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 Edge, Broker 10680
Direct: (647) 773-4849
Email: sarah [dot] colucci [at symbol] mortgageedge [dot] 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