As I mentioned in my previous blog posts about Covid-19 and credit, Canadian banks would likely start tightening up secured line of credit products to avoid financial risks like defaults and insolvencies.
Banks can accomplish this in three ways. One, they can arbitrarily reduce available credit limits. Two, they can disallow the ability to use a line of credit for certain objectives such as providing a down payment on another property, for example; or three, they can close them altogether. Ultimately, a bank's decision to alter a person's credit facility on a home line of credit product will depend on factors such as repayment history in the last three to six months, and whether a person used the deferral option due to unemployment. The Federal Government's assistance program called CERB, which stands for Canada Emergency Response Benefit, is temporarily helping Canadians make their bill payments. Additionally, many have also used mortgage deferral options for up to six months to help stay afloat without a salary or wage. In light of the foregoing and also considering the CERB and deferrals are coming to an end banks must prepare for the financials risks that may present themselves if borrowers start drawing from home lines in order to supplement income. If it becomes apparent that lines of credit are used as income replacement, then we will witness banks take restrictive measures immediately. Home Equity Lines of Credit have the capability of expanding risk for banks. After all, when people have limited income during recessions and times of higher unemployment rates, they turn to their home lines because they are inexpensive due to a low interest-only payment, and are easily accessible. Unfortunately, if lockdowns continue or the economy has a rough restart with continued unemployment, then, of course, this will become reality. Scotiabank, for example, will no longer allow borrowers to use home equity lines of credit as a form of a down payment on another property. And although other big banks have not employed a similar policy, it wouldn't be unusual if they did. A Home Line of Credit is a collateral mortgage which is different from a conventional mortgage because it allows the bank to change its terms. Do you have mortgage questions? Feel free to call or write. Sarah A. Colucci Mortgage Agent, Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849
0 Comments
If you’ve received your mortgage renewal agreement and your mortgage is up for renewal soon, you may be wondering whether you should lock into a fixed rate or choose a variable rate mortgage this time around.
Historically, the variable rate mortgage has always been cheaper over the long run despite the economy going through periods of volatility and rates increasing and decreasing. Overall, however, the savings achieved through having a variable rate have always been greater than the savings offered through fixed-rate mortgages. Nevertheless, each person’s situation is different, and while one person may be able to withstand times of higher interest rates, another person may not. Therefore, choosing a variable rate mortgage requires careful consideration. A variable rate is usually set at either Prime Rate, Prime Rate Plus an Interest Rate (Prime Rate plus a premium) or Prime Rate less an Interest Rate (Prime less a discount). Prime Rate itself is influenced by the Bank of Canada’s overnight lending rate, which is further determined by economic conditions and the Government’s attempt to maintain healthy inflation. In November 2000, the Bank of Canada introduced a system of eight fixed dates each year on which it would announce whether or not it would change the policy interest rate, otherwise known as the overnight lending rate. Therefore, it’s important to realize there’s an opportunity for the Prime Rate to fluctuate up to eight times a year, and if you are someone who cannot afford interest spikes, the variable rate may not be for you. Fixed Rates A fixed-rate on the other hand simply means the rate will stay the same for your entire mortgage term. So for example, if you choose a five-year closed mortgage, this will mean your payments will be determined by the same rate for five years, and there will not be any fluctuation to your payment. Fixed-rate mortgages are obviously beneficial because someone can budget their payments each month and not have to deal with the stress of following the market or the Bank of Canada’s overnight lending rate meetings. On the flip side, however, a person who chooses a fixed rate will miss out on an opportunity to pay a lower interest rate and may be faced with a large penalty should they decide to exit their mortgage early. Penalties. There will always be a penalty to exit a closed mortgage before the contract expires, which is why it’s important to consider how penalties get calculated for both fixed and variable rate mortgages. A variable rate mortgage will always be just three-months of interest - it doesn’t matter where you are in the term, the calculation will be the same. Fixed-rate mortgages are calculated differently and often, more punitively. A fixed-rate mortgage is calculated using an Interest-Rate-Differential (IRD) formula. The penalty is either three months’ worth of interest OR the IRD, whichever is greater. For more information, please do not hesitate to call or write. Sarah A. Colucci Mortgage Agent Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@mortgageedge.ca In my previous article, I emphasized that changes to mortgage guidelines and prudent risk measures would start being implemented by mortgage lenders.
The last point I made touched on secured lines of credit and some measures mortgage companies would likely start implementing to mitigate credit and financial risk. It is very possible, if the economic lockdown continues to degrade the economy, we will see lines of credit arbitrarily closed or in the alternative, available credit limits will be drastically reduced with or without notice to borrowers. The reason: There is very sobering problem with liquidity constraints in the market right now which means there are not many funds circulating, which also means mortgage funds will come at a greater cost to consumers. This is why the interest rates have risen upwards of 70 basis points in the last three weeks despite the retreat by most investors to the bond market (that normally pushes rates down). Clearly, there is too much risk to investors considering the volatility and skyrocketing unemployment rates which is also why private lenders are not lending nearly as much as they used to or even at all. Despite the many well-versed economists declaring their predictions and forecasts, the truth of the matter is this is an unprecedented time with no end date determined and not one person has a crystal ball. With each passing business day, there are more lay-offs, more closures of small businesses and much more uncertainty regarding whether unemployment will become permanent or long-lasting even after COVID-19 has been resolved. While a lender may agree to lend a mortgage at 80 percent of the property's value today, it is essential for them to realize (which they certainly do) that in just two to three weeks from now the same property's value can plummet by ten percent or more. It's not surprising, then, to consider a lender may stop lending at this loan to value and scale back on approved mortgage limit. Now, regarding lines of credit. Many homeowners have a mortgage product such as a Home Equity Line of Credit registered against their property. I have written about some benefits and disadvantages of home lines before, however, not in this context. I'd like to forewarn borrowers about what we could see happen very soon. Although having a line of credit with available cash to access in a crisis seems re-assuring, the truth of the matter is any lender can reduce or close this account without any reason or rationale should they decide to. When your mortgage is registered as a collateral mortgage, it is not a conventional mortgage, it is based on a promissory note which allows the lender to have full-reign on the entire credit facility. This authority allows the lender to exercise all risk mitigation strategies it is entitled to employ, which it will without notice. Therefore, the question is: if you are someone who has no savings, no cash for a rainy day and are relying on your secured line of credit to get you through a depression (even if temporary), is this a safe position to take? This is a critical question to ponder and if need be, act on. Sarah A. Colucci Mortgage Agent Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@coluccimortgage.com What's Happening With Mortgage Rates, Lending Guidelines and Property Value During Covid-19?4/2/2020 There have been many changes to mortgage lending over the past couple of weeks that will likely continue to change as long as we are within the COVID-19 crisis.
Many mortgage lenders are facing liquidity constraints and borrowers in general are posing more risk to lenders because of lay-offs and the likelihood of lay-offs in the near future. As a result of the foregoing, many lenders are tightening their guidelines which will make mortgage borrowing more difficult from here on out and until we move past the pandemic. The changes discussed above are also making mortgage money more expensive and as we have noted in the last couple weeks, some lenders have increased fixed rates by upwards of 70 basis points. Although the Bank of Canada's overnight lending rate has gone down drastically, which directly impacts Prime Rate, most lenders have reduced a discount off the Prime Rate or have added interest. When it comes to mortgage changes, here are some examples we may see in the near future. Keep in mind some have already been implemented: Down payment for investment properties will likely need to come from personal savings only. Currently, most lenders allow a borrowed down payment which is secured against an existing property, however, with the tightening of liquidity and overall risk, we can expect lenders to disallow this form of down payment going forward. Temporary lay-offs will likely disqualify borrowers from obtaining mortgage financing even if previously approved. Mortgage applications that have already been approved may be declined if borrowers have been temporarily laid off. New applications will be declined if a person has been temporarily laid off. Personal savings may play a larger role in qualifying for mortgage financing. As long as applicants meet the standard qualifying criteria such as income and credit requirements, for example, a mortgage loan is usually approved. With the liquidity constraints and substantially increased risk borrowers are now posing, however; lenders may require borrowers to have additional "healthy" savings beyond their down payment or if they are refinancing. Rates will be held for a shorter period of time. Once an approval is issued by a lender, a rate will be honoured either until the closing date or for a couple of months regardless of whether a borrower signs and accepts the approval right away. With the changes and tightening of mortgage lending in place, rates will likely not be held for an extended period of time if an approval is not signed and accepted by borrowers within 7-10 business days from the date of approval. Lines of credit may be closed. If the situation becomes dire, we may start to experience secured line of credit facilities closed or reduced. This means lenders may arbitrarily close down credit products to minimize overall risk. What about property value? Some economists have postulated that depending on how long the Covid pandemic goes on, property prices may decrease as much as 30 per cent. In Toronto, the damage would be less than in the suburbs. This is likely due to the higher unemployment rate and lay-offs which may become permanent. It will all depend on how long the economy is shut down and consumer sentiment once this is over. Do you have questions about your mortgage? Feel free to call or write. Sarah A. Colucci Mortgage Agent Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah [dot] colucci [at symbol] mortgageedge [dot] com |
By: Sarah ColucciSenior Mortgage Agent, Lic. M14000929 Categories |