Vet calls for mortgage qualification crackdown

Vet calls for mortgage qualification crackdown

Vet calls for mortgage qualification crackdown  It may not be a popular opinion, but one veteran broker argues there should be tougher standards for qualifying for a five-year fixed-rate mortgage.

“100% there should be tougher standards for qualifying for a five-year fixed rate; I’m in awe that they haven’t done it,” Calum Ross, principal broker of Verico Calum Ross Mortgage, told “With the Big Short movie out and everyone saying Canada is immune (to a similar downturn); I’m going to say the five-year qualifying rate is a disaster waiting to happen."

Clients taking a five-year mortgage rate can qualify at the contract rate. However, variable rate mortgages and fixed mortgages under five years typically require homebuyers to qualify at a higher “benchmark” rate.

Ross, who has both an undergraduate and an MBA in finance, argues many clients who currently qualify for a five-year fixed-rate would face potentially unsurmountable economic challenges if rates were to increase.

“You can put this in real terms: If that 1% interest rate increase is realized, that means five years from now my income would have to increase by 33% to maintain my current debt servicing numbers,” Ross said. “Real wage growth in every province is not above 3%. So you would have to be a statistical anomaly just to keep your head above water.”

Ross estimates that half of mortgage holders have a five-year fixed-rate mortgage product and many of them have maxed out their debt servicing numbers.
He argues even a 1% increase in interest rates could be difficult for these clients to handle.

“It’s unrealistic to think today’s interest rates are going to be around forever,” Ross said. “Five years from now if interest rates increase 1%, that’s a hell of a big pill for the average Canadian to swallow.”

Ross also argues the current qualification standards pose a risk to the industry.

“I worked in global treasury in London before working in the mortgage industry; I’ve taught finance at the MBA level. It’s unequivocally a risk,” he said. “I don’t think there is a risk; I know there is a risk. It’s just how much of a risk there is.”

Ross’ argument in favour of tougher qualification standards may not sit well with many brokers. When told this, he replied:

“In a perfect world I would be both respected and liked but, if I have to pick between being respected versus being liked, I will take being respected every time,” Ross said. “Anyone who doesn’t’ think the five-year qualifying rate is a disaster waiting to happen simply doesn’t’ understand credit capital markets or default risk.”
  • Mortgage Geek 2016-03-18 9:06:02 AM
    100% agree with Callum Ross. Finally someone who is willing to say what many in this industry don't want the public hear.
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  • William Gosewitz 2016-03-18 9:17:41 AM
    i have been saying for almost 40 years that the GDS and TDS ratios make no sense. We have never asked the proper questions - what about budget based qualifications instead of a global ratio ?...a person with 3 children qualifies for the same money as someone with no children - that is just one of so many examples of the the cracks in the system - 40 year amortizations make sense - just need to make the qualification process more stringent . And what if someone refinances 2 years from now and has to qualify at the benchmark rate instead of the 5 year rate ...they may not qualify - sadly the regulators do not fully understand the process...that is my humble opinion.
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  • David Pylyp 2016-03-18 9:34:05 AM
    Yet buyers continue to qualify at the posted 5 year rate [of near 4%] and select the Variable rate option of 2.29% which really defeats this whole argument.

    Income levels to support the debt required are a financial reality. If the Math works...
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