers that are both for-profit and not-for-profit which has encouraged the low-cost loan budget from $2.5 to $13.75 billion. Therefore, CMHC now encourages 42,500 rental housing units across Canada in the next four years.
So, in conclusion, when everyone including the Government is making billions off the dream of homeownership, why is Siddal telling a small group of people to take up renting forever? Why is Siddal telling them, they shouldn’t let anyone sell them “the dream”? What “dream” is he trying to sell them?
Not only are first time home buyers treated unfairly by the stress test which has inadvertently allowed existing homeowners, investors and money launderers to keep amassing wealth but the new initiatives put in place by CMHC to help developers and landlords create more rentals, will only help the rich get richer while the aspiring purchasers will rent from them.
Therefore, end the glorification of homeownership if you want, just know that when you do, those who won’t, will keep making money and attracting wealth through real estate. Even CMHC will use the renters as a tool to attract more developers and landlords who will pay more premiums, more application fees and generate more profits for its one shareholder, the federal government.
Sarah A. Colucci, Sr. Mortgage Agent/Mortgage Edge Broker 10680/Direct: (647) 773-4849
Investors are a group of mortgage borrowers that have persistently and profitably used mortgage financing to establish their real estate empires, therefore using mortgage debt as a necessary financial tool. The average consumer will declare they “hate” carrying a mortgage and yes, it is a thing abhorred, except if it used to generate loads of wealth.
Striving to build a sizeable real estate portfolio involves a lot of research and careful planning but once achieved can generate wealth not only for property owners but for their families and future generations. Having wealth in real estate can exempt a person from economic uncertainty since someone who produces substantial investment income or has assets they can liquidate, for example, is less likely to experience financial crises.
Throughout my career, I have had the pleasure of helping individuals build wealth through real estate. I have watched mortgage financing become an exciting endeavour when it is used to build a real estate portfolio.
Leveraging mortgage debt means a person borrows capital to make maximum profits that supersede the interest paid on that capital. Although it’s a basic concept, it can become complex and somewhat scientifical when purchasers own multiple properties, which is likely the reason more people don’t have larger real estate portfolios or any at all.
Below, I will explain some basics people should consider when building their real estate portfolios that will ensure success.
To successfully build a real estate portfolio, each property needs to get purchased with careful consideration of:
1. Cash flow Potential; and
2. Length Of Time Before Mortgage Debt Gets Repaid.
Cash flow is how much money is available after expenses get paid. For example, if the principal and interest payment is $1,500 per month, and property taxes are $350, then how much income the property generates above and beyond this amount is critical. The amount of cash flow will determine to what degree the property is acting as a successful investment, if at all.
Some believe cash flow should add to supplementary income. Not always and never right away. Initially, cash flow should be used to shorten the length of the mortgage. For example, if the property cash flows $600 a month then that money should go toward prepayments.
In the above-scenario, prepaying could reduce a twenty-five-year mortgage to a ten-year one and, therefore, any investor should analyze how soon cash flow will pay down mortgage debt when determining whether an investment property is worth purchasing.
The truth is if an investor breaks even or contributes a small amount of their own money each month to help carry the property's expenses, their investment is not as successful as it should be.
Building a truly successful real estate portfolio involves taking necessary steps to ensure the mortgage is for the shortest term possible. Successful investors know equity must be available to leverage as soon as the next opportunity presents itself.
Keep in mind, the economy may not always provide the circumstances that will cause property to appreciate so an investor should always lay the foundation for success regardless of market conditions.
Mortgage financing is an obvious necessary step in building a successful real estate portfolio. However, most people get it wrong when they believe getting a mortgage and refinancing a short time later to buy another property is building them wealth the fastest way possible. As mentioned above, a mortgage is a financial tool meant for the shortest term possible. Therefore, cash flow to shorten the amortization is not only crucial for wealth building but necessary to qualify for additional financing.
Mortgage lenders usually get squirmy and hesitant about an investor who owns more than four properties and is applying for more mortgages, and especially if those properties have large mortgages on them. To keep building, existing mortgages require maintenance and a plan to reduce their balances as soon as possible. A plan of this nature ensures that investors always remain attractive covenanters to mortgage lenders.
Although there are more factors to consider in wealth building through real estate, it's important that investors consider the basics.
I specialize in helping investors structure their mortgages effectively to ensure they are cash flowing. I also help investors reorganize their personal debts and liabilities to cash flow within their own finances.
Please call or write if you have questions about your current investments. I would be more than happy to help you free of charge.
Sarah A. Colucci, Sr. Mortgage Agent/Mortgage Edge, Broker 10680
Want to win $10,000? If you complete a mortgage with me between now and December 31, 2020, you will automatically be entered into my "Mortgage With Me" Contest Draw to win!
Today, the Mortgage Stress Test does not provide a purpose except to destroy opportunities for home ownership.
As a mortgage expert, my job is to facilitate financing, but since it’s become problematic for the average Canadian to invest in real estate because the Government has not changed the qualifying tests, I must also advocate for home ownership.
Aspiring purchasers that must pass the Mortgage Stress Test are qualified using unrealistic mortgage interest rates which ultimately disqualify an enormous percentage of them from owning property. Therefore, the test is a radical measure that is doing more harm than good in helping Canadians gain and preserve wealth.
Mortgage Stress Test Is No Longer Relevant
The government enforced the Mortgage Stress Test to cool a hot real estate market which was experiencing the side effects of uncontrolled foreign investment, unprecedented bidding wars and yes, crime.
At the time of implementation, average Canadians were fighting in bidding wars alongside foreign investors who possibly didn’t even require financing.
Canada Mortgage and Housing Corporation (CMHC), Genworth and Canada Guaranty were insuring homes that were worth hundreds of thousands less than the sale prices.
In some pockets of Toronto, the Greater Toronto Area, and Vancouver, homes appreciated by 52 percent in as little as three years.
It was a moment that called for intervention especially since rising interest rates and the havoc they would produce in an insanely inflated market posed a palpable risk to the financial sector.
While high-risk mortgage insurers were insuring mortgages lent on inflated property values, financial institutions were bearing an extraordinary risk of delinquency on their balance sheets. Therefore, the Stress Test had its place.
The foreign investment tax of 15 percent also had its place because foreign investors were less likely to engage in bidding wars if they had to fork over 15 percent of the purchase price to the Canadian Government.
The Government was successful in blocking a mounting pressure that might have wreaked havoc on purchasers and the economy.
As a result of the test and the tax, Toronto and Vancouver, two of the most heated areas in the country cooled. Later, the market continued to remain slow as real estate sales went down, prices went down, and both the test and the tax continued to knock wannabe purchasers out of the market.
Last year, interest rates started to rise as the Canadian economy seemed strong and resilient and made the perpetuation of the stress test appear warranted. Then, something happened that altered the relevancy of the test altogether.
Suddenly, a surge of populist movements such as Trump’s tariffs and Brexit threatened globalization and demanded federal banks all across the world to cut their overnight lending rates. Interest rates started moving down as the bond market was a secure place for investors to be and Poloz couldn’t find any reason to increase the overnight lending rate.
Fast forward to today. Interest rates are still low and the Bank of Canada has confirmed in its 2020 outlook that the economy will remain stagnant as the world awaits a technological revolution.
The Mortgage Stress Test, accordingly, no longer serves a purpose, it only destroys hopes of home ownership.
It seems unwarranted to qualify a borrower at 5.19 percent when the contract rate is only 2.64 percent. The chances of rates jumping by over two percent in just a few years are improbable and uncommon. Yet, instead of the Government conceding the preposterousness of the Stress Test in today’s environment, CMHC is telling borrowers they should reject the thought of home ownership and take up a lease, instead.
My theory is to discard the Stress Test, grant free market reign over the supply and demand of real estate. Recognize that the Stress Test had no place in Canada besides Toronto, GTA and Vancouver and that it caused and continues to cause tons of individuals to lose out on home ownership. Admit the obvious challenges with Corporations, and how incorporation in Canada can hide beneficial owners, which may encourage foreign investors to continue to tamper with our real estate markets and evade taxation.
If you are a Canadian who wishes to own a home but is considering renting to be a better option, understand that the ONLY situation that would make renting superior to owning is if market rents were modest enough to permit forced savings. And, if those savings would multiply at a significant rate of return. It’s not cheaper to rent if there is no room to save money.
Wealth accumulation through renting is a fable. Renting is not practical given the cost of living. Inflation outpaces the rise in income. Property values increase faster than savings.
Sometimes, it’s not about surrendering the dream but discovering new ways to accomplish it. I can merely anticipate the Government will scrap or change the rules that function as a barricade on the pathway to homeownership. But if not, it’s time for purchasers to think outside of the box, and that’s where I can help!
Sarah A. Colucci, Mortgage Agent Lic. M14000929, Mortgage Edge Broker 10680/Direct: (647) 773-4849, www.coluccimortgages.com
APR stands for “Annual Percentage Rate.”
APR includes the contract interest rate which determines the monthly, weekly or bi-weekly principal and interest payment in addition to lender fees that are charged or can be incurred throughout the mortgage term.
The lender costs, although they don't affect the mortgage payment, are expressed as a percentage rate in the APR. Therefore, we can say the APR is the true cost of borrowing because it accounts for both the contract rate plus all other fees.
Despite disclosing standard APRs, it is impossible for a lender to calculate the true APR when it comes to Variable Rate Mortgages or the cost of penalties incurred through early termination. Because fluctuating rates and penalties definitely change the APR but can’t be predicted at the onset of a mortgage contract, determining absolute costs with certainty is impossible for both lenders and borrowers. As a result, neither costs are included in standard mortgage APRs but should be considered by borrowers with equal weight.
Fortunately, there are standard fees and calculation methods that can be considered by borrowers when mulling over mortgage options to ensure a lower cost of borrowing.
Lenders charge fees during mortgage terms which are mostly accounted for in the standard APR. For example, a lender may charge a property tax administration fee, NSF fee, discharge statement fee, fee for transferring the mortgage to a new property, fee for prepayment, fee for payment frequency change, etc.
These fees add up.
For example, if a lender collects $200 a year for each borrower's tax administration service, it will collect $200M for every one million borrowers. Therefore, small fees do add up in both costs and profits.
By paying their own property taxes and/or setting up a payment plan directly through their municipality, borrowers can reduce their mortgages' APR by cutting costs. Other costs, however, can not be changed or altered so it’s imperative that borrowers determine their total cost of borrowing - the total APR - before signing on the dotted line.
Variable Rate Mortgages
Although a mortgages’ standard APR is defined in the contract, variable-rates can change during the mortgage term increasing or decreasing the APR.
A variable mortgage rate fluctuates and depends on the Bank of Canada's overnight lending rate which is determined by factors affecting the global and domestic economy. Therefore, borrowers who choose a Variable-Rate-Mortgage must be aware that the APR can increase at any time.
Pre Payment Penalties
Mortgage contracts set out the written formula used by lenders to calculate prepayment penalties, but it’s simply impossible to calculate what a penalty could be at any point during the mortgage term at the time of approval.
Because the lender assumes the borrower will not exit the mortgage until the maturity date, penalties are not reflected in the APR. To calculate it properly, a lender would have to know, 1. When the borrower is exiting, 2. The remaining term of the mortgage, 3. The remaining balance left on the mortgage, and 4. The interest rate at the time of exit. These factors are all impossible to know ahead of time and it’s not certain whether or not a borrower will break their mortgage at all.
Realistically, it's not uncommon for borrowers to break their mortgage and, in theory, "the penalty" should be considered as part of the APR. But since it’s not, borrowers should choose a lender who doesn’t use the most expensive penalty calculation methods.
Major banks, for example, have the most costly penalties for fixed-rate mortgages. And, although all lenders have the same prepayment penalty calculation, which is “three months of interest or the interest rate differential (IRD), whichever is greater”, big banks take the most expensive route.
For example, banks use the Bank of Canada’s posted rates which are heavily inflated when compared to contract rates, and therefore, borrowers appear to have received a larger discount which, in turn, makes their penalty larger.
In comparison, monoline lenders use their current contract rates in the formula which are not inflated and which ultimately make their penalties cheaper.
In conclusion, when shopping for a mortgage, borrowers should choose lenders who have a lower cost of borrowing and more favourable terms in order to truly get the best deal.
Want to Win $10,000? Enter my "Mortgage With Me" Contest Draw for a chance to win!
Many municipalities all over Ontario offer funding to help people become property owners (otherwise known as "tax-paying citizens"). Taxes help cities and towns fund civic services and build infrastructure, and therefore, new buyers are not only sought after but necessary for economic growth and prosperity.
Purchasers can use these incentives alone or together with the Federal Government's Shared Equity Program to help get their foot in the door of the real estate market.
Here is a list of programs currently funded by the federal and provincial governments through the Investment in Affordable Housing (IAH) Program. To apply, you must receive a Mortgage Pre-Approval. Please contact a mortgage broker, trust company, credit union, bank, or another qualified lender of your choice to apply for a no-cost mortgage pre-approval.
You can also start the process by APPLYING here. We specialize in providing the proper form of pre-approval documentation geared for these programs. Programs are available all year.
1. Region of Waterloo Affordable Home Ownership
If your household is selected to receive down payment assistance, you will enter into a Loan Agreement with the Region of Waterloo. The Agreement outlines the terms of the loan. The loan you will receive is 5% of the purchase price of a home.
To qualify, you must:
2. B-Home - Brantford Home Ownership Made Easy
To be eligible for an interest-free down payment loan prospective purchasers must meet the following criteria:
3. Lanark County Home Ownership Program.
This program is funding through the Investment in Affordable Housing Program. It assists low to moderate income households currently renting a home in Lanark County or the Town of Smiths Falls to purchase a home by providing a forgivable down payment loan to a maximum of 5% of the purchase price of the home. The loan is forgivable after twenty years.
4. Home Peel - Affordable Home Ownership Program
This program will assist eligible applicants who have a total gross (pre-tax) household income of $88,900 or less to purchase a resale home in the Region of Peel that does not exceed a purchase price of $330,000.
Approved applicants are eligible for $20,000 of down payment assistance.
5. Gateway Muskoka
Down payment assistance loans of up to $20,000.00 are available. The maximum purchase price of a home is $335,000.00. The down payment assistance loans are available through an application process. Gateway down payment assistance loans are limited and therefore may not be available to all eligible applicants.
6. Simcoe - Affordable Homeownership Program
The Affordable Homeownership Program aims to assist low-to-moderate income renter households, in Simcoe County, to purchase an affordable home by providing 10% down payment assistance in the form of a forgivable loan.
7. Kingston Home Ownership
The maximum amount of the funding will be ten per cent (10%) of the purchase price of the home to a maximum of $30,000.00. The funding will be in the form of a twenty (20) year interest-free forgivable loan registered on title of the property.
For more information, please do not hesitate to contact our office. We can help increase your chances of getting approved for these programs by providing thorough and comprehensive pre-approval documentation.
Apply with me today to get started! And don't forget, if you "Mortgage With Me" between now and December 31, 2020, you will automatically be entered to win $10,000!
Sarah A. Colucci, Sr. Mortgage Agent, FSCO #M14000929, Mortgage Edge Broker #10680/ Direct: (647) 773-4849 www.coluccimortgages.com
By: Sarah Colucci
411 Queen St.
15 Wertheim Court, Suite 210
Richmond Hill, Ontario
Sarah A. Colucci, Mortgage Agent Lic. M14000929
Mortgage Edge, FSCO Lic. 10680