In a slowing market, it is that much more effective. It was a prudent move....
The real estate industry has ramped up its attack on rules making it
harder to borrow but its challenges face one big obstacle — mortgage
restrictions are working exactly the way the federal government wants
them to. In the past week the Canadian Association of Accredited Mortgage
Professionals weighed in with complaints that Ottawa’s restrictions were
killing consumer confidence and even raised the stakes further by
suggesting the entire Canadian economy was at stake.
Toronto builders joined the fray, calling out the federal government
for rules it maintains have a lot to do with the cooling market in the
city that saw sales in October dip 14% below their long-term average. But Finance Minister Jim Flaherty has given no indication he is ready
to reverse course on his tightened restrictions. There’s also the
argument that it wasn’t the rules that have sabotaged the market, but
rather an overall fatigue from consumers when it comes to real estate.
“I think the government is not responsible, remember the housing
market was slowing already when the government introduced these [latest]
measures,” said Benjamin Tal, deputy chief economist at CIBC World
Markets. “In a slowing market, it is that much more effective. It was a
prudent move.”
Among the changes instituted by the government was a lowering of
allowable amortization from 30 years to 25 years for consumers borrowing
with mortgage default insurance which is backed by the federal
government. A longer amortization allows consumers to lower their
monthly payment and qualify for a larger loan at the expense of paying
more interest over their mortgage period.
Mr. Tal said there is something to be said for a “natural slowing” of
the market which was probably accelerated by the latest changes. “It
might mean a little bit of over shooting but that’s the risk that you
took,” he said, adding the real question is what happens when interest
rates rise or other factors impact the market.
All
of this will probably do very little to satisfy the critics who
maintain Ottawa stepped in at the wrong time. CAAMP, among others,
suggests the latest rule modifications have squeezed the first-time
buyer out of the market. CAAMP said 17% of the high-ratio mortgages
funded in 2010 would not qualify today, including 11% of prospective
high-ratio homebuyers who wouldn’t qualify under the new 25-year
amortization rule.
“The government in general is walking a tightrope here. On the one
hand they are concerned about household debt and all these insured
mortgages. But on the other side, housing is an important contributor to
the overall economy,” said Jim Murphy, chief executive of CAAMP, which
noted in a previous report that 18% of all jobs in Canada created
between 2006 and 2011 were related directly or indirectly to housing. It’s not impossible the government could switch gears and stimulate the
market. It’s hardly unprecedented. In the past, Ottawa allowed
amortization lengths to stretch to 40 years and, significantly, it
lowered the minimum down payment needed by consumers to avoid costly
mortgage default insurance from 25% to 20% — something that remains in
effect. And, to this day, consumers still only need 5% down to qualify
for a mortgage if they buy such insurance.
We were due for a slowdown. The timing was unfortunate but it’s not a major event
Some, like CIBC’s Mr. Tal, suggest maybe it’s time the economy stopped being so dependent on the housing market for growth. One executive who says he’s changed his tune on the government’s
crackdown is Phil Soper, chief executive of Royal LePage Real Estate
services. When the latest regulations came out in July, he was one of
the first to suggest the time was wrong, but he’s gone full circle since
then. “At the time, I thought it didn’t make sense,” said Mr. Soper. “I’m
being a contrarian again. I think the impact of mortgage regulation is
being blamed far too often these days in what is clearly just a natural
cyclical slowdown in the market driven by overpriced homes. We were due
for a slowdown. The timing was unfortunate but it’s not a major event. I
think chances of it being reversed are close to zero.”
While most of us already have felt the immediate changes of the 30 year amortization to 25 year, and the Home Equity Line of Credit change from 80% Loan to Value to 65% Loan to Value, some of you may not know some of the other changes as well for Underwriting Guidelines and there fore your immediate mortgage approval.
For Example financial institutions will be raising the Qualifying Rate on Variable, 1, 2, 3, and 4 year fixed terms to the Bank of Canada's current Benchmark rate (Currently at 5.24%). This comes into to play regardless of Loan to Value. Where as in the past with 3 years or under we could use the 3 year Qualifying Rate or sometimes best rate.
Also the heat component of the property (which does make a difference in qualifying for your mortgage), which with more financial institutions use to be based on the Insurer (CMHC or GE) and sometimes the lenders preference, will change as well. Going from what was zero to $100/month. To this, depending on size of the property:
• < 2,000 sq ft = $1,020 annually ($85/month)
• 2000 sq ft to 3,500 sq ft = $1,140 annually ($95/month)
• >3,500 sq ft = $1,380 annually ($115/month)
Currently HELOCs are to 65% Loan to Value, however some Credit Unions, who are not governed under the same rules as the banks, still have their Loan to Values for HELOCs to 80% ltv. As well as Cash Back, while still being available, is no longer available to be used towards down payment.
Just to RECAP B-20 I have an article from Canadian Mortgage Trends.com which is a great read.. please see below...
Today is B-20 Day- November 1, 2012
No, B-20 Day is not some obscure holiday. It’s the day that banking regulator OSFI required most federally-regulated lenders to comply with its B-20 mortgage guidelines.
The effects of these guidelines are visible already. A host of
lenders have announced stricter rules on things like conventional
mortgage qualification, self-employed income verification, borrowed down
payments and cash-back mortgages. Albeit, some implemented these
changes well ahead of today.
In essence, it is now tougher for many borrowers to get mortgage financing.
The twist here is that OSFI regulates banks and trusts. Yet, even non-banks are impacted by all this.
One prime example is First National, Canada’s biggest non-bank lender. It has adopted OSFI’s low-ratio
qualification policy on variable and 1- to 4-year fixed mortgages with
20% or more equity. That requires it to analyze a borrower’s debt ratios using the Bank of Canada’s5-year posted rate (which is usually a much higher rate than the actual contract rate).
(This is generally a sound guideline. It helps protect unsuspecting
borrowers from the risk of higher rates. In the past, many lenders used
rates like their 3-year discounted rate to qualify conventional
mortgages with variable, 1-, 2-, 3- or 4-year terms.)
Like most non-bank lenders, First National relies in part on
OSFI-regulated institutions to fund its mortgages. Those institutions
now require compliance with B-20, and First National has little
practical choice but to go with the flow.
And it’s not alone. Most monoline lenders are in the same boat.
We spoke with a treasury executive at one lender earlier today. He told us:
“My view is that all non-bank lenders other than credit unions will be subject to B-20, it’s just a matter of time.”
“All other lenders are selling loans to
federally regulated financial institutions (FFRIs), either on the FI’s
balance sheet or through the Canada Mortgage Bond (CMB) program. Those
lenders would all be subject to B-20.”
(He added that “every one of them” will eventually use the 5-year
Bank of Canada benchmark rate to qualify variable and 1- to 4-year
conventional mortgages.)
In short, OSFI guidelines will rule the day for any bank, trust or lender that gets funding from a bank or trust. As you read above, however, credit unions (CU) are not federally regulated (see OSFI Rules Spell Opportunity for Some Credit Unions). That means CUs have more flexibility when approving a mortgage. That flexibility will continue as long as:
(a) provincial regulators don’t impose new OSFI-style guidelines (b) a CU doesn’t accept funding from an OSFI-regulated source, and (C) a CU doesn’t apply for a federal charter.
Due to B-20, CUs have now become the last bastion of common sense
lending in the prime mortgage market. Take Meridian Credit Union, for
example, one of Canada’s biggest credit unions. Meridian still uses the
actual mortgage rate to qualify 1-4 year conventional mortgages. And
there are various other CUs that do the same.
In most cases, we would never advise a borrower to not
assume higher rates in the future. But in limited circumstances, that
extra borrowing power is appropriate for a well-qualified borrower with
good equity, good employment, good credit and either a short holding
period or higher near-term income expectations.
Instead of conforming to a rigid box, Meridian and many other credit
unions use old-fashioned good judgment. This allows for flexibility
where needed, without taking unnecessary risks. Meridian says there are
no plans to change its qualification rate on conventional mortgages. By
contrast, most lenders under OSFI rules will be more black or white:
You’re either in their credit box, or you’re not. Exceptions to these
rules will be more limited than ever before. Sidebar: Here’s a partial list of other OSFI-inspired changes occurring across the mortgage market:
Tighter debt ratios on uninsured non-prime mortgages (some "B" Lenders have never even published debt ratio guidelines before today)
Stricter proof of income for self-employed borrowers with more than
20% down (i.e., more evidence that an applicant’s business can afford to
pay the salary being stated by that borrower—business and personal bank statements, for example.)
Stricter guidelines for calculating a borrower’s minimum monthly
payment on unsecured debt (This payment affects a borrower’s debt
ratios. Three per cent of the outstanding balance has long been a
standard, but several lenders used more flexible guidelines.)
Stricter policies for estimating heating cost, which is also used in debt ratio calculations
The end of cash-back down payment mortgages (at all lenders except credit unions)
The end of borrowed down payments (at some lenders).
Many of these changes are sound, but all of them (combined) will
curtail housing demand and/or affordability for some period of time.
That means medium-term housing pain for the hope of long-term economic
gain. Rob McLister, CMT
Wondering if you should continue renting or take the plunge into home
ownership? To help you clarify this debate, we've compiled a list of
questions from various professionals associated with a real estate
transaction. Answering the right questions about the early stages of the
home ownership process will likely help you sit confidently with your
decision to stay put, or leap with eyes wide open into the market.
Why do you want to buy a house?
This is an important question for first-time buyers, according to
Sarah Wilson, a Calgary-based Certified Financial Planner and consultant
with
T.E. Wealth.
First-time buyers have to ask themselves if they want a home because
their friends are buying and they think it's the next step or because it
actually fits into their long-term life plan and will be a smart
financial move. Ms. Wilson adds that we should have an overall financial
plan that takes into account our short and long-term life goals, to
ensure that such a significant investment makes sense. If you don't have
a financial plan, then locating a
certified financial planner for a discussion would be a smart step.
What values will I honour by buying or renting?
Christie Mann, a Toronto
based leadership coach and consultant, asks clients how buying or
renting will align with their life vision and specifically their
five-year plan. Travel plans, entrepreneurial pursuits and timelines for
starting a family are all examples of things to consider in your
five-year plan.
If you are thinking of starting a family in the next five years, for
example, will the home you are considering accommodate such a life
change? If not, you should think about the financial implications of
selling a few short years after buying.
Why take a five-year view? According to Ms. Wilson, we have to
realize that when we're buying a home, we're buying into a market, and
if we are going to buy, we need to be in our home for at least five
years. If we sell our homes prior to the five-year mark, there's a
higher risk we won't get our money back due to the fees associated with
the transaction, compared to the increase in the home's value.
Are you ready for home ownership?
Owning may match up with your values and fit neatly into your
financial plan, but that might not mean you're ready for ownership. When
you own, you see the property in a different light, according to David
Fleming, founder of
TorontoRealtyBlog.com.
"You look at your floors and think about replacing and upgrading
them. You get down on your hands and knees and plant flowers. You paint.
You decorate. You want bigger and better for your house," Mr. Fleming
says.
However, he adds that people should be ready to "rake leaves, shovel
snow, take out garbage, and deal with racoons, damp basements, and leaky
roofs." If a problem arises, you can't just call the landlord and be
done with it. You're now on the financial hook for the repairs and the
upkeep. You inherit the good and the not-so-good elements of home
ownership when you're handed your keys.
Do you have a steady job and income?
It's harder and harder to be approved for a mortgage if your provable
earnings are not steady. A steady income and a reliable job make a very
big difference these days, according to Mike Averbach, president of
Averbach Mortgages in
Vancouver. He adds that going through a full analysis of credit and
income is an important first step for house-hunters because it provides
an accurate feel for the amount of house you can afford and will address
any possible issues before you begin your search.
A credit check can be done free of charge with a broker, or you can
receive your score and a detailed credit report for around $20 at either
Equifax or Trans Union. The best lending rates are usually reserved for
those with a score of 750 or higher. A higher score could translate
into thousands saved over the life of a loan. When you get your report,
scan it for any discrepancies - they happen more often than you think -
and correct them right away. It's best to know you're in good standing
prior to applying for any type of loan.
Do you have any money saved for a down payment? What about for the closing costs?
You can purchase a home with less than 20 per cent down, but if you do, you'll be required to pay
mortgage insurance.
If you're purchasing a home later in life, and with a partner, 20 per
cent isn't entirely unrealistic. However, it's still very difficult.
You'll also need to consider closing costs, which can add thousands to your total bill.
Click here
for a list of costs to consider, such as moving expenses and legal
fees. If you're not prepared for the closing costs, you could be left
shocked and scrambling at the eleventh hour to find the necessary funds.
It's also important to consider how much your monthly mortgage
payment will increase if rates rise (if you choose a variable rate
mortgage) or when your mortgage comes due at the end of the first term,
Mr. Averbach says. It is quite easy to calculate the outstanding balance
due at the end of a mortgage term and worth the exercise to see how
much an increase in interest rate will affect the monthly payment, he
says. Then, it's back to your five-year plan. Will you be in a position
to manage an increased debt load, or do you plan to be living on one
salary with two children at home?
How much are you spending now for rent v. your expected mortgage payment?
Speaking with a mortgage specialist or plugging numbers into an
online comparison calculator
will help you get a rough idea of the financial implications of each
scenario. It's often a good idea to pretend you're making the increased
monthly payments for at least a few months. If you're paying $1100 in
rent, for example, and your mortgage broker tells you your housing costs
would double, try socking away $2200 a month to see how it feels, how
it affects your lifestyle and if it's doable. You might be in a better
position a few months from now if you socked away more money and worked
toward the goal of homeownership in the future.
If you're new to the mortgage process, there are a number of great sites, like
Ratehub.ca, to help simplify the mortgage process and provide a wealth of important information to consider.
I've been to housewarming parties where the homeowners are
ridiculously happy, full of pride showing off their new space, and
clearly ready for the financial commitments. I've also spoken to
friends, months after their purchase, who feel house poor, overwhelmed
and unprepared. You don't want to end up like the latter, so it's key to
consider all aspects -- financial realities, goals and values -- before
you make any move.
The debt threat facing this country begins at home.
Mortgages are by far the biggest component of a national debt load
that has recently prompted warnings from the Governor of the Bank of
Canada and one of the country's largest banks.
Their concerns raise questions about the way in which financial
institutions ensure people can afford the mortgages they need to buy a
home. Raising a family and maintaining a home require finesse and
constant financial manoeuvring. And yet, the housing affordability
measures used by bankers are strikingly simplistic.
In essence, they provide a snapshot of a home buyer's ability to meet
his or her basic housing costs and other debts based on gross monthly
income. Bankers say these calculations serve them well, but others
question how effectively they size up someone's ability to carry the
cost of the house through real life's ups and downs.
It's a critical question because these affordability measures are the
margin of safety on which the housing market depends at a time when
people are paying near-record prices and facing higher mortgage rates
ahead.
Look to the United States to see what happens when people suddenly
can't afford the home they own. "In the back of our minds, we all worry
about the U.S. scenario, where we have large groups of people in society
who cannot afford to make the payments on their house," said Moshe
Milevsky, a finance professor at York University's Schulich School of
Business. "They're under water, they're stuck, and that can lead to
larger problems."
1. Evaluating Affordability: How It's Done
The average Canadian two-storey house costs $360,000, so a huge mortgage is inevitable for most buyers.
Two simple, time-tested measures are used by lenders to ensure this debt load is affordable.
The first is called the gross debt service ratio, or GDS. The rule is
that monthly housing costs, usually defined as mortgage payments
(combined principal and interest) plus property taxes and heating,
should not exceed 32 per cent of monthly household income before taxes.
The second measure is called the total debt service ratio, or TDS,
and it compares monthly income to housing costs plus payments on lines
of credit, credit cards and other debt. Housing costs plus debt payments
shouldn't exceed 40 per cent of income.
"I'm 23 years in the business and we haven't really adjusted the debt
ratios," said John Turner, national director of specialized lending at
Bank of Montreal. "They're tried-and-true guidelines that are proven to
work for us in the industry."
The 32-per-cent GDS limit and 40-per-cent TDS limits are definitive
enough that Canada Mortgage and Housing Corp., a federal government
agency, uses them on its website to help home buyers see if they're
financially ready to buy a home. But there are some variations.
Mr. Turner said some lenders will factor 50 per cent of condo fees
into the calculation for the GDS, while solid borrowers might be allowed
to take their TDS as high as 42 per cent. Lenders use "five Cs" in analyzing someone's ability to afford a
mortgage: capacity to repay, which refers to income; collateral, or the
value of the home; character, which factors in things like your record
in repaying previous debts and how long you've been at your job;
conditions, which refers to economic conditions; and, capital, or the
down payment. Mr. Turner said that if someone is weak on capacity but
strong everywhere else, a higher ratio may be allowed.
Debt service ratios serve the needs of lenders and are not meant to
assure borrowers that their debt loads are manageable, said Jeff
Schwartz, executive director of the non-profit Consolidated Credit
Counselling Services of Canada. Homeowners may in fact struggle to cover
their various monthly expenses, even if they're comfortably onside with
the two debt service ratios.
Lenders accept this potential risk because they know people will pay
their mortgage while letting other debts slide, Mr. Schwartz said. "The mortgage is the first thing that gets paid," he said. "People
will pay for their shelter first because they're fearful of ending up on
the street."
2. Flaws in the System
Assuming you don't eat, have kids or drive a car, the calculations
that decide whether you can afford a mortgage should fit you perfectly.
Everyday expenses are not considered when lenders size you up for a
mortgage. All they look at is whether payments on an applicant's
mortgage and other debts plus property taxes and heat will account for
more than 40 per cent of gross household income.
"I have a big problem with the idea that you can spend 35 to 40 per
cent of your income on housing and debt because the numbers don't take
into account all the other expenses we incur," said Schulich's Prof.
Milevsky. Like income taxes and contributions to registered retirement savings
plans, for example. "If we're supposed to save for retirement and if
we're paying average taxes of about 23 to 25 per cent, there isn't much
left for housing," Prof. Milevsky said.
And yet, there are many more fixed expenses to juggle. Groceries,
transportation costs and daycare are among the ones listed by Laurie
Campbell, executive director of the credit counselling agency Credit
Canada. On top of that, consider the sudden, staggering expenses that
homeowners must inevitably cope with. "People get themselves so bogged
down," Ms. Campbell said. "They get into their home and their roof needs
repairing three years after they move in. There's $3,000 to $4,000
right there." A typical way of managing sudden expenses is to tap into a home
equity line of credit, where people borrow against the value in their
homes. But credit lines represent added debt that can push people
offside on the debt measurements that lenders use when setting up
mortgages.
Rising interest rates put even more pressure on affordability.
Mortgage rates are still close to all-time lows as a result of the
financial crisis, but sooner or later they will rise back to normal
levels. It's just a matter of time until mortgage holders are affected -
variable-rate mortgages get more expensive gradually, while people with
fixed rates pay more at renewal time.
The Bank of Canada has estimated that 6.1 per cent of households were
already spending 40 per cent of their personal income to carry debt in
2009. The bank figures that this number will rise to 7.5 per cent in
mid-2012 if mortgage rates rise to pre-recession levels.
A wave of defaults is the worst case if rates surge and people can't
afford the high-priced homes they bought in recent years. But economist
Benjamin Tal of CIBC World Markets doesn't see this happening.
"You will have defaults rising - they'll be higher than they are now -
but not in a very significant way," he said. "Remember, interest rates
rise for a reason - the economy is improving." How to Protect Yourself
Protect yourself against buying more house than you can afford and
you help prevent the kind of national housing catastrophe that is into
its fourth year in the United States.
Mortgage lenders measure your debt load in relation to your income to
assess how much you can borrow to buy a home. Tempted to buy as much as
they'll lend you?
So were a lot of the home buyers who later ended up coming into the
Toronto offices of Mr. Schwartz's credit counselling agency. "That's a
trend we've seen among our client base for a while now," he said. His preferred solution is to take a completely different tack than
lenders do in assessing how much mortgage you can handle. Start by
putting together a budget that sets out the percentage of your net
income that will go to all housing costs, including mortgage, property
taxes and home insurance. "By and large, we tell people you should probably only spend about 25
per cent on housing," Mr. Schwartz said, before acknowledging that
people living in high-cost cities like Vancouver or Toronto may have to
go as high as 30 or 35 per cent.
Vancouver mortgage planner Robert McLister said he starts his
evaluation of how much a home buyer can afford with the standard
measures used by all lenders, the gross debt service and total debt
service ratios. He then asks clients whether they have savings that they
could depend on if they lost their job, and how much money they have
left over at the end of the month.
"If someone tells me, 'I have $50 left after all my debts are paid
each month and I want to buy a $500,000 house,' then that's a warning
sign."
If at some point your mortgage debt becomes unmanageable, you can
ease the load by taking longer to pay off the loan. This is called
extending the amortization period and Mr. McLister said it can be done
through a routine refinancing of your mortgage (expect to pay a few
hundred dollars for this transaction).
The longer your amortization period, the smaller your payments. The
tradeoff is that you'll pay more interest and take longer to be
mortgage-free.
"You do what you have to do," Mr. McLister said. "But even if the
amortization is 25 or 35 years, that doesn't lock you in for life. When
you're up for renewal, you can reduce the amortization period if times
are better."
The
Canadian Association of Accredited Mortgage Professionals says since
new rules went into effect in July, 2012, resale housing activity is 8%
lower between August and October than a year earlier.
Reuters
New borrowing rules have hit homeowners so hard
that it could undermine any economic recovery in Canada, says a new
study from the country’s mortgage brokers.
The Canadian
Association of Accredited Mortgage Professionals says since new rules
went into effect in July, 2012, resale housing activity is 8% lower
between August and October than a year earlier.
Among the changes
instituted by the government was a lowering of allowable amortization
from 30 years to 25 years for consumers borrowing with mortgage default
insurance which is backed by the federal government. A longer
amortization allows consumers to lower their monthly payment and qualify
for a larger loan at the expense of paying more interest over their
mortgage period.
My concern is that a
policy-induced housing market downturn creates unnecessary risk that
directly affects not just housing but job creation and the economy as a
whole
CAAMP says 17% of the high ratio mortgages funded in
2010 would not qualify today, including 11% of prospective high ratio
homebuyers who wouldn’t qualify under the new 25-year amortization rule.
“This
smaller number of first time buyers is already impacting the resale
market, which in turn threatens to dampen economic activity more
broadly,” said the group, in a release.
Jim Murphy, chief
executive of CAAMP said his group’s survey of 2,000 Canadians shows the
“vast majority” of mortgage holders are acting responsibly with their
debt. “Our concern today is the number of growing first time buyers who
are now unable to get a mortgage. We worry that this is having a
dampening effect on what was an already cooling market and we hope
policy makers will give some thought to addressing the needs of this key
sector of the market,” he said.
Will Dunning, chief economist
for the group, said the downturn in the resale market could be an
indicator of what’s next for the market. “Since the government tightened
mortgage accessibility for the fourth time this past July we’ve seen a
drop in resale activity that I think foreshadows an overall decline in
the housing market. My concern is that a policy-induced housing market
downturn creates unnecessary risk that directly affects not just housing
but job creation and the economy as a whole,” he said.
CAAMP
said the impact of first-time buyers can be felt throughout the market
as move-up activity is curtailed because those potential buyers find it
more difficult to sell their entry level homes.
The survey found
it doesn’t matter whether consumers take a 20, 30 or 40-year
amortization — something available until three years ago — they end up
paying off their mortgage in two-thirds of the time originally intended.
Other findings show one-third of borrowers made additional or
accelerated payments on their mortgage while 87% of homeowners have at
least 25% equity in their homes.
Lower rates have been good for
Canadians too. Of the respondents who renewed in the last year, 61% saw a
reduction in their interest rate.
From October 23, 2012, The Bank left its policy rate unchanged, which means that prime rate should exit 2012 at the same level it’s been for 25 months, 3.00%.
Carney
& co. said that, “Over time, some modest withdrawal of monetary
policy stimulus will likely be required.” That’s vaguer than prior
projections but still a signal that the next rate move should be up.
Here’s more from the Bank’s statement from Oct 23, 2012:
“Core inflation has been lower than expected in recent months…”
“Total CPI inflation has fallen noticeably below the 2 per cent
target…and is projected to return to target by the end of 2013, somewhat
later than previously anticipated.”
“Housing activity is expected to decline from historically high
levels, while the household debt burden is expected to rise further
before stabilizing by the end of the projection horizon.”
“The timing and degree of any such withdrawal (in rate stimulus)
will be weighed carefully against global and domestic developments,
including the evolution of imbalances in the household sector.”
That last line is new. The Bank’s recent statements haven’t suggested
such a close link between household debt and rate increases. But it’s
an implied warning that does little to convince anyone that rate hikes
are looming.
The next BoC rate meeting is December 4, 2012.
Taken from Rob McLister - Canadian Mortgage Trends.com
I got this from Canadian Mortgage Trends.com - Rob McLister ... it is a great article! In regards to payments etc, and I do like the thought, of since mortgage rates are low, why not make your payments like it is a normal rate, you will make life mortgage free quicker :) Just some food for thought. I am kinda giggling as well, since BMO were the ones to really get this 2.99% rate going, the potential long term results are what really is being surveyed. ... read below and enjoy for Monday Morning!
October 28, 2012
The “Significance” of Rising Payments
BMO published a survey last Tuesday that got a ton of media play. It stated that 72% of households:
“would feel a significant strain if they were to experience a modest increase in monthly mortgage payments...”
Yet, despite the fact that Canadians are highly leveraged, this finding seemed suspicious. So, we investigated.
It turns out that mortgage payment sensitivity is not as dire as last week’s headlines implied.
BMO’s survey asked people to indicate what things they’d cut back on
if their monthly mortgage payment increased by 5%, 10%, 15% or 20%.*
The actual results found that the 72% of respondents said a 5%
increase would “have an impact - of some kind - on their household
budget,” said BMO spokesperson Laurie Grant.
“Some kind” — but how much impact was not specified.
Obviously, personal budgets are finite so if you have to pay $100
more to the bank, you keep $100 less for yourself. Hence, virtually
everyone’s budget is impacted somehow by payment increases.
But some writers played up the fear factor, declaring:
Here’s the thing. A 5% payment increase on the average mortgage is $51 a month, according to CAAMP data. That’s less than 1% of the median family’s after-tax income of ~$5,600 per month. Incidentally, it would take the equivalent of two Bank of Canada rate hikes (50 basis points
total) to boost payments by 5% for the typical borrower. And, it would
take a 225 bps rate increase for payments to rise 20%. (For what it’s
worth, economists project anywhere from 2-6 quarter-point rate hikes
within 24 months.)
So, would a modest 5% mortgage payment increase have a “significant”
impact on the typical borrower’s finances? Grant says no. “The word
‘significant’ should be applied to the high percentage of people
(affected), not the impact on household spending habits,” she explained.
We can get a further sense of borrower vulnerability by looking at
the number of homeowners forced to dip into their savings to pay their
mortgage. In the past year, 17% of those polled had to withdraw from
savings to make one or more mortgage payments. But a 5% payment increase
would raise this 17% by only one percentage point, says BMO.
Oddly, a 10% payment increase would cause fewer people (16%) to reach into their savings, according to the poll.
And one last point: Canadian lenders and insurers have no desire to
loan out hundreds of thousands of dollars without knowing the client’s
future payment tolerance. Therefore, lenders routinely qualify borrowers
at rates which are higher than the contract rate.
The message of this post is to look behind the headlines. Banks love
to feed the press with housing surveys. But dramatic poll-related
headlines always warrant a second look.
********
Here are other findings from BMO’s survey… On the Effect of New Mortgage Rules
22% of those polled say they’re less likely to buy a home in the next five years because of the rule changes
29% who plan to buy in the next five years say they’ll likely spend less on a home because of the changes
43% of homeowners were not familiar with the new mortgage regulations introduced this year
On Mortgage Affordability
92% of respondents agree that debt is a serious national issue but only 19% say it’s a problem for them
16% say a 10% rise in mortgage payments would leave them at risk of not being able to afford their home (Although, this doesn’t mean the majority would default on their mortgage.)
1 in 4 homeowners have reduced the amount they’re saving over the past year to make their mortgage payments
On Moving intentions:
Within five years:
18% plan to downsize to a smaller home
18% plan to upsize to a larger home
10% plan to sell and either rent, move into a retirement community or move in with family
21% plan to purchase an additional property for income, investment, or recreation
* This question was asked to the 55% of homeowners in BMO’s poll who
said they had a mortgage (562 people). They were given a list of
“impacts” on their household budget to choose from such as eating out,
vacation spending, renovations and so on.
The BMO Housing Confidence Report was conducted by Pollara via online interviews with a random sample of 1,011 Canadian homeowners, 18 years of age and over. Rob McLister, CMT
