Jim Flaherty hadn’t formally announced the latest mortgage rule changes before broker phones began to ring.
The calls came in just as fast and often just as furiously to network execs as mortgage professionals grappled with the impact for both themselves and their clients.
You may have been on the receiving end of some of that analysis, but not all. Well, that is until now.
CMP has corralled many of those broker heads, asking them to share their own insights on four mortgage rule changes meant to slow down the market and protect Canadian households from the perils of unmanageable debt.
These broker execs don’t pull any punches about the 25-year amortization cap on insured mortgages or the “refi reset” to a maximum LTV of 80 per cent. They also meet square on concerns about the $1-million ceiling on home values and a maximum gross debt-service ratio of 39 per cent, with a total debt-service ratio limited to 44 per cent.
Still, their collective message is undeniable: Brokers will survive; brokers will continue to succeed.
An Amortization Abatement
Director of Business Development
Centum Financial Group Inc.
We all know the government recently changed lending guidelines, including limiting maximum amortization to 25 years. I have been following the reaction from a large portion of our industry, and I think the sky falling theory is overstated. I have come to this conclusion by really paying attention to some consumer polls that show over 45 per cent of mortgage holders thought that 25 years was already the maximum allowed; 25 per cent said that they knew about 30 years, the balance simply did not know or care.
We also need to step back and look at the hard numbers. The impact of that extra five years to the consumer is not drastic. A $350K mortgage with a rate of 5.99 per cent only has a payment difference of $157.55 per month. If that change means that you cannot afford your home then you should not be buying that home. What will happen in the event of a major repair, assessment, or other unexpected expense? We should also consider that the interest paid on that mortgage increases from $321,174.25 to $398,692.91 - a staggering $77,518.66. Yes, you have a moderately smaller payment, but is that small savings really worth it in the long term when considering how much more you pay in interest over the full term of the mortgage?
In some areas, this impacts the ability of consumers to purchase a home in their preferred location. There are always options such as buying a smaller home or buying in a different area. This is not a new dilemma; it has always existed and is why we have suburbs. We can’t always get what we want, and sometimes we should consider needs before wants. Does a first-time home really need a $50,000 kitchen? I want to live on a waterfront, but do I need to? This may also result in some price compression and create pressure for greater affordability in housing. True this is not always a good thing, but the industry ebbs and flows, always has.
Homeownership is a good long-term investment, but it needs to be smart homeownership, that is made with educated decisions and creates financial sustainability for the consumer. It should not create hardship. We live in a world today where we want instant gratification, and that is no different when purchasing a home. Living on debt, however, is also living on borrowed time, because, eventually, it will catch up to us.
Brokers have the ability to turn these changes into an opportunity should they make that choice. We can become true advisers to our clients and instead of just focusing on the transaction today, stop and consider the long-term homeownership goals of our clients. They might not be able to own the biggest house in the best neighbourhood today, but with sound advice, and a properly structured mortgage plan, that customer will come back to you when they are ready to move closer to their dream home.
Reduced LTV on Refis and its Impact
President & CEO for Mortgage Alliance
We’ve all heard the expression “using a home as an ATM.”
It’s referencing the concern that Canadians are utilizing the equity in their homes to potentially live beyond their means and to rely on debt as a way to sustain their lifestyles. I don’t think anyone was ultimately surprised by the government’s announcement to reduce LTV (on refis) given the recent trend in economic and consumer indices. The writing was on the wall and it was only a question of “when”!
Change in our industry is the one constant you can bet on. The pendulum never stops swinging – which direction and how far over one way or the other is hard to say. You can’t run a business today based on the assumption that things will be the same tomorrow. You either choose to succumb to the problem or you carve a strategy to pursue the opportunities. Each change will bring with it those respective scenarios.
OK, so here’s the bad: If you owe, for example, $20,000 in debt outside of your mortgage and are paying 21 per cent in interest, the 80 per cent maximum limit could mean that you are paying an extra $3,600+/- annually in interest (since you can’t roll it into your mortgage based on current interest rates). In addition, this may have an effect on home renovations – since quite a few homeowners depend on refinancing their mortgage or taking a home equity line of credit to pay for major home renovations.
The Good: The reduction to 80 per cent (previously 85 per cent) means that as a homeowner, you will now retain an additional $20,000 in equity in your $400,000 home. The plus is that a loan-to-value less than or equal to 80 per cent means you save approximately $5,900 in high-ratio mortgage insurance premiums (based on a $400,000 property value).
The Outcome: We may see the return of more private lenders to fill in the gaps. We will manage those partnerships to the benefit of the Mortgage Alliance network and their customers.
Our network is founded on providing the ultimate choice, convenience and counsel. Mortgage Alliance Professionals are in a unique position to provide that “counsel” and deliver their clients with alternate solutions for their customer’s challenges. It comes from our position of having the resources of a bank, but the attitude of an elite mortgage brokerage.
With this in mind, we will have to become better at helping our clients at managing their debt and counsel them toward planning for major spending by first saving or paying down their mortgages faster before they borrow again. Therefore, the better we know our clients, the more we connect with them and the more they’ll trust us to help them navigate their financial future. That hasn’t changed and never will.
Don’t forget: Changes Three and Four
President of Mortgage Centre Canada
Fixing maximum TDS/GDS: 44%/39%
Consumers who are in debt with credit vehicles that have higher interest rates and higher minimum payments and could use a consolidation mortgage to better their monthly cash flow will be affected by the new TDS ratio change. Those wanting to purchase a little more house and are stretching will also be affected. Brokers will win themselves an advantage if they are in tune with being more creative on behalf of these clients and use private funds or non-traditional lenders. The broker who is a transactional cookie-cutter broker will have to better his knowledge in creative financing .. and do it fast!
Maximum insured mortgage amount: $1M
In a nutshell, a borrower with less than 20 per cent down payment cannot have a mortgage amount of more than $1 million.
I think the Smith Manoeuvre scenario may be affected more in this rule change than simply the consumer looking to purchase with less down on mortgages over a million. I think once a purchaser qualifies for this kind of mortgage then he or she should be able to come up with a 20 per cent DP more times than not. Maybe those professionals that are cash flow heavy but are still paying student loans or would rather use home capital for their business may see it more difficult to get into a high-end home or condo now. Brokers that have this kind of clientele will probably see their average mortgage come down slightly. This market is small and tends to be only in the big cities, so overall the change won’t have much of an effect on the average mortgage broker really.
Take Four: A four-pronged approach
President and CEO
Verico Financial Group Inc.
At VERICO, we ensure that we arm our professionals with balanced and insightful perspectives on any issues that affect our business.
On the day that these changes were announced by the government, we immediately hosted a webinar featuring two VERICO members who, not only have great insights, but are also regularly interviewed by major media: Calum Ross in Toronto and Jared Dreyer in Vancouver.
We started the discussion with the 25-year amortization change, which will mostly impact first-time homebuyers and those on the fringe. We advised our mortgage brokers who have focused on this particular sector as an opportunity to expand their demographic circle and offer their valuable services to a broader range of consumers.
The removal of CMHC insurance for $1 million-plus homes will affect mainly brokers in Vancouver and Toronto where many homes are in and over that price range. The consensus was that there is no reason why CMHC and the Canadian taxpayer should be backing luxury home purchases with less than 20 per cent down. Calum pointed out that this is a change for the greater good in terms of helping citizens use credit responsibly and that CMHC insurance should not have been available for $1 million-plus home in the first place.
On the change to GDS and TDS; it is hard to determine how this will affect the market overall. Combined with the maximum amortization cutback, there will be reduced buying power, but will likely stimulate more subprime lending and, again, present new opportunities to VERICO members.
And finally, we addressed the change to LTV on refinances from 85 per cent to 80 per cent. In our opinion, there are few cases where a refinance at 85 per cent was justifiable given that clients would need to pay insurance premiums if they wanted the extra five per cent, so this change is beneficial to consumers.
I’m pleased to have been able to provide our VERICO members with this opportunity for discussion and to gain valued insight from two very involved members in our network. Credit changes or shifts are part of our new landscape and we need to learn to adapt and find opportunities in any market condition. Bottom line is if our employment rate stays consistent then these regulatory changes or market shifts will be less cumbersome than some predict.
VERICO mortgage brokers are in the best position to adapt to the changes and to continue to provide sound financial advice and to help secure the best mortgage products for Canadian home buyers.
A Broker’s Critique
President & CEO of Argentum Mortgage and Finance Corporation
There is much discussion and speculation around the past and pending mortgage rule changes that have been implemented by our respective regulators and government. A number of mortgage brokers and agents are trying to crystalize the impacts of these changes as it relates to lending institutions and borrowers and that has raised many questions and concerns.
There are varying opinions as to whether or not these changes are necessary, but my opinion rests in the following notions. While I agree that the Canadian government must safeguard against potential credit issues experienced in other countries, I believe the manner in which they are doing so is disagreeable from my point of view. It is true that Canadians have been using their homes as ATMs to cash in equity for many purposes, including the consolidation of debt and therein lies the symptom of what I deem to be the greater issue. Canadians and their homes have been made the targets while other more vulnerable areas should be scrutinized, namely credit card debt.
It seems that day in and day out we are inundated with mail solicitation to apply for credit card debt and it is clear that Canadians are starting to take advantage of those campaigns towards the option of overextending themselves and are looking to normalize their monthly payments by extracting equity from their homes. The Canadian residential mortgage market has been stable for quite some time now with policies that allowed for higher loan-to-value ratios and more relaxed lending criteria than what is being imposed by our regulators. With that said it is my opinion that our credit preservation and liquidity concerns would be better aimed at revolving credit facilities such as credit cards rather than targeting a segment that has been fairly stable and consistent.