9 things mortgage shoppers should know about the stress-test changes

The excerpted article was written by THE GLOBE AND MAIL

Policy-makers are finally righting a glaring wrong in the mortgage market.

Effective April 6, Canadians applying for default-insured mortgages will no longer be subject to an improperly devised “stress test.”

This change will affect anyone getting an insured mortgage, including those putting down less than 20 per cent on a new purchase – for which default insurance is generally mandatory. It’ll also move the goalposts closer for borrowers trying to qualify for a mortgage with 20 per cent equity or more.

WHAT EXACTLY IS CHANGING

Today, people getting insured mortgages must prove they can afford a payment based on the benchmark five-year posted rate. The Bank of Canada calculates this rate from typical big-bank rates, and it’s currently 5.19 per cent.

Starting on April 6, a new and improved benchmark rate will be used. It’ll be based on the country’s median five-year fixed insured-mortgage rate, plus two percentage points. If that rate were in existence today, it would be about 4.89 per cent, says the Department of Finance. That’s 30 basis points less than the current (minimum) stress-test rate.

(There are 100 basis points in a percentage point.)

If you’re a mortgage shopper wondering whether any of this matters, here are nine reasons why it does:

1. The stress test is no longer determined by the biggest banks

Prior to this, the Big Six banks determined the benchmark rate, which serves as a minimum stress-test rate. It’s taken a few years, but officials have finally realized that’s not a good idea. For well over a year, banks have refused to cut their posted five-year rates enough to reduce this all-important qualifying rate. That’s kept the stress test unnecessarily difficult, blocking thousands of borrowers from qualifying for the best mortgage – or qualifying at all.

2. It’s economically beneficial

When interest rates dive, it’s usually indicative of a slowing economy. By keeping their posted rates high, banks prevented the stress test from adapting to lower economic growth expectations.

This new benchmark rate is more flexible. As economic prospects dim and rates decline, more people will qualify for a mortgage, and vice versa. That gives our housing-dependent economy a boost when it needs it most and slows economic growth when it gets too hot.

3. It’ll also make the uninsured stress test more fair

Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), is expected to use the same benchmark rate for the uninsured stress test, which applies to borrowers with 20 per cent equity or more.

It said on Tuesday, “OSFI is proposing that the new [uninsured] benchmark rate for qualifying uninsured mortgages be the greater of:

  • The contractual mortgage rate plus 200 bps; or
  • The new benchmark rate (i.e. the weekly median five-year fixed insured-mortgage rate as calculated by the Bank of Canada from federally backed mortgage-insurance applications adjudicated by mortgage insurers, plus 200 bps).”

The majority of existing mortgages in this country are uninsured. OSFI’s stress test will remain tougher than the insured stress test because, as it puts it, “… uninsured mortgages … may have borrower and loan characteristics that are riskier than … insured mortgages.”

4. It’ll heat up home prices

Assuming rates stay the same by April, by my calculations a 30-bps reduction in the stress test would give most borrowers upward of 3 per cent more buying power. That won’t send home prices to the moon, but it should take them higher into the atmosphere.

Already, the national average home price is up 11.2 per cent in the past 12 months. This news creates unequivocally bullish market psychology, particularly heading into the high season for homebuying.

5. Expect more purchasing power to come

Other things equal, the buying-power boost discussed above could be magnified if mortgage rates fall further. The market implies that’s a good probability given Canada’s yield curve is inverted – long-term rates are lower than short-term rates. That’s traditionally been a sign of even lower rates ahead.

Some economists are predicting a Bank of Canada rate cut as soon as this spring or summer. That could drop the stress-test rate floor once again. (Although an easier stress test might arguably reduce the central bank’s desire to lower rates further.)

And then, of course, there’s the coronavirus, an unquantifiable wild card that could further weigh on rates.

When all’s said and done, we could potentially see a 50- to 100-plus-bps reduction in the stress-test rate by sometime next year.

6. The timing’s not ideal

There’s usually not a bad time to right a wrong, and the stress test did need fixing. But heading into a spring market with housing supply shortages, bidding wars in big markets and falling rates, this change could further fuel housing imbalances and over-indebtedness. For that reason, it might have been wiser to wait until summer to ease the stress test.

Then again, no one can predict home prices, and regulators may have something else up their sleeves to counterbalance the stimulative effect of this change. Based on OSFI’s Jan. 24 speech, the government is clearly concerned about the resurgence in borrowers with high loan-to-income ratios. More credit-tightening could eventually be on the way, particularly if home prices keep soaring.

In short, it’s not a given that the timing of this announcement is “bad.”

7. It takes pressure off banks to cut posted rates

This is one potential negative. Banks have been under the spotlight because their inflated posted rates adversely affect the stress test. Now, with policy-makers decoupling the stress test from posted five-year rates, banks will face less pressure to lower those rates.

That means the gap between posted and actual mortgage rates could widen, given that actual rates fall quicker than posted rates and given that banks are incentivized to keep posted rates elevated. This could result in bigger and more painful “interest-rate-differential penalties” for people who break fixed-rate mortgages early.

8. Expect more rate-timing

If you’re someone with high debt ratios, an easier stress test helps. Now that we’ll have an objective and responsive stress-test rate, it’s possible we’ll see more borrowers – those who almost qualify for a mortgage – trying to time rates. Folks whose debt ratios are too high under the then-current stress-test rate might defer their mortgage application until rates fall “enough.”

Conversely, some people could be caught waiting longer than anticipated if rates unexpectedly jump. The moral for those considering this strategy: Don’t try rate-timing.

9. The new benchmark is useful for rate shoppers

This is the first time the government will be publishing median market-wide insured-mortgage rates. Insured borrowers will be able to use that info to quickly compare the rate they’re being offered with the rates other people are getting. This could result in fewer lenders getting away with quoting inferior rates.

Robert McLister is a founder of RateSpy.com and intelliMortgage, and mortgage editor at rates.ca.

Ottawa changing stress test rate for insured mortgages starting April 6

OTTAWA _ The federal government is changing the stress test rate for insured mortgages starting April 6.

The government says the change will allow the rate to be more representative of the mortgage rates offered by lenders and more responsive to market conditions.

The new minimum qualifying rate will be the greater of the borrower’s contract rate or the weekly median five-year fixed insured mortgage rate from mortgage insurance applications, plus two percentage points.

The stress test rate currently is the greater of the borrower’s contract rate or the Bank of Canada five-year benchmark posted mortgage rate, which is based on the posted rates at the six largest banks.

“The government will continue to monitor the housing market and make changes as appropriate,” Finance Minister Bill Morneau said in a statement Tuesday.

“Reviewing the stress test ensures it is responsive to market conditions.”

The federal government required the stress test apply to all insured mortgages in 2016.

The test is used to ensure that Canadians can afford their mortgage payments if interest rates rise in the future.

The government said the Bank of Canada five-year benchmark posted mortgage rate has typically been about two percentage points higher than the average five-year fixed contract rate for insured mortgages.

However, it said that in recent years, that rate has not been as responsive to changes in the average mortgage contract rates.

The Office of the Superintendent of Financial Institutions says it is also considering using the same new stress test rate for uninsured mortgages.

OSFI has been using a minimum 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.

OSFI, which is consulting with stakeholders, has proposed that it will also adopt the new benchmark rate on April 6 to coincide with the changes for insured mortgages.

What happens when your mortgage is higher than your property assessment?

What happens when your mortgage is higher than your property assessment?

The excerpted article was written by Scott Hannah, Postmedia News

Q: My brother-in-law has been struggling to find his ideal career in the technology field. He mentioned a great job offer he got in another city, but my sister voiced her disappointment about him likely having to turn it down. She said when they got the assessment notice for their house, they realized they’re underwater with their mortgage. I don’t really know what that means but it seems kind of crazy to turn down a job you really want. Is there some way to help them? ~Ricardo

A: Buying a house is typically the single biggest purchase most of us make in our lifetimes. We work hard to come up with the money to buy it, and then we continue working hard to pay for it. During this time, however, the value of our home may change. We hope it increases in value, but there are no guarantees. It can also decrease in value, often due to factors beyond our control. It is when it decreases in value to below what we still owe against it that we find ourselves in an underwater — or negative-equity — mortgage.

Your equity is the value of your home minus whatever you owe against it. When your home loses value or there is a market correction that decreases the value of your home, you can end up owing more than what you could sell your home for. While this isn’t a situation you want to find yourself in, there are ways to deal with it, or to avoid it entirely in the first place. Here are some things to know:

A small down payment can cause negative equity

One way negative equity happens is when you buy a home with a small down payment. If you pay less than 20 per cent down, you must also have mandatory default insurance. The cost for this insurance is a percentage based on how much of a down payment you are making. The smaller the down payment, the higher the cost for the insurance.

For example, you may buy a condo for $450,000 with a five per cent down payment ($22,500). The default insurance can then be as much as four per cent of the amount of the mortgage, i.e., $450,000 less the $22,500 down payment is $427,500, times four per cent comes to an insurance premium of $17,100. Some people pay for this insurance from their savings but most add it to their mortgage. This means that on the day you receive the keys to your new home, in addition to your down payment, closing costs, legal fees and moving expenses — none of which are part of your mortgage amount — you owe 98.8 per cent of the price you paid for the condo.

If your condo drops in value at all within the first five or so years of buying it, you will likely end up in a negative-equity position, owing more than what you could sell it for.

How to Tell If You’re Ready for a Mortgage

Can you end up underwater any other time?

Even if you have a lot of equity built up in your home, either through years of mortgage payments or buying with more than a 20 per cent down payment, a negative-equity situation could still happen. If you refinance a mortgage to borrow more money against your home, apply for a second mortgage, or take out a home equity line of credit (HELOC), you could end up owing more than what your home is worth, especially with private financing.

Alternatives to Expensive Home Refinancing Loans

Canadian lenders are heavily regulated to try and prevent negative-equity situations, especially with secondary financing arrangements; however, when big mortgage debts are paired with circumstances beyond your control (e.g. municipal rezoning, market challenges, economic factors or even natural disasters), it could still happen.

3 Steps to Pay Off Debt Before Interest Rates Rise

How to avoid ending up underwater

When the real estate market is hot or interest rates are low, it can be tempting to buy a home, spend more on a home than you wanted to, or take advantage of additional secured credit to get a little extra cash.

Now after a period of cooling, many potential buyers are seeing a small window of opportunity to get into the real estate market. The fear of missing out is a strong motivator. However, the easiest way to avoid ending up underwater with your mortgage is to not allow yourself to get into that situation in the first place. Buy with more than a minimal down payment and/or buy and stay well below any financing amount your lender has approved you for.

What No One Tells You When Buying a Home

How does negative equity impact other decisions?

A negative equity situation can have consequences for other decisions in your life. For instance, you may not be able to sell your home because the money you’d get from the sale wouldn’t pay off your mortgage. You’d have to come up with the difference. Not being able to sell your home might mean that you can’t move to a different city to take advantage of a job offer or to be closer to loved ones.

When your mortgage comes up for renewal, your options are also more limited if you’re already underwater. It’s harder to negotiate with your existing lender for better rates or conditions. It can also be virtually impossible to switch lenders because no lender will lend you more than the value of your home. It is always nice to have the option to switch lenders to get a great rate or mortgage with other benefits (e.g. travel points or cash back).

What can you do if you find yourself underwater?

If you find yourself in an underwater situation with your mortgage, consider your overall situation carefully. Try to determine what has caused your negative equity and if there’s anything you can do personally to turn it around.

If you are underwater because your mortgage is new or market conditions are simply what they are, do what you can to tighten up your budget a little and increase your payments even a small amount. To generate a little extra income to balance an already tight budget, maybe you could rent out a part of your home, garage or yard. There are different strategies to accelerate mortgage payments , so choose one that works for you.

If you have a large balance owing on a HELOC, second mortgage or home-equity loan , consider how best to pay those off as quickly as possible. Maybe you can sell a vacation property or spare vehicle to generate a lump-sum payment. Making extra prepayments on your first mortgage whenever possible is also a good idea. They are applied straight to your principal and affect your equity immediately.

Don’t let feeling trapped cause you to make snap decisions; base your choices on a realistic budget. Even if you can’t sell and move, could you rent out your home and live elsewhere for a lesser amount? If you can’t accelerate your mortgage payments because your budget is too tight, maybe it’s all of your other bills and debts that need taking care of first. The sooner you start looking at your options, the more you likely have available to you.

Get Relief from Your Mortgage, How to Avoid Foreclosure

The bottom line on finding yourself in a negative-equity situation

The start of any new year generally brings with it real estate assessment notices. For the first time in several years many homeowners are becoming aware of a decrease in their home’s value and may find themselves in negative-equity circumstances. However, what the assessment notice says and what a home will actually sell for can be quite different. Your situation might not be as dire as you think, but if drowning in mortgage debt has flashed before your eyes, let that be your wake-up call to get your overall financial situation into better balance.

Source: Chronicle Harold News

Buying a home? Here’s how to decide how much to put down

The Star Vancouver

Housing prices are ticking up again, with the average price for homes sold in September in the GTA reaching $843,115, according to the latest report.

Rising prices present prospective home buyers with a dilemma when it comes to saving for a down payment. Putting down the minimum five per cent on a $500,000 home gets you into the housing market for a reasonable $25,000. Saving up a 20 per cent down payment, on the other hand, avoids costly mortgage default insurance premiums (mortgage loan insurance from Canada Mortgage and Housing Corporation).

Note that the minimum amount required for a down payment depends on the purchase price of your home. Homes valued at $500,000 or less need a down payment of five per cent, while homes valued between $500,000 and $999,999 require five per cent on the first $500,000 and 10 per cent for the portion above $500,000. Home buyers need to put down 20 per cent on homes valued at $1 million or more.

There are pros and cons putting down more or less on your home purchase. I reached out to Robert McLister, mortgage expert and founder of RateSpy.com, to discuss house down payment options.

Five Per Cent Down

Pros: The obvious advantage to making the minimum five per cent down payment is there’s less capital required to become a homeowner and reaching that threshold requires less time to save.

“So many young buyers stay on the sidelines scrimping for a bigger down payment only to see home prices run away from them,” says McLister.

He points to the past two decades of price growth as evidence that getting into the market quicker can pay off, “provided homebuyers don’t overextend themselves.”

Putting down less than 20 per cent requires the buyer to purchase mortgage loan insurance to protect the lender against default. While the borrower must pay those insurance premiums, McLister says an advantage to having an insured mortgage is that it gives purchasers access to the lowest interest rates available.

A five per cent down payment is also compatible with the First Time Home Buyers’ Incentive – the shared equity mortgage with the Government of Canada – and other governmental home subsidies.

A deliberately smaller down payment can leave a borrower with a larger cash cushion, saving for more immediate closing costs and furnishings, or simply retaining more money for emergencies and other needs.

Another advantage is that automatic monthly mortgage payments create a forced savings plan for those who might otherwise squander that money as a renter.

Cons: The financial impact of putting the minimum amount down on your home is that it comes with a four per cent default insurance premium. While this amount can be rolled into the mortgage, it creates a highly leveraged situation with risk of negative equity should home prices fall.

“On Day One you’re almost 99 per cent financed. It doesn’t take much of a home price selloff to trap you in your home, preventing a sale,” said McLister.

A five per cent down payment also means more interest expense over the life of your mortgage, compared to a larger down payment.

Note that the amortization for buyers with five per cent down is limited to 25 years. The property also cannot be a non-owner-occupied rental property.

Another caveat to consider: Prospective home buyers can borrow the five per cent down payment (even from a credit card) so long as they meet the lender’s debt limit ratio. The big red flag on this means, “they can essentially owe more than their home price on Day One,” said McLister.

 

Brookfield acquires mortgage insurer Genworth Canada in $2.4-billion deal

BANKING REPORTER | The Globe and Mail

Brookfield Asset Management Inc.’s private-equity arm is making a long-term bet on Canada’s mortgage market with a $2.4-billion deal to take control of Genworth MI Canada Inc., the country’s second-largest mortgage insurer.

Brookfield Business Partners LP, a publicly-traded subsidiary of the global asset manager, is acquiring a 57-per-cent stake in Genworth MI Canada from the mortgage insurer’s American parent company, Genworth Financial Inc.

Brookfield will pay $48.86 a share for nearly 49 million shares in Genworth MI Canada – a 5-per-cent discount to the price at Monday’s close on the Toronto Stock Exchange, but an 18-per-cent premium compared with the date when the company was formally put up for sale.

The deal appears to relieve a headache for Richmond, Va.-based Genworth, which has waited years for regulators to approve a separate deal that would see the American company acquired for US$2.7-billion by a privately held Chinese buyer, China Oceanwide Holdings Group Co. Ltd. That transaction, which was first announced in October, 2016, has stalled while awaiting approval from Canadian regulators and federal officials, who are required to consider the potential impact on Canada’s mortgage industry and have held the deal up over national-security concerns, even after U.S. regulators gave it a green light.

Earlier this summer, Genworth Financial announced it was considering “strategic alternatives” for Genworth MI Canada, seeking to break the deadlock. That raised the prospect that, absent a suitable buyer, Genworth Financial’s stake in its Canadian subsidiary might have to be sold into the public market at a discount. But Brookfield emerged with deep pockets and the industry expertise needed to take control.

“We are pleased to find such a high-calibre buyer for our interest in Genworth Canada,” said Genworth Financial president and chief executive Tom McInerney.

Genworth Financial’s share price shot up 15.8 per cent on Tuesday, and Brookfield Business Partners shares rose 2.7 per cent, but stock in Genworth MI Canada fell 1.7 per cent.

The Canadian arm of Genworth is a rare asset. It is Canada’s largest private-sector mortgage insurer, providing a backstop against defaults to residential mortgage lenders, and it trails only the government-owned Canada Mortgage and Housing Corporation (CMHC) in size. Its only privately owned competitor is Canada Guaranty Mortgage Insurance Company, which is jointly owned by Ontario Teachers’ Pension Plan and financier Stephen Smith.

Genworth Canada currently has a 33-per-cent share of the country’s mortgage-insurance market, while CMHC holds half and Canada Guaranty the remaining 17 per cent, according to data from RBC Dominion Securities Inc. But the federal housing agency has been ceding its share to the private insurers.

Genworth’s improving position in a highly consolidated market made it a logical target for Brookfield Business Partners, which seeks to acquire and manage companies in sectors where the barrier to entry is high. Brookfield also has extensive expertise in mortgages and housing: It is one of the largest residential real estate developers in North America, active in real estate financing, and owns the Royal LePage brokerage.

Brookfield Business Partners managing partner David Nowak described Genworth Canada as “a high-quality leader in the mortgage-insurance sector,” in a statement.

The total share of mortgages that are insured has been falling, from 57 per cent in 2015 to 41 per cent in 2019, according to a recent CMHC report. The shift toward uninsured mortgages comes as regulators have tightened rules on mortgage lending, requiring borrowers to meet stricter tests to qualify for mortgage insurance.

Even so, the housing sector as a whole has continued to grow, adding a steady stream of new demand for mortgage insurance, particularly from first-time home buyers. And Brookfield is betting that Genworth can grab a larger share of the market, making full use of Brookfield’s deep relationships with banks that do the lion’s share of Canada’s mortgage lending.

The deal is expected to close before then end of 2019, subject to approvals from Canada’s banking regulator and Minister of Finance.

Brookfield is not currently looking to acquire the 43 per cent of Genworth MI Canada’s shares that are owned by other investors. But Jaeme Gloyn, an analyst at National Bank Financial Inc., said that prospect “is not entirely off the table” and “would likely unfold at a premium” to the price Brookfield is paying for control.

Ratings agency DBRS Ltd. called the deal “positive for Genworth Canada,” which has been more stable than its U.S. parent.

Oceanwide Holdings consented to the transaction and extended the deadline to finalize its own deal with Genworth Financial until Dec. 31.

Source: The Globe and Mail

First your home is flooded – then you lose your mortgage?

By  | Global News

When flooding ravaged parts of southern Alberta in 2013, banks and other lenders took notice.

“We would be asked on every deal, ‘Is it in the flood zone?’” Mike Boyle, president of Calgary-based The Mortgage Group, told Global News.

Lenders didn’t want to get involved with addresses that turned out to be in the disaster areas, he recalled.

Six years later, with the flood a “distant memory,” that’s no longer an issue, according to Boyle. But he worries about homeowners in regions like southeastern Ontario and Quebec, where rivers seem to be overflowing with alarming regularity.

“You can’t get a mortgage if you can’t get insurance,” he said.

Speaking from the Ottawa-Gatineau area, which is experiencing its second major flood in the span of 24 months, licensed insolvency trustee John Haralovich shares the same concern.

“We have seen lenders not agree to renew the mortgage,” said Haralovich, a senior vice-president at debt consultancy firm MNP.

Those have been rare cases so far, he said, but that could change.

“In 2017, they said (the flood) was a once-in-100-year occurrence, and two years later, it’s happened again,” he said.

Homeowners who discover they can’t continue their insurance coverage may also hear from banks that they won’t keep servicing their mortgage once it comes up for renewal, he added. With no insurance to protect the collateral, mortgages on homes in flood-prone areas may become too risky for mainstream lenders, he said.

Several experts who spoke to Global News are concerned that a growing number of Canadians may find themselves facing this issue after the latest round of spring flooding.

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