Banking regulator’s revised guidelines include financial stress test on buyers

By Armina Ligaya

THE CANADIAN PRESS

TORONTO _ Canada’s banking regulator said Tuesday it is going ahead with a new stress test for home buyers who don’t need mortgage insurance, who will soon have to prove they can make their payments if interest rates rise.

The move is expected to reduce the maximum amount buyers will be able to borrow to buy a home, even if they have a down payment of 20 per cent or more, starting Jan. 1.

The Office of the Superintendent of Financial Institutions set out final guidelines on the changes to its residential mortgage underwriting guidelines Tuesday, the broad thrust of which are similar to what it had proposed in a draft consultation in July that had been criticized for potentially increasing costs and limiting access to mortgages for some buyers.

However, the regulator did tweak the calculation of the qualifying rate for uninsured mortgages to address concerns that using the contractual rate plus two per cent could lead borrowers to seek out shorter terms.

“We didn’t want to create an artificial incentive for borrowers to shorten terms because of the regulation,” superintendent Jeremy Rudin told reporters.

Would-be homebuyers will need to prove they can still service their uninsured mortgage at a qualifying rate of the greater of the contractual mortgage rate plus two percentage points or the five-year benchmark rate published by the Bank of Canada. An existing stress test requires those with insured mortgages to qualify at the Bank of Canada benchmark five-year mortgage rate.

Phil Soper, chief executive of Royal LePage, said most first-time buyers were probably already subject to a stress test, but buyers looking to move up to a larger home may be affected.

“Someone who is using the equity in their home to move from say a condominium to a detached home because they have had a baby or another baby, they may not be able to do that,” he said.

Soper said the change has increased the risk of a market correction, where home prices reset lower.

“I don’t expect that, but the risk certainly increased today.”

Other changes include restrictions on co-lending, or bundled mortgages in which federally regulated lenders pair up with unregulated providers to finance a property aimed at ensuring financial institutions do not circumvent or appear to circumvent rules that limit how much they can lend. Federally regulated financial institutions must also establish and adhere to loan-to-value ratio limits that are updated as housing markets and economic dynamics evolve.

“We certainly see the risks that are caused by high household indebtedness, by the high house, property values in some markets… and the risks posed by potential changes in interest rates,” Rudin said.

The government has tightened mortgage rules several times in recent years including a change last year that expanded stress tests to all insured mortgage applications. Meanwhile, the Bank of Canada has raised interest rates twice in the past few months to the current overnight lending rate of one per cent.

Rudin also said he would consider revisiting OSFI’s uninsured mortgage stress test down the line and adapting it as circumstances change.

“We are prepared to revisit that if there is an evolution in interest rates over time,” he told reporters. “But right now I would expect it to be durable, because it is well lined up with the comparable test … for insured mortgages.”

TD Bank senior economist Brian DePratto said data for August showed insured mortgages were down 4.5 per cent compared with a year earlier, while uninsured mortgage credit grew 17.3 per cent.

“While this is partly related to the rising prices of Canadian real estate, with more and more of it priced above the insurance caps, it also likely reflects the skew stemming from the past stress test requirements,” he wrote.

“As such, today’s change, alongside the explicit guidance around co-lending arrangements, will together help address the shift as far as those borrowing from federally regulated institutions.”

David Madani, senior Canada economist at Capital Economics, estimated that using a traditional 25-year amortization the changes reduce the maximum house price a buyer can afford by about 15 per cent.

“Needless to say, these latest mortgage rule changes will have a negative impact on house prices and household wealth,” Madani wrote in a note to clients.

Rudin reiterated Tuesday that OSFI was aware the stricter guidelines for uninsured mortgages could have unintended consequences, such as sending borrowers towards more risky lenders that are out of the regulator’s purview.

“We can’t control what we can’t control,” he said.

“Our mandate is focused on the safety and soundness of the federally regulated institutions… It isn’t something that we favour but it isn’t something that we have an authority to prevent.”

A spokesperson for Ontario Minister of Finance Charles Sousa said Tuesday it was  “too soon to determine the impact of the stress tests imposed by the Federal government.

We support measures that reduce risks for consumers and improve Canada’s long-term growth and competitiveness.”

 

Desjardins Insurance announces changes to its leadership team

Press Release:

Gregory Chrispin, Senior Executive Vice-President of Wealth Management and Life and Health Insurance, is pleased to announce the following appointments.

André Langlois has been named Senior Executive Vice-President, Life and Health Insurance.

André will head up operations for Desjardins Insurance and all of its business lines, including: individual insurance, group and business insurance, group retirement savings and creditor and direct insurance. He will be responsible for managing the group savings firm Desjardins Financial Security Investments (DFSI) and the SFL and Desjardins Financial Security Independent Network (DFSIN) distribution networks. André has extensive knowledge of the life and health insurance sector, acquired over nearly 30 years with Desjardins Group.

Michael Rogers has been named Vice-President, Sales and Distribution.

In this national role, Michael will be responsible for individual insurance business development. He will also manage the SFL and DFSIN distribution networks and the group savings firm Desjardins Financial Security Investments, which has more than $14 billion in assets. Michael will be rolling out a renewed service offer for our distribution partners to contribute to their performance and strengthen their presence across the country. Relying on the expertise of 4,800 people and more than 10,000 distribution partners, Desjardins Insurance provides peace of mind to more than 5 million Canadians. With assets of $100.3 billion, the company is the fifth largest life and health insurance company in Canada.

Source:

John Bordignon
Media Relations – State Farm Canada

www.statefarm.ca

5 Reasons Canada’s Housing Market Won’t Crash

Jason Phillips | Motley Fool

Much has been made over the past decade of Canada’s rising household debt, which is now at levels similar to those in the United States prior to the 2008-09 Financial Crisis.

With housing prices in Toronto up more than 30% over the past 12 months, and Vancouver prices having been inflated for several years, many are wondering: now that the Bank of Canada has raised interest rates twice in the last three months, will it be enough to topple the Canadian housing market?

There are five very important reasons why investors should not expect a housing correction in the Canadian market to be of nearly the same magnitude as the one experienced in the United States 10 years ago.

Reason #1: The United States incentivizes home ownership

In the U.S., federal policy actively encourages home ownership, whereas in Canada, policies are designed to encourage access to housing, but they do not explicitly favour home ownership over renting or leasing a property.

It seems then only natural to suggest that creating incentives for home ownership (like, for example, allowing mortgage interest to be tax deductible in the U.S.) would be more likely to create an environment ripe for a housing bubble.

Reason #2: Canada’s housing market is directly backed by the Federal government

In the U.S., Fannie Mae and Freddie Mac are responsible for providing guarantees on mortgage-backed securities and providing overall stability to the housing system.

At the time of the Financial Crisis, Fannie Mae and Freddie Mac were privately owned, with the “implicit” backing of the Federal government. Yet, when push came to shove, investors learned the hard way the difference between an implicit guarantee and direct backing.

By comparison, the Canadian equivalent responsible for providing insurance and stability, is the Canada Mortgage and Housing Corporation (CMHC) — a Crown corporation directly owned by the Canadian Federal government.

Reason #3: Canada does not allow non-recourse mortgages

In Canada, mortgages are typically “full-recourse” loans, meaning the borrower continues to be responsible for repaying the loan in the event of a foreclosure, which effectively incentivizes the borrower to do everything in their power to avoid foreclosing and losing the property.

Meanwhile, many U.S. states employ “non-recourse” mortgages, which, in the event of a foreclosure, allow the borrower to walk away from their homes, leaving the lender with no-recourse besides taking over ownership of the property.

It’s easy to see how non-recourse mortgages can exacerbate the problem of homeowners defaulting on their payments.

Reason #4: Canada has tighter restrictions on mortgage insurance

Canadian legislation prohibits lenders from issuing mortgages without loan insurance if the loan is greater than 80% of the value of the property.

Insurance which is purchased from the CMHC covers the entire amount of the loan for the entire life of the mortgage.

In the U.S., it is a little different; while many lenders will require insurance, they are not legally obligated to do so.

Moreover, in the U.S., loan insurance is “partial,” often covering 20-30% of the loan amount and is cancelled as soon as the value of the loan falls below 78% of the purchase price.

Reason #5: The relative absence of a subprime market in Canada

Sub-prime mortgages are made to riskier borrowers, such as those with a weaker credit history or less stable income.

In the U.S., before the housing crisis, the sub-prime mortgage market peaked at 23.5% of all mortgage originations.

By contrast, in Canada today, the sub-prime mortgage market, which includes Home Capital Group Inc. (TSX:HCG), accounts for less than 5% of originations, making the market significantly less risky.

Conclusion

Regardless of how you look at it, rising interest rates are not a good omen for the future of Canada’s housing market. And while delinquencies today are well below historical averages, that may actually be confirming evidence that a bubble is present.

Current and prospective homeowners should approach the market with caution. Those warning that the “sky is falling” and that the environment is similar to the situation in the U.S. 10 years ago, ought to think a bit more Foolishly.

RBC first bank in Canada to enable bill payments using Siri

Who doesn’t wish they had an assistant to pay their bills? Thanks to an update to the RBC Mobile app, Royal Bank of Canada (“RBC”) personal banking clients are now the first in Canada who can ask Siri to pay their bills on iPhone and iPad.

Image of the final bill payment screen when paying a bill using Siri on iPhone. ILSTV.com

RBC also launched seamless Interac e-Transfer® payments within iMessage, which means clients can send a transfer without leaving their iMessage window. Building on its market leading, free person-to-person (P2P) money transfer services for chequing account clients launched last year, and money transfers with Siri earlier this year, RBC continues to develop simple and innovative ways for clients to make payments and bank with their mobile devices.

“By offering bill payments through Siri and P2P transfers through iMessage, we’re providing more convenient solutions to support our client’s payment needs,” said Sean Amato-Gauci, executive vice-president, Cards, Payments and Banking, RBC. “Our clients are avid users of Interac e-Transfer payments, and embraced our launch of money transfers using Siri earlier this year. By giving clients the ability to seamlessly and conveniently bank using voice commands, we’re delivering simple and innovative solutions.”

 

Using Siri to pay your bills with the RBC Mobile app

Paying your bills using Siri is simple. Once you give the voice command, Siri will confirm the name from your payee list and the RBC Mobile app automatically debits your account and sends the payment. The payment is secure and protected by TouchID.

Sending an Interac e-Transfer payment is just as simple. Clients simply type the amount of money they’d like to send to their contact in the iMessage window, and authenticate the transfer using TouchID.

These payment solutions are the latest enhancements from the RBC innovation labs, which test new ideas by partnering with academia, fintechs and RBC clients to make banking easier. The RBC labs are actively working on a range of client solutions that will be coming to market this year.

“We’re one of the leading voices on artificial intelligence in Canada, and our integration of Siri into bill payments and P2P transfers are an example of how our clients are already benefitting from these advancements in AI,” said Amato-Gauci. “We’re committed to providing clients with exceptional experiences when, how and where it’s most convenient for them, including exploring ways to integrate into social networks and digital platforms that are essential to their everyday lives.”

The RBC Mobile app was recently awarded the Highest in Customer Satisfaction Among Canadian Mobile Banking Apps by the J.D. Power inaugural 2017 Canadian Banking Mobile App Satisfaction Study. RBC has seen an increase of more than 20 per cent in active mobile users over the past year, a clear indication that more Canadians are using the RBC Mobile app to bank whenever and wherever they want.

The RBC Mobile app is available for free download from the App Store on iPhone and iPad or at www.AppStore.com. For more information about the RBC Mobile app, please visit www.rbcroyalbank.com/mobile/.

About RBC
Royal Bank of Canada is Canada’s largest bank, and one of the largest banks in the world, based on market capitalization. We are one of North America’s leading diversified financial services companies, and provide personal and commercial banking, wealth management, insurance, investor services and capital markets products and services on a global basis. We have approximately 80,000 full- and part-time employees who serve more than 16 million personal, business, public sector and institutional clients through offices in Canada, the U.S. and 35 other countries. For more information, please visit rbc.com.

RBC helps communities prosper, supporting a broad range of community initiatives through donations, community investments and employee volunteer activities. For more information please see: http://www.rbc.com/community-sustainability/.

SOURCE RBC Royal Bank

For further information: Heather Colquhoun, RBC Communications, 437-994-5044, heather.colquhoun@rbc.com; Sarah Hall Turnbull, Blue Sky Communications, 416-458-3878, sturnbull@blueskycommunications.com

Looking at Canada’s Insurance Sector

Looking at Canada’s Insurance Sector

Excerpted article was written by Ryan Goldsman

Over the past six months, shares of a number of Canadian insurance companies have moved either sideways or fallen slightly. While insurance companies have offered investors fantastic long-term rates of return, it is essential for new investors to consider the next decade to have proper expectations.

Considering the current low interest rate environment, the challenges over the past decade have been significant for companies that take in float and invest the capital while waiting to pay it back out in the form of claims. Insurance companies may be the biggest benefactors from rising rates (from the Bank of Canada) or rising risk-free rates of return through government t-bills.

Over the past six months, the insurance company that held up the best is Manulife Financial Corp. (TSX:MFC)(NYSE:MFC). It has been flat (from a price perspective), and investors still received the quarterly dividend of $0.21 over that time. At a current price near $24.50, the dividend yield offered to new investors is approximately 3.4%. As of the most recent financial statements (March 31, 2017), the tangible book value amounts to $21.82 per share.

The second-biggest insurance company by market capitalization is Great-West Lifeco Inc .(TSX:GWO). Over the past six months, it has lost 3% while paying a quarterly dividend which yields 4.25% on an annual basis. While the company currently trades at a trailing 13 times earnings with a tangible book value of $16.49 per share, the current share price of almost $35 may not be the best option available to investors.

Next up is Sun Life Financial Inc. (TSX:SLF)(NYSE:SLF). At almost $46 per share, it offers investors a dividend yield of approximately 3.75% and trades at 11.2 times trailing earnings. The tangible book value per share is $27.59 per share as of March 31, 2017. Over the past six months, shares have lost close to 11% while still paying quarterly dividends.

Last up is the much smaller Industrial Alliance Insur. & Fin. Ser.  (TSX:IAG). At $53.50 per share, it is the cheapest at a trailing price-to-earnings multiple of 10 times. The dividend yield, however, is only a little more than 2.5%, while the tangible book value is a solid $42.83 per share. Over the past six months, the price change has been close to negative 2%, but the dividends have been paid every quarter.

While the Canadian insurance industry offers investors a many different choices, it is important for investors to line themselves up with the right insurance company. While shares in the smaller Industrial Alliance Insur. & Fin. Ser. may offer higher potential for capital appreciation, the shares of Great-West Lifeco Inc. will probably be the least volatile while providing the most lucrative dividend at 4.25%.

Going forward, investors will need to ask themselves which insurance company they would like to invest in.

Source: The Motley Fool

Where to Invest With Increasing Interest Rates

South of the border, the chair of the Federal Reserve, Janet Yellen, is primed to announce a hike in interest rates in the coming weeks. Although this move may already be largely priced in to the equity markets, Canadian investors still need to stop and take a serious look at their investment holdings.

Although a small interest rate increase is by no means a disastrous event for investors, the reality is, what were otherwise fantastic returns may diminish to adequate returns. Higher interest rates translate to higher interest costs and lower net profit. Investors need to reset expectations in the years to come.

Many asset classes will decline in value if interest rates rise, so investors need to ask the question: “Where do I invest to benefit from rising interest rates?”

Obviously, long term bonds, REITs, and utility companies are not going to be anywhere the top of the list. Instead, the list will be topped by banks and insurance companies. In Canada, we have three large insurance companies that dominate the marketplace. Let’s look at each insurance company.

Manulife Financial Corp. (TSX:MFC)(NYSE:MFC)

Currently, Manulife is Canada’s biggest insurance company. Investors taking a new position will be offered a dividend yield of almost 3.5% and are picking up shares at a premium to tangible book value of 50% with a trailing price-to-earnings (P/E) ratio of 17 times.

Great-West Lifeco Inc. (TSX:GWO)

While the shares of Canada’s second-largest insurer are much less volatile, the dividend yield is approximately 4%, and shares trade at more than double the tangible book value. Although the trailing P/E is less than 14, shares are not necessarily a fantastic deal depending on what metric is used to evaluate the security.

Sun Life Financial Inc. (TSX:SLF)(NYSE:SLF)

Shares of Sun Life offer new investors a dividend yield of just under 3.5% and trade at a premium to tangible book value in the amount of 82%. The trailing P/E ratio is currently 12.3 times.

While investors may be looking for somewhere to hide in the face of rising interest rates, the truth is that many other investors have already found their way into Canada’s insurance companies and big banks. Although valuations may not seem very attractive at current levels, the importance for investors is to understand what rising rates mean for the companies they are investing in.

As insurance companies invest the premiums received (this is called the float) into short-term, very low risk investments, the increase in interest rates will greatly benefit these companies over time.

Looking at all three Canadian insurers, investors should note the volatility and dividend yield of each stock. While low payout ratios translate to more money reinvested into the company, the truth is, growth is only good if it is profitable. Sometimes boring is better!

Six “pro” strategies for today’s highly uncertain market

Motley Fool Canada’s $250,000-real-money-portfolio service, Motley Fool Pro, is currently closed to new members. But lead advisor Jim Gilles is doing something special for investors who are worried about the market and where it will head in 2017.

He’s revealing the six strategies he uses in Pro to help members guardrail their portfolios and make money in up, down, and sideways markets.

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