I’m the kind of guy who gets his car repaired at the dealership.
I believe in specialization.
I believe in experts; the best at what they do.
And I believe in subject matter experts as well, so while I don’t acquiesce to the incessant requests for guest and sponsored blogs here on TRB, once in a while, I’ll look for insight from folks who can speak to certain subjects more eloquently than I.
Last week in my “Discussion Points” blog posts, I brought up two topics related to mortgages:
1) The Mortgage Market
2) First Time Home Buyer’s Incentive
The first point was really about potential changes to the mortgage market in 2020, and most of the discussion surrounded the “stress test” and any alterations that could be on the horizon.
The second point involved me voicing my displeasure with the FTHBI because it’s useless for an overwhelming majority of Canadians (zero people in Toronto/Vancouver will use this), and not only that, I don’t think it’s the government’s job to lend money to people who can’t afford to buy real estate.
So I’ve asked my mortgage broker, Tony Della Sciucca, if he would provide us with his thoughts on both subjects.
Here is what Tony had to say….
The Mortgage Market In 2020
When the Office of the Superintendent of Financial Institutions (OFSI) fully launched the “Mortgage Stress Test” in January 2018, their mission was quite simple; ensure that would-be home owners could afford (and continue to afford) to make mortgage payments in the event that interest rates would rise or potential income loss.
With rising consumer debt levels at an all-time high, inexpensive interest rates and accelerating home prices, the policy made complete sense. The notion to prevent borrowers from biting off more debt than they can chew left many of us in the industry giving this a thumps up.
However, when digging a bit deeper, there are some flaws within the “stress test” worth mentioning,
For a quick recap, the “stress test” is a metrics whereby applicants looking to purchase a home, transfer or refinance their existing mortgage from a federally-regulated lender would need to “qualify” at their contracted rate, plus two per cent, or the Bank of Canada’s five year Benchmark Rate, whichever is greater.
Presently, the Bank of Canada’s five year Benchmark rate is set at 5.19%. So, despite receiving a lower contracted rate with your lender, you will need to qualify “as if” you’re inheriting a higher interest rate. Because of this qualifying metric, the mortgage stress test reduces affordability by approximately 20% for all borrowers.
Let’s take a look at a few examples;
- interest rate is 2.99% (5yr fixed) + 2% = 4.99%. ….Qualifying rate = 5.19%
- interest rate is 3.29% (5yr fixed) + 2% = 5.29% ….Qualifying rate = 5.34%
Since the “stress test” only applies to federally-regulated institutions, credit unions and private lenders are left roaming “stress free” given that they are provincially regulated and thus, not mandated to follow the same set of guidelines outlined by OFSI policymakers.
This creates an unfair playing advantage as provincially regulated lenders will simply charge a surplus to borrowers who cannot pass the federal test. To compare, If we consider a 50 basis point (0.5%) interest rate premium on a $500,000 mortgage, that would equate to approximately $12,000 in additional interest over the five-year term.
The current method used to set the stress-test qualifying rate is based on an arithmetic mean of our big banks’ posted five-year fixed rate. Since higher posted rates favour banks when calculating pre-payment penalties, many feel that lenders can manipulate these posted rates to work in their favour to increase profit margins.
Instead, some within the mortgage industry have advocated that the stress test be correlated to the five-year government bond yield as this is what dictates the fluctuations of fixed interest rates.
Another criticism and flaw surrounding the “stress test” is that it does not apply to borrowers who renew their mortgage with their existing lender.
Once again, lenders will have the ability to charge higher renewal rates knowing that their borrowers cannot qualify elsewhere. This exemption can lead to predatory lending, with many borrowers feeling handcuffed at time of renewal.
If OFSI’s intention was to limit default loses and ease home prices from skyrocketing, then the stress test has certainly achieved this to some extent. But in terms of the efficiency and fairness, some will call it a failure, including myself.
Given the ongoing policy changes hitting the mortgage industry over the last several years, aspiring home owners are finding it increasingly more challenging and difficult to enter the real estate market.
Because of this, Prime Minister Justin Trudeau requested his federal Finance Minister Bill Morneau to “review and consider recommendation from financial agencies related to making the borrower stress test more dynamic.”
In terms of what specific changes we can anticipate from OFSI in 2020, it’s a still a little premature to tell, but many are advocating and anticipating for longer amortizations (thirty years) on insured mortgages and purchases over 1M, along with a lower and more transparent qualifying stress test.
Only time will tell!
The First-Time Home Buyer Incentive
If you’re a first-time buyer, you’ve probably caught wind of the First Time Home Buyer Incentive (FTHBI) being offered by the Federal Government.
The “incentive” which was fully launched on September 2nd, 2019 was set out to provide interest free loans in the form of “Shared Equity Mortgages” or SEM (via CMHC) for first-time homebuyers looking to enter the already scorching real estate market in cities like Vancouver and Toronto.
Doesn’t sound so bad right?
Well, before you start fist-pumping your family and friends at this “interest free loan,” there’s a catch. So, saddle up as you’re probably not going to like what’s coming next.
To recap, the incentive would allow eligible first-time homebuyers to apply for a portion of their home purchase (down payment) with the Federal Government in exchange for an equity stake in your home.
For the purchase of a resale home, the incentive or equity stake would be capped at 5%, and 10% for newly constructed homes.
Simply put, the Government would proportionally share in the profits (or loses) of your home value at time of repayment.
On the programs’ website, here’s an illustration of how this works; “You receive a 5% incentive of the home’s purchase price of $200,000, or $10,000. If your home value increases to $300,000, your payback would be 5% of the current value or $15,000. https://www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive
Still not phased and looking to apply? Well….let’s make sure you meet the requirements, along with some of the repayment conditions;
- Must Be a First Time Home Buyer
- Insured Mortgages Only ( > 80% Loan To Value)
- Have at least 5% Down Payment
- You are a Canadian Citizen, permanent resident or non-permanent resident authorized to work in Canada
- Household Income cannot exceed $120,000
- Have a combined mortgage, plus incentive that does not exceed four times the household income *
- Loan must be paid in full if the home is sold or after 25 years
- Meet all the normal default insurance requirements
If you’re feeling a bit puzzled, don’t worry you’re not alone. Many of us are too.
Assuming the best case scenario; someone purchasing a home with a down payment of 14.99% and household income of $120,000, would qualify for a maximum purchase price of $565,000.
In soaring markets such as Vancouver and Toronto, this “incentive” does very little to “incentivize” buyers where average home prices have skyrocketed to well over $850,000 in each of those respective cities.
So, is there an ideal candidate for the FTHBI and are there any benefits? Sure, if you’re willing to relocate to Regina, Saskatchewan or Thunder Bay, Ontario where average home prices still remain quite modest, then congratulations the FTHBI could be a consideration.
The benefits you ask?
Well, according to their website (read HERE), a borrower with a qualifying income of $70,000 will be able to purchase a home in Montreal for $310,000 with a Shared Equity Mortgage (SEM) and save themselves a whopping $93.35/month or $3.11/day.
In their attempt to assist Canadians trying to enter the real estate market, many of us are left scratching our heads as to how the FTHBI actually achieves this.
According to Mortgage Professionals Canada, 47 per cent of first-time buyers are putting 20 per cent down or more. These buyers would be excluded since FTHBI requires a loan-to -value of 80.01 per cent or more.
In addition, due to the number of restrictions that come with the FTHBI, specifically four-times income rule, borrowers on average will qualify for a higher priced homes and larger mortgages if they forfeit the program altogether compared to a traditional insured mortgage.
If you’re a millennial looking to buy your first home, and home prices don’t rise too much before you sell, the FTHBI has your name all over it.
Conversely, if home prices continue to soar in 2020 and beyond, get ready to pony up some serious cash as the Federal Government will be eagerly licking their chops.
Tony Della Sciucca
Mortgage Agent, FSCO Lic #12214
Dominion Lending Centres
I’m picturing Bill Morneau standing in front of a giant wheel, not so much like the wheel at The Price Is Right’s “Showcase Showdown,” but rather one that you’d see at a casino or carnival, and on that wheel, are a whole lot of different ways to change the mortgate market in 2020.
I remain unconvinced that there is some sort of “master plan” for how best to serve Canadians, and I think Mr. Morneau spinning this wheel to determine what moves to make might actually produce a better result than any well-thought-out course of action would.
For years, it was “We have to shrink mortgage amortizations!” Now, we’re looking at increasing amortizations again.
Rates are too high, rates are too low.
We want to stimulate the economy with a rate cut, but we’re afraid Canadians will take on more debt as a result.
The stress test was a great idea, until it wasn’t.
We want Canadians to afford real estate, but we’ve put measures in place that help non-residents, and punish hard-working tax-paying Canadians.
We encourage fiscal responsibility, but we’ll loan people money to buy houses they can’t afford.
We know the CMHC is over-stretched, but we’ll come up with new ways to stretch it some more.
Look, I don’t have the answers. I never said that I did. But I will say that this government continues to invest in change for the sake of change, and I don’t really understand their long-term “plan.”
Is it possible that there isn’t one?Back To Top Back To Comments