Federal mortgage policies help investors but are driving first-time buyers out of the opportunity to own a home: Here are two ways to get in to the market as a new buyer.
The federal government introduced the mortgage stress to make it harder to qualify for mortgage financing and ultimately reduce maximum mortgage limit by approximately 30 percent. The stress test also protects federally regulated financial institutions from "payment shock," a situation wherein borrowers are at an increased risk of default due to rising interest rates.
Besides making it harder to qualify, the stress test also gives investors or those with a larger downpayment an unfair advantage in the market. For example, a borrower with a down payment of 20 percent or more will find it easier to qualify for mortgage financing than someone with a smaller down payment since they can extend their amortization period to 30 years and lower their monthly payment. Furthermore, they can also qualify with credit unions that use the "contract rate" or apply with alternative lenders, also called "B" lenders.
Thus, conventional borrowers have more financing options and, as a result, they continue to dominate the market, as is evidenced by the fact that purchases made by first-time buyers are decreasing while those made by investors (those who already own their principal residence) are exploding year after year.
Regrettably, government policies meant to help the overall market by "cooling" it are driving more inflation and pushing a smaller segment of buyers out of the market altogether. Add to this: because having a smaller down payment makes mortgage lending riskier for banks, rules like the "stress test" will remain in place for the foreseeable future, likely continuing a cycle of unfairness between investors who get to own more property and first-time home buyers, who find it challenging or impossible.
If you're a first-time homebuyer with a down payment that is less than 20 percent of the purchase price, you may wonder what you can do to "get in" to the market. Here are two suggestions:
Do you have a mortgage question? I would be more than happy to assist you with your questions or concerns. Please call or write today.
There are many reasons people pay off their entire mortgage or a portion of their mortgage balance earlier than expected.
Most mortgage contracts allow a prepayment privilege up to a certain percentage annually, usually not exceeding 25 percent of the original principal balance. Therefore, even if you don't have enough funds to pay off your mortgage in full, you may come into a windfall of cash, have some money saved or even receive a tax refund that you feel can lower your mortgage balance. Lowering your mortgage will also reduce your monthly payment and decrease interest during the term.
Still, you may wonder whether it's best to pay down your mortgage or reinvest the funds elsewhere, possibly generating a higher return that you could use to pay down your mortgage in the future. Like any other financial decision, it all comes down to your financial situation, risk tolerance and overall strategy.
In the 80s, 90s and 2000s, paying down one's mortgage remained a top priority because interest rates were much higher (try 12 to 19%). Additionally, most property owners weren't diversifying their investment portfolios like today in the wake of lucrative investments like cryptocurrency.
It's critical to learn how mortgage financing works so you can make a better decision about your extra money.
Mortgages in Canada are amortized up to thirty years, but the terms are shorter, usually between one and ten years. Your payments will get based on your mortgage amount, interest rate and will be stretched out over the maximum amortization period during the term limit of your mortgage (i.e. five years).
The idea is after each term; you renegotiate your mortgage rate. At the same time, the amortization period gets smaller, meaning you stay on track to pay off your mortgage within twenty-five years, for example, from when you initially took on the mortgage loan (if that's the amortization period you chose).
Your mortgage payments are comprised of both principal and interest. As you pay down your mortgage, the interest you pay will become less and less, while more will go to the principal.
Most mortgage contracts have a clause that allows prepayments of up to twenty-five percent of the original principal balance annually. So, for example, if your mortgage is $300,000, you could pay up to $75,000 each year without a penalty. Whenever you make more than the prescribed principal and interest payment, the funds get allocated to strictly principal, reducing your amortization period, meaning you're on your way to being mortgage-free sooner.
Of course, making any amount of allowable prepayment is beneficial. Still, when interest rates are low, like today, for example, it may make sense to invest the funds into an asset that's earning more. If you're earning 4 percent, isn't that better than saving 1.45 percent on your mortgage?
On the other hand, when you pay down your mortgage with larger chunks of money, like the total allowable prepayment limit, you get to renegotiate your monthly mortgage payment, which could drastically help with cash flow.
Reducing monthly obligations may mean more to you than earning money in investment portfolios, and that's why it's essential to speak to a mortgage professional and financial advisor about sorting through which is the better option.
Investing in other properties.
If you have an increased appetite for risk, you may also consider using your additional funds to expand your real estate portfolio. You can use the money as a down payment on another purchase, financing the rest. Factoring in market appreciation and the rental income that will reduce the mortgage balance, you may find this is more lucrative than simply reducing your amortization period of the mortgage registered against your principal residence.
Investing in other Markets.
Again, depending on your appetite for risk, you may find investing in financial markets of sorts more advantageous. The rate of your return might exceed the amount of interest you saved by prepaying your mortgage.
For example, $100,000 invested that garners a return of 10% may earn you an additional $159,374 compounded over ten years.
It is best to speak to your financial advisor to determine your level of risk tolerance, based on your age, amount of time the money will get invested before you'll require it again, and your overall financial goals.
It's important to note that the market can be a blessing and a curse. You may lose on stocks, and therefore, in the end, not acquire as much profit as you thought. A 10 percent return can quickly plummet to a 1 percent return depending on what is happening in the economy.
On the flip side, paying down your mortgage is permanent and will always reduce your amortization provided you don't refinance or increase it through other means. Still, even if you did, you can structure payments to tailor the amortization period to what you need or want.
Do you have specific mortgage questions? I would be more than happy to help you sort through your options for free, without any obligations to apply for mortgage financing.
Get in touch today. Call or write.
In a surprising yet not wholly unexpected turn of events, the Omicron Covid-19 variant has negatively impacted the economy.
Given the expectations that the Central Bank would begin to raise interest rates now that the economy was recovering from the pandemic, it may be somewhat of a shock (or not) that the Bank of Canada is doubtful about raising interest rates in the face of Omicron.
Economists and mortgage experts from across the country admit that the overnight lending rate must increase to stop inflation from soaring to unprecedented levels. But if the economy is tottering on volatility like another wave of lockdowns and further disruptions both internationally and here at home, the BoC may have no choice but to leave rates low for some time. Of course, this will only add more speed to the increase in real estate value, currently plaguing cities like Vancouver, Toronto & Calgary.
On December 8, at the last meeting, the Bank of Canada decided to leave its overnight rate at .25% even though it had signalled this rate would increase because of mass vaccinations and job recovery.
Although the global economy is showing signs of positive growth like in the United States, where there has been much economic expansion, other countries still face shortages and disruptions to various supply chains.
Omicron has also raised concerns, and, as a result, has initiated various travel bans by countries around the world. Oil prices have also declined, which has regenerated insecurity about how the global economy is recovering.
The Bank of Canada states it remains "committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved."
You may wonder if obtaining a mortgage in Canada without income is possible. Perhaps you are self-employed or unemployed or receiving pension income like Canada Pension Plan (CPP) or Old Age Security (OAS).
Many different mortgage programs can help you purchase property, but qualifying will depend on a few factors.
Let's look at the different employment types, including unemployment and other factors like credit scoring and available down payment or equity in an existing property (if you're already a homeowner).
SELF-EMPLOYED AND GETTING A MORTGAGE
If you're self-employed, it's possible to get mortgage financing. To get a mortgage with a major bank, credit union or "mono-line" lender (a prime lender without a storefront), you must have been in business for at least two years, and you must have claimed enough income on your last two years of taxes to qualify. Prime lenders usually do not have "stated income" programs that solely rely on the "reasonability" of income or bank statements. Therefore, you will have to claim enough income to qualify.
If this doesn't apply to you, you can still try other options. It's not unusual for self-employed borrowers to claim very little on their income taxes, rendering them ineligible for a standard mortgage loan. In this case, depending on your downpayment, credit score and gross business income, we can try the "stated income" program offered through either of the two high-risk mortgage insurers CMHC (Canada Mortgage and Housing Corporation) or Sagen (formerly Genworth). To qualify under the stated income program, the lender, along with the insurance company, will review the following:
If you qualify, the bank will offer you the best mortgage rate, which is an insured rate. However, you will have to pay an insurance premium, added to your basic loan amount and amortized out to a maximum of twenty-five years.
Suppose you don't qualify under the stated income program or conventional criteria. In that case, depending on the size of your downpayment, we could apply with an alternative lender, also known as an "Alt" lender. Alt lenders don't necessarily rely upon conventional income but can consider bank statements or even invoices and contracts to verify revenue. Alt lenders usually charge .50% to 2% more than traditional loans and a commitment/lender fee of approximately one percent of the loan amount.
PENSION INCOME AND GETTING A MORTGAGE
Many potential borrowers are surprised to learn that pension income is a qualifiable source of income for Canadian mortgage loans. Banks can either use pension income from Canada Pension Plan, Old Age Security, Retirement Income Fund, or more to qualify you. With prime lenders, your pension income will have to service the loan using standard qualifying criteria, and if it can't, you will likely have better luck with an "Alt" lender since these types of lenders can lend more based on income to mortgage amount ratios.
What if you have zero income?
It's still possible to obtain mortgage financing even if you don't have income. You may need to apply with a private lender that can consider the amount of your down payment or available equity along with your credit score. Depending on your age, you may also qualify for the CHIP Reverse Mortgage that pays you each month using the available equity in your home. The CHIP mortgage may be the best option if you have a lot of equity but don't have income.
You may also be able to qualify without income if you have a co-signer who can apply with you. A co-signer may be able to go on title with you or remain off-title as solely a guarantor.
If you have any specific questions, get in touch with us by phone or email.
According to TransUnion, one of Canada's central credit reporting agencies, Canadian mortgages grew by 49 percent and $145 billion during the second quarter of 2021.
When looking at the size of mortgage debt, the report detailed the average amount grew approximately 22 percent to $379,567. This year, mortgage originations grew a little over $200 billion.
It is clear that pent-up demand, which happened during the pandemic, fuelled higher than average market growth and further prompted the relaxation of mortgage rules allowing an additional supply of credit to stream into the real estate market and accommodate the demand for more credit.
One worry many economists have is the rate of delinquencies since consumers are taking on larger mortgages faster than ever before. Statistics offered by TransUnion show a decline in mortgage delinquency in the country, falling by approximately 5 percent to .13 percent.
According to TransUnion, a large segment of the already minor delinquencies reported were due to mortgage and credit deferrals offered because of the pandemic.
Survey Finds That More Than Half Of Young Potential Buyers In Toronto Have Given Up On Ever Owning A Home.
A new survey has found that more than half of young people in Toronto who want to buy a home have already given up on the idea due to soaring real estate prices and the cost of living.
The Sotheby’s International Realty survey looked at 1,502 Canadians aged 18-28 across the country and focused on downtown neighbourhoods in Vancouver, Calgary, Toronto and Montreal. It found that more than half of young people in the GTA who wanted to purchase a home had given up due to high housing prices.
Sixty percent said they were “seriously considering” moving out of Toronto in order to own a home. A third said they planned on leaving within two years, and another 17 percent said they would be gone within four years.
The trend was consistent in other cities. In Calgary, 49 percent of respondents said they had given up on homeownership, as did 47 per cent in Montreal and 43 per cent in Vancouver.
“There’s been a seismic shift over the past decade when it comes to how young people view real estate and homeownership,” said Ross McCredie, president of Sotheby’s Canada.
“It’s not that they don’t want to own a home; it’s that they can no longer afford to do so in the neighbourhoods they grew up in. They are now being forced to look further and further afield for a property they can afford.”
The report comes as Canada faces a growing affordability crisis, particularly in its largest cities. Last month, the Bank of Canada warned that Toronto and Vancouver were at risk of a housing market crash due to high levels of household debt and soaring prices.
Home prices have more than doubled in Toronto since 2009 and are up more than 60 percent in Vancouver.
The Sotheby’s survey also found that most young people no longer view real estate as a reliable investment. Just over half of respondents said they believe home prices will decrease in the next five years, while only 15 percent said they think they will go up.
Sarah is a senior mortgage consultant, working with Mortgage Edge, Canada's largest independent brokerage house. Get in touch at firstname.lastname@example.org.
The Canadian real estate industry is still going strong and prices continue to surge as demand increases, mainly because of historically low-interest rates.
The Bank of Canada (BoC) has stated that fixed rates will persistently rise as it ends Quantitative Easing, and variable mortgage rates will increase as early as March 2022.
The BoC is also meeting today (December 8, 2021) to discuss monetary policy and the overnight lending rate, but experts agree that it will likely not increase in the face of the Omicron Covid-19 variant and its many unknowns.
The inevitable rise of mortgage interest rates continues to create a strong urge for prospective buyers to get in on the action, driving up the cost of property in cities like Toronto and Vancouver, where the average price is currently around $1.2 Million (some say an insane price for your average townhouse or condominium).
Not Enough Supply In Canada's Biggest Cities.
According to the Calgary Real Estate Board, sales are up 46 percent from just one year ago, and new listings cannot seem to keep up with the number of buyers popping up. The Real Estate Board of Greater Vancouver has also expressed there is massive demand that, unfortunately, is not in line with the number of properties currently for sale.
The main issue that has tortured prospective buyers is supply, which is minuscule compared to how many people are actually looking for homes. The imbalance between sellers and buyers causes property prices to rise quickly, like in Ottawa, where supply has dropped by 27 percent as of October 2021. It is also responsible for bidding wars and blind bidding which seeks to purposely inflate the cost of property.
In Toronto, for example, the cost of real estate has increased about 22 percent year over year, whereas new listings are down 13.2 percent.
Getting a pre-approval can provide a type of "interest rate insurance" while you look for a home.
Pre-approvals can protect you from rising interest rates because mortgage lenders can guarantee you a rate for four months while you shop for a home.
Low rates can also be used for things like debt consolidation through refinancing, helping you save a ton of money on high-interest credit card debt or other loans that eat into your cash flow each month.
If you're thinking of getting into the market, a pre-approval can offer you a clear picture of what you can comfortably afford while leaving you prepared to put forward a stronger and more successful offer.
We specialize in residential mortgage financing for all types of borrowers, including those with bruised credit, self-employed individuals, or individuals with unique income.
Get in touch with us today. Call or write or book a one-on-one consultation.
Sarah is a senior mortgage consultant, working with Mortgage Edge, Canada's largest independent mortgage brokerage.
Just as markets showed signs of recovery, the news about the Omicron Covid-19 variant may have thrown a wrench into the Central Bank's plans to move ahead with rate hikes.
The Bank of Canada bought $5 billion worth of bonds during the pandemic to keep interest rates low; the process is called Quantitative Easing. But since the economy was getting on its feet through mass vaccination, the central Bank forecasted a steady rise in fixed rates and an increase to variable rates as early as March of 2022.
It is now apparent that Omicron may cause the postponement to rate hikes, although the interest rates are still ahead of what the government initially proposed in order to meet inflation targets.
According to RBC senior economist Josh Nye, Omicron will delay some central bank rate hikes.
The Bank of Canada will meet this Wednesday, December 8, to deliver a rate decision for the end of 2021. It can choose to increase the current overnight lending rate, decrease or keep it the same. The BoC will have to factor in the present state of the economy, including GDP, employment data, and consider how any rate hikes will affect the housing industry that generates 300 percent more money than the country's GDP.
Here's a summary of what economists predict will happen this Wednesday:
NBC: ... we think the central bank will avoid raising its policy rate too quickly out of fear of triggering an abrupt landing of the housing market. (Source)
RBC: ... recent inflation and GDP data are consistent with BoC's October forecasts, and we continue to look for interest rate liftoff in April 2022. We think markets are over-priced for BoC tightening next year and expect Canada-UD spreads will narrow in 2022. (Source)
TD: "Both the BoC and the Fed are focused on employment gains, with the goal of closing in on maximum employment. But, threading the needle in an already elevated inflation environment could lead to a policy error. Central bankers are mindful that risks are two-sided. Hiking a little earlier and leaving sufficient time between policy decisions to monitor outcomes helps to mitigate the adverse impact of leaving policy rates too low for too long. The yield curve will continue to respond as the months roll forward, putting upward pressure on a wide array of lending rates from corporate bond yields to individual mortgage rates. The time for patience on monetary policy is ending." (Source)
CIBC: "With COVID still a headwind to growth in the next couple of quarters, we see the Canadian GDP and employment track under-performing the Bank of Canada's call, which would lean towards the first rate hike at near mid-year, rather than, as the market has it, in Q1." (Source)
Sarah Colucci is a senior mortgage consultant, working with Mortgage Edge, Canada's largest independent brokerage house.
The cost of real estate continues to rise at an unprecedented pace in Canada, making the housing industry fundamental to the economy. The explosion of buying activity and price increase may be why Canada's central bank is cautious about enforcing policies that will depress the market, bringing the frenzy to an end.
During the pandemic, home prices have skyrocketed due to record-low interest rates, limited supply of property available, and lockdowns that cultivated a phenomenon known as 'pent up demand,' which means the period of little or decreased spending eventually led to a sudden surge in demand.
Moving forward, the central bank could cool the market in the following ways:
The Bank of Canada's overnight lending rate is currently 0.25 percent, and it has kept this rate low over the last two years, contributing to the explosion of real estate prices. The real estate market is worth 300 percent more than Canada's GDP, making some of its largest cities victims of housing bubbles.
In reality, approximately 75 percent of Canadians hold most, if not all, of their wealth in real estate. According to a report by Stephen Punswasi, "Co-Founder and chief data nerd at Better Dwelling," $248 billion got invested in Canadian real estate in just the first three months of 2021. This figure represents a 42 percent increase compared to 2020.
The significant issues with rapidly rising home prices include affordability, payment shock if interest rates rise, and risks of sharp corrections. When the cost of property becomes highly inflated, borrowers take on substantially larger mortgage debt, which places them in a situation where they could struggle with higher mortgage payments when rates rise.
Poll after poll has shown that Canadians would enter turbulent financial waters if their mortgage payments unexpectedly rose by just $100. Therefore, if suddenly, the housing industry plummeted into a recession, the consequences would be severe for homeowners, investors and Canadian homebuilders.
Here is a list of what the government has tried to so far to cool the market but has been unsuccessful:
Despite all of these measures, home prices in Canada's largest cities continue to rise at an unprecedented speed. A report by Teranet shows that 25 percent of property purchases in 2021 were done by investors, people who already owned their principal residence. What is obvious is the increase in value allows existing homeowners to purchase a new property by tapping into equity, which leads to a cycle of price growth that continues to benefit investors. Unfortunately, the number of new purchasers (i.e. first-time homebuyers) getting into the market is declining.
It seems the government will eventually have to act. We will stay tuned about what they will propose next and update you accordingly.
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To purchase real estate in Canada, purchasers require a down payment of at least 5 percent of the purchase price up to $500,000 and then a minimum of 10 percent on the remaining amount up to $999,999. So, for example, if you're purchasing a home for $800,000, you will require $25,000 on the first $500,000 and then $30,000 on the remaining $300,000, equalling a total down payment of $55,000.
High-ratio mortgage insurance, required under Canadian law, is only available to those who have the minimum required down payment. Any purchase price greater than this amount will require a down payment of 20 percent or more.
High-ratio insurance protects lenders from default and safeguards the banking sector against potential insolvencies. The insurance premium is added to your total loan amount and amortized to a maximum of twenty-five years. There is also an option of paying the premium upfront, which allows you to avoid interest charges charged over the life of your mortgage.
Insured mortgages are considered less risky to mortgage lenders. As a result, insured mortgage products have better interest rates.
Does it make more sense to take a high-ratio mortgage even if you have 20 percent down?
As mentioned, insured mortgage rates can be less than conventional mortgage rates. For this reason, some borrowers may feel it's advantageous to capitalize on the lower rate by putting less money down. On this note, here are some things to consider:
On the flip side, consider conventional mortgage (putting down 20 percent or more) financing can be amortized up to 30 years, lowering your monthly principal and interest payment. Therefore, this may be the better option if you require extra monthly cash flow.
Of course, the preceding depends on your financial situation, mortgage amount, the premium quoted, and the interest rates offered.
We would be happy to help you sort through your options to determine the best route. If you have any specific questions, please do not hesitate to call or book a one-on-one consultation here.
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929