Are “confusion” and “uncertainty” two different things?
I believe so.
And yet both words are dominating the mortgage circles these days as buyers know less about what’s happening in the world of mortgages than ever before.
Add in the fact that many people are trying to predict what’s going to happen in the future, and I don’t recall a time with this much perplexity. And yes, I Googled “a synonym for confusion” and perplexity came up!
On Tuesday, I’m going to interview my mortgage broker, Tony Della Sciucca, once again. We’ll have that blog post up later in the week and well in advance of the Bank of Canada’s scheduled rate hike announcement on October 26th.
Please use the comments section below to provide your mortgage questions for Tony.
And have a fantastic long weekend!
Appraiser
at 6:23 am
If someone told you that the average price of a home today was $275,000 more than the average price in 2019, would you consider that to be a correction?
Because that’s where we’re at.
Derek
at 11:04 am
Why compare to 2019?
Appraiser
at 11:34 am
Why? In order to help illustrate the remarkable price acceleration that we’ve witnessed in a very short period of time, and to help put things in perspective.
Cec
at 7:09 am
If the lending rate keeps increasing, will the discount on prime go back up as well at some point. In a variable prime -1% mortgage right now and the current discounts are more -.3%
Anwar
at 8:07 am
Good timing!
I was a just having this convo with a colleague:
The Bank of Canada may be tripling rates but how long CMHC and OSFI change lending criteria so banks can make up any lost business?
Karolina
at 10:13 am
Please see what creative solutions the banks and gov’t are working on if the rates keep on increasing. What is the likely hood of dropping the stress test plus increasing amortizations to past 30 years?
Caris
at 10:25 am
Was going to ask about the return of 40-year amortizations too.
Nobody
at 10:43 am
There’s broad agreement on cooling housing demand specifically.
While Trudeau Government has done some “non-orthodox” things in the past in regards to the economy given everything it’s back to the Paul Martin types being in charge and even the Trudeau types realizing that’s necessary.
Politicians, as ever, will say things about how horrible it is that the mean Central Bankers are being mean and horrible. They will do absolutely nothing because they know it’s necessary and an independent Bank of Canada lets them avoid responsibility.
The increase in the GST rebate is a way of looking like you’re doing something but not really doing much of anything.
Given the risks in the banking system and the need to cool down the housing market across the entire country only the furthest left NDP member would drop stress tests or push amortizations out at the moment.
Nobody
at 10:59 am
This is a situation where you see who has a math heavy background and who doesn’t.
You can know that you’re in a very strong storm but not know if the wind is 95km/h or 110km/h. You’re “uncertain” about the exact windspeed but you’re not confused about whether you should be inside and preferably in a basement/in a room without windows.
Confusion is not knowing what’s going on at all.
Similar to the difference between accuracy and precision. Saying we’re going to get 1 meter of snow in a huge storm and then getting 3 feet 1 inch is accurate, Saying we’re going to get 1 meter of snow and then having clear skies for an entire weekend is not. Precision is the absolute error in your measurement/prediction. Were you within 10 cm? 1 cm? 1mm?
Or, for real estate, predicting a house will go for “1 million”. Does it sell for 990k? 999k? 1001K? 1010k? vs it going for 650k or 1.8 million and you were totally out to lunch (er, confused).
My only mortgage questions involve a time machine to get a second mortgage circa January.
Jimbo
at 7:19 pm
I get winds of 90km/hr with gusts of 110 a couple times a year. Only saw the window bow in once.
Graham
at 12:49 pm
Tony, without knowing precisely what the danger is, would you say it’s time for David’s readers to crack each other’s heads open and feast on the goo inside?
Ace Goodheart
at 1:53 pm
Might want to look at how many people actually have mortgages.
A lot of us don’t.
A quick search of the internet comes up with this number:
“Just under half of Canadians own their home outright”.
So that would be close to 50% of us who really don’t care what the interest rate is at renewal, because a bank doesn’t partially own our houses.
Then take a look at how many people in that just over 50% category bought their house during the “great Canadian housing bubble” (hint – you will find these people at your local pharmacy buying stomach antacid medication).
That number is even lower. Somewhere in the 5% range of total mortgaged home owners.
The rest of the folks with mortgages would likely have a wide financial moat, as they would not owe that much.
So when we talk about the great crisis to come in terms of mortgage renewals and people unable to make their monthlies, we are really only talking about around 5% of the total population of this Country.
The rest of us are fine. Those of us without mortgages are not sure what all the fuss is about. Those who do have mortgages but who purchased before 2019, are probably thinking that the current interest rates on offer are really not that bad a deal.
For the 5% who borrowed millions to get a house or a condo before the prices escalated so far that no one could afford a house or a condo, well, I mean, what sort of a silly idea was that? If no one can afford them, who was buying them?
You make your bed, you lie in it. Most home owners will be just fine……
Nobody
at 2:42 pm
Some quick math.
In 2021 there were 121k homes sold in GTA according to TRREB. 46k of those were new homes. So 75k sales of existing homes.
In 2017 there were 1.7MM residential properties in the GTA according to Stats Can. Plus ~160k to account for the 40k ish new homes per year.
So there were 1.85MM homes in GTA in 2021 and 75k of those transacted. That’s 4% of homes that transacted.
If you suddenly have an additional 5% of existing homes in distress and NEEDING to sell within 18 months… YOU HAVE A MASSIVE PROBLEM.
Markets are priced on the margin. With 120k total transactions a difference of 5 or 10 thousand homes being available will cause large price changes. An additional 92k homes being on the market would be a catastrophe that would cause a cascade.
People can roll a mortgage fine with 30% equity. But if they suddenly have 5%? -5%?
These types of contagion happen famously in financial markets. It’s what caused Bear Stearns and Lehman to crash. It’s what bankrupted Amaranth Capital, it’s what annihilated Archegos Capital in 2021. More sellers than buyers, prices go down, then people get margin called/can’t roll debt, more sellers, prices go down further, more people can’t roll…
Just as in a recession the VAST majority of people don’t lose their jobs, but they get nervous. They save more, spend less, don’t start a business… Which is why one of the most famous Econ books is called A Theory of Moral Sentiments.
Ace Goodheart
at 3:24 pm
True.
But many people just sold one house and bought another.
So they have no downside. If they had kept their old house, it would have been worth less.
Their new house is also worth less.
What we are looking for, is folks who went in slim on equity (ie 20% or less) and who don’t have any other liquidity.
These folks are exposed.
That is maybe 1% of the total home owner pool.
So this probably is a big fat nothing burger
Alex
at 11:25 am
Keep your head in the clouds…
Condodweller
at 2:10 pm
I like how they used uncertain in the show Billions. How uncertain are you that house prices are going down? I’m not uncertain.
I have two questions:
1. I have asked before but have not seen an answer to this question: At renewal time the generally accepted occurrence is that your existing lender renews your mortgage. A commenter hinted on a recent post that it’s possible your current lender may not renew. I know that mortgage loans are callable. How realistic is this scenario i.e. I have a million mortgage with bank A and both family members lose their jobs in a recession and the bank won’t renew? Am I forced to sell to pay back my bank and If I’m under water by say $300,000 is my only option declaring bankruptcy (alternate lenders where I could lose my kneecaps are not an option)? Would a bank ever ask to see proof of income before renewing, and not renew if it can’t be proven?
2. Are banks cutting back on HELOCs? I heard that credit unions won’t do a HELOC to access capital on an investment property. Are banks the same? Say someone wanted to leverage their investments by using an interest-only loan like a HELOC, are banks willing to play ball? Asking for a friend 🙂
Ace Goodheart
at 2:40 pm
What generally happens on renewal is your mortgage becomes due and payable in full.
You then go to the bank that issued it, and request that they refinance you, for whatever is left owing (often more than a million dollars).
Your bank will do a re-qualification of you and then either agree to advance you the funds, or demand that you repay them in full if you cannot qualify anymore.
When you cannot qualify, people usually go to a subprime lender, and that is when the “debt spiral” starts. If you can’t qualify with your bank, then you are not going to be able to keep up with subprime. But they will try anyway.
I have argued (and argued) against the “notional amortization period” that is used on all mortgages today, for the very reason that it sets people up for this in a rising interest rate environment.
Basically, they give you a loan which has a 25 year payment plan, but is due in full and payable in five years, and they front end load the interest, so you are paying mostly interest for the first five years and retire very little of the principal.
When the five years are up, the loan is due in full. The amount due can be in the millions, and no one ever has the money. So you are left to go begging, if you can’t qualify at your bank anymore.
The issue with changing this silly system is, if we made it so that a five year mortgage had to be fully paid in five years, interest and principal, then this would crash house prices to levels not seen since the 1970s. It would also reduce the profits of banks, and would have a negative effect on the central planning of taxation and government revenue policies (because you want to keep people working for 25 years to pay off a mortgage, that is the whole idea behind funding a government, you need people working at a certain income level, for a long period of time, or taxation doesn’t work).
So for the foreseeable future, we are going to have 5 year loans with front end loaded interest, operating on payment plans that take into account a “notional” (ie, non existent) 25 year loan term.
Condodweller
at 12:11 pm
“What generally happens on renewal is your mortgage becomes due and payable in full.”
This is something I bet 99% of people with mortgages don’t realize. I didn’t when I took out my first mortgage or the 2nd for that matter.
“You then go to the bank that issued it, and request that they refinance you, for whatever is left owing (often more than a million dollars).”
Typically what happens is that the bank sends you their ridiculously high rate offer to renew, which would probably shock me how many just accept, and you negotiate with them a reasonable rate. From what I hear very few switch to get a better rate. So even here people don’t realize the amount is due in full.
“Your bank will do a re-qualification of you and then either agree to advance you the funds, or demand that you repay them in full if you cannot qualify anymore.”
Do they really? I don’t see the point of this. Let’s say I lost my job but kept making the payments. What difference does it make to the bank if I don’t qualify anymore? I guess they can de-risk their books by making me find another subprime lender. But I thought they sold off their mortgages anyway. I guess making you move at renewal avoids the uncomfortable foreclosure call in the future.
“When you cannot qualify, people usually go to a subprime lender, and that is when the “debt spiral” starts. If you can’t qualify with your bank, then you are not going to be able to keep up with subprime. But they will try anyway.”
Problems really start when people can’t make payments and house values start heading down. Especially if you are underwater. Since the loan is callable, it would make sense to me for the bank to call you when you start missing payments. Even then, we saw during COVID they let people defer. Would they do that if it starts happening to a larger % of the population? Will the government step in to save us/them(the bank)?
Looking forward to Tony’s answer on this one. “Sorry Mr. Broke, we are unable to renew your mortgage at this time and BTW you owe us $1,000,000. Have a nice day”
Nobody
at 2:49 pm
In the housing market of the last 20 years (barring a couple months in 08 and 17) banks ALWAYS (well, almost) would renew if you’d been making the payments. There was “no risk”.
When prices are coming down, rates are going up, and OSFI is looking over people’s shoulders, banks start actually doing what they’re supposed to have been doing and re-underwriting the mortgage upon renewal. Including checking ALL your paperwork.
Back in 08 & 09 credit card firms started to get more careful with their portfolios. I know a reasonably famous (and very wealthy) venture capitalist in NYC who had his American Express cancelled out of the blue in Spring of 09. His purchasing behaviour matched a pattern that indicated financial stress. With Amex’s offer to high income/high net worth people they can end up with a LARGE amount of bad debt very quickly. So it made business sense to lose some VERY valuable customers just to de-risk the overall portfolio.
We haven’t seen this behaviour from banks in the GTA in a LONG time. But they have manuals on how to do it, have used it in places like Calgary and even distressed places in Ontario relatively recently, and WILL do it here should conditions indicate it.
And yes, banks ABSOLUTELY want to get that possible foreclosure off their book and on to a subprime lender that is getting paid for that risk and isn’t a systemically important financial institution. OSFI et al are also going to be pressuring them heavily to get their books as clean as possible as fast as possible.
The Feds don’t care what happens to Harold the Jewlery Buyer. They do care what happens to RBC and then eventually CDIC. If you’ve seen Margin Call, the Bank of Canada and the heads of the major banks will 100% guaranteed act like Jeremy Irons and do what’s necessary to save the franchise even if it is “less than ideal” for housing market in GTA or the economy of Ontario.
Condodweller
at 4:03 pm
“We haven’t seen this behaviour from banks in the GTA in a LONG time.”
I have actually experienced this personally. I deal with multiple financial institutions, to keep them honest, and I had a credit line revoked that I wasn’t using and another said they would revoke it if I wasn’t using it. A third is offering to increase my limit. Notably, these were unsecured credit lines that I didn’t need nor used but when they were offered I said why not, you never know when they might come in handy. One is reasonably significant from before the days of HELOCs, or I didn’t have enough equity for it to be a HELOC when I bought my first place, and they tried to close it where I had to “use” it to keep it alive. So it has started, I imagine the next step is to tighten credit cards but yeah, I haven’t heard of anyone’s existing card being canceled.
Ace Goodheart
at 8:22 pm
For more than ten years, folks with mortgages have operated in a declining interest rate environment.
Each time you remortgaged your house, when your five year term came due, you did so at a lower rate.
Your home had also increased in value, often by hundreds of thousands of dollars (interest rates and home prices move in opposite directions).
Many people took out HELOCs and removed their new found equity, buying cottages, rental suites and renovating their existing properties.
Each year the same thing happened. Equity went up, rates went down, and everyone had more money.
That is home ownership in a falling rate environment.
Now, we are in a rising rate environment.
The opposite of the above will happen.
Each year, houses will be worth less. Often by hundreds of thousands.
HELOCs, which are demand loans, will be called in by banks. Pay up or we sell your house, power of sale.
At renewal, you will pay more interest, for less equity.
Many people will no longer qualify and will be asked to pay back what they owe, in full.
Many home owners have never managed a mortgage in a rising rare environment.
The next few years should be interesting.
Vancouver Keith
at 3:31 pm
In terms of market share, how big has the non traditional real estate financing sector become, the area of lending outside traditional banks and credit unions? Is it growing significantly?