An Alphabet Soup of Economic Predictions

Which is Canada Most Likely to Experience?

You’ve likely heard of analysts using letters of the alphabet to describe the potential paths for Canada’s economic recovery.

Will that graph of the country’s GDP look like a V or more like a U? Perhaps even a W, but hopefully not an L.

Below we take a brief look at what each of the recovery shapes mean, which is most likely, and how that might affect the country’s housing markets.

Let’s take a look at the letters that have been employed to describe the “shape” of where Canada’s economy has been and where it’s headed:  

V-Shaped: The most optimistic of the scenarios, this forecasts the steep decline in Canada’s GDP bouncing back quickly and returning to pre-COVID levels in short order.

U-Shaped: Similar to the “V” recovery, but this scenario anticipates a longer period of low or no growth. However, it also describes an eventual quick return to pre-COVID growth levels. 

“Nike Swoosh” Shaped: This is a variation of the “U-shaped” recovery, but describes a more gradual and prolonged period of economic recovery.  

W-Shaped: Like the V-shaped scenario, except the W forecasts a second steep decline in economic performance—possibly due to a second wave of the virus—followed by a second quick recovery to more normal levels.

L-Shaped: This is the most dreaded of them all, describing a persistent recession that doesn’t see the economy returning to pre-COVID levels potentially for many years.
 
Which Recovery Path is Most Likely?

There’s much disagreement over which model is likely to play out.

Some expect the economy to face continued headwinds for at least the next year, with some ups and some downs, perhaps along the lines of a W-recovery.

“Our economic forecast envisions the economy continuing to operate well below full capacity into 2021,” economists with RBC Economics wrote in a research note. “The road to recovery will be slow, and it could be quite bumpy.”

Others remain optimistic that the V-recovery is still taking shape.  

“The good news is that the incoming data continue to suggest a recovery that is about as v-shaped as we could reasonably have hoped for,” noted Neil Shearing, Group Chief Economist at Capital Economics. “The bad news is that sustaining the pace of recovery will get increasingly difficult from here.”

In a separate research note, economists at Capital Economics added, “In terms of fundamentals, it now seems clear that household income has not fallen by anywhere near as much as we expected in the second quarter, despite the slump in employment.”

Then there are others who don’t think any letter—in the English language or otherwise—can accurately describe the path that lays ahead.

“I don’t think a letter is going to neatly capture what we’re going to be looking at,” Douglas Porter, chief economist at BMO, told the Financial Post. 

What’s the Impact on Canada’s Housing Market?

The fallout for the real estate and mortgage markets has been a big unknown since the start of the crisis, largely because both supply and demand fell in unison.

“The fact both sides of the demand-supply equation fell in virtually equal proportions…revealed an important characteristic of COVID-19,” RBC economist Robert Hogue wrote. “To date, it hasn’t created market imbalances.”

While home sales plummeted in April by 57% as the effects of the lockdowns took hold, the decline in home prices has so far been limited in many markets.

And with sales already rebounding in May by nearly 57% and new listings seeing a 69% increase, there are signs some markets may be back to posting year-over-year price increases in short order.

As of May, MLS benchmark prices were up year-over-year in the Greater Toronto Area (+9.4%), Greater Vancouver (+2.9%), Montreal (+11%), Ottawa (+15.7%) and Halifax (+9.3%), according to the Canadian Real Estate Association.

Still, as economic fundamentals remain below potential for the foreseeable future and as government assistance programs, such as CERB and the mortgage payment deferrals, come offline this fall, many expect modest price declines.

“We believe downward price pressure will build in most markets in the coming months,” wrote Robert Hogue of RBC Economics. “Nationwide, we expect benchmark prices to fall 7% by the middle of 2021, though believe a widespread collapse in property values is unlikely.”

Mortgage Insurers Making Headlines

CMHC Makes Policy Changes – Genworth & Canada Guaranty Stay Put

It came as a surprise to many mortgage industry insiders when the Canada Mortgage and Housing Corporation (CMHC) announced its plan to further tighten their lending guidelines on July 1, 2020. Thankfully for many potential homeowners, Canada’s two private insurers, Genworth and Canada Guaranty, have decided not to follow suit.

Citing a need to mitigate its exposure (and taxpayer’s) to what the Crown Corporation’s CEO Evan Siddall’s predicts will be a drop in house values by as little as 9% and as much as 18% due to COVID-19, and a potential surge in household debt from 176% to 200% through 2021, they implemented changes that would cut purchasing power by up to 11%.

Under CMHC’s new guidelines, which is set to go into effect on July 1, 2020, the following will apply:

• Maximum Gross Debt Service (GDS) ratios, or the max percentage of home ownership debt payments ie principal, interest, taxes, condo fees and heat when compared to gross income, will be lowered to 35% (from 39%)
•  Maximum Total Debt Service (TDS) ratios, or the max percentage of total personal debt payments relative to gross income, will be lowered to 42% (from 44%)
• The minimum credit score needed to qualify will rise to 680 (from 600) for at least one household borrower
• Many non-traditional sources of down payment that “increase indebtedness” will not be permitted. 

However, borrowers will still be able to access their RRSPs through the Home Buyers Plan or a home equity line of credit on another property they own.

According to Mortgage Professionals Canada, 61% of first-time home buyers buy with less than 20% down. And 20% of down payment funds come from borrowed sources. This move by CMHC could cut purchasing power by up to 11%.  For example, a family earning $100,000 with 5% down, with no other debt, would qualify for a $320,000 mortgage (approx.) Under the new CMHC guidelines that mortgage amount gets reduced to approx. $280,000.  

Siddall said in a statement, “COVID-19 has exposed long-standing vulnerabilities on our financial markets, and we must act now to protect the economic futures of Canadians. These actions will protect home buyers, reduce government and taxpayer risk, and support stability of housing markets while curtailing excessive demand and unsustainable house price growth.”

Critics of the move wondered out loud at the timing of these changes, when provinces have begun easing lockdown restrictions to kickstart the economy, they felt it was counterproductive to efforts focused on regaining confidence in the housing sector.  

Paul Taylor, CEO of Mortgage Professionals Canada was quoted as saying, “…I think the timing for the introduction of these restrictions is poor, especially since the Federal government itself is pouring billions of dollars into the economy to keep it afloat.”

Canada’s Private Insurers Hold Firm

In Canada, federally regulated lending institutions such as banks, non-bank lenders, credit unions and trust companies, are required to insure high ratio mortgages – those with less than 20% down –against default. There are three insurers in Canada -- CMHC is a federal Crown Corporation and Genworth and Canada Guaranty are private sector suppliers of mortgage insurance. 

After reviewing their policies and CMHC’s decision, the two private insurers have decided to NOT follow CMHC’s lead. Both insurers made statements defending their current underwriting polices and are confident in their ability to manage risk. This is positive for borrowers.

As the economy starts its slow climb to recovery, we have seen positive signs across the country as sales start to increase. 

When it comes to real estate, consumer confidence is key. As we continue to ease restrictions, continue to practice safe protocols, and consumers start to feel comfortable again, we may see both homebuyers and those critical home sellers become more active.

It’s hard to say what the true impact to the market might have been if all three insurers had decided to tighten their rules. It’s clear that having a competitive market for mortgage insurance greatly benefits homebuyers. 

Government, Monetary Policy and Fiscal Policy Reactions to COVID-19

By Mark Kerzner, President TMG The Mortgage Group

There was a second emergency reduction in the Overnight rate of 50 basis points on Friday, March 13 – to ensure market liquidity, and in response to the unprecedented economic impacts of the COVID-19 virus.  Many are anticipating yet another 50-basis points reduction that would bring the overnight rate to 0.25% in the near future.

Rates ultimately received by the end consumer are determined based on discounts or premiums from BANK Prime rates

One of the big questions following the latest emergency Overnight rate reduction by the Bank of Canada last Friday was whether or not Banks would follow suit with their PRIME rates and if so by what amount.

Yesterday afternoon it was confirmed that Prime lending rates are dropping but the price that new consumers will pay for variable based lending products may in fact be staying flat or potentially going up.  Discounts from bank PRIME of up to 1% appear to be vanishing. For existing variable rate and line of credit clients, your rates should be decreasing.

Just to reiterate, existing discounts for variable in-force mortgages are not changing.  Current discounts would related to new, renewing and refinancing mortgage clients who are choosing variable rate products.

After the Global Financial Crisis over a decade ago, variable rate discounts went from P-85 to P+100 almost overnight. One difference is that the ARM was a much more popular product a decade ago as the spread between it and fixed rate was much more pronounced. Today, the vast majority of consumers have been taking fixed mortgages, and are likely going to continue to do so.

Some have been asking questions about how is it now, that with the reduction in PRIME rates, are we seeing increases in mortgage lending rates.  As bond yields fluctuate (in part due to the oscillating markets) and liquidity premiums starting to dramatically increase, the cost of funds and the desired margins earned by lenders increases.

The Government and Regulators are using other fiscal policy stimulants to work to protect the economy as well.

To stabilize funding, the Government of Canada, through CMHC, announced yesterday they were buying $50 billion of insured mortgage pools.

OSFI mandates the rate of the Domestic Stability Buffer – a rate of capital that is set aside to safeguard against shocks in the system. Over the past few years that amount has continually increased.

It was less than a year ago in April 2019, that the Big 6 banks were required to hold risk weighted capital of 2.25% against the backdrop of increasing indebtedness of Canadian households and increasing ‘vulnerabilities’ faced by those lending institutions.

Lowering the capital requirements to 1% increases the ability for banks to lend approximately $300B in freed up capital. This is largely anticipated to support small business loans, helping those firms meet immediate business and payroll obligations.

In the mortgage world one announcement that received attention on March 13th was OSFI suspending consultation on the minimum qualifying rate for uninsured mortgages. This means the previously announced changes to the Stress Test were now not coming into force. I can assume that OSFI and the Minister of Finance never likely imagined rates dropping this low and having people qualify at 4% (or lower) when they likely consider 4% to be a more normalized rate to begin with (and not a buffer rate).

For those with mortgages, it’s now very important to speak with a licensed mortgage broker to assess options you may have available to refinance, early renew, extend term, choosing longer term fixed rate products, etc.

For those of you in financial distress who are existing mortgage consumers you have a variety of options available to you. A mortgage professional can help you navigate that landscape with your current lender and potentially with your mortgage insurer as well.  Options may include, payment deferral, loan re-amortization, capitalization of outstanding interest arrears and other eligible expenses and special payment arrangements.

This situation is unprecedented and is requiring swift and significant action.

The Bank of Canada and the Federal and Provincial Governments are setting up defence mechanisms during this unprecedented global pandemic. Ensuring the financial system operates, protecting deposits, ensuring liquidity, and providing a means of support for business continuity are at the forefront.

A mortgage professional has always been best suited to guide you through your personal situation and to provide you with options worthy of consideration. That has never been truer than Today.

Know Your Words – Mortgage Words, that is

Buying a home is a big investment. With so much at stake, it’s important learn what you can about the homebuying process as well as understanding the “language” of mortgage lending.

A recent survey conducted by the Financial Consumer Agency of Canada, and the Bank of Canada in 2019 suggested that homeowners don’t have a good understanding of the terminology used in mortgage lending. A large percentage -- 74% of homeowners or soon-to-be homebuyers -- did not fully understand what a mortgage term or amortization period were.

So, to help you better understand what you’re getting into, here is a partial list of terms to increase your mortgage knowledge.

• Adjustable Rate Mortgage (ARM): A type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. The interest rate resets based on the lender’s Prime rate plus or minus a variance. With most ARM mortgages, different from VRM mortgages (variable rate mortgages) the mortgage payment adjusts automatically with each change in interest rate.
• Adjustment Date: A date used by the borrower and lender to move payment dates to a schedule that suits the borrower. Between the funding date and the adjustment date, the borrower typically pays interest only vs. principal and interest.
• Amortization Period: The number of years over which you have to repay a loan. The most common period is 25 years for a first-time homebuyer.
• Benchmark Rate:  A qualifying rate set by the Bank of Canada and can be adjusted at any time.  All insured and insurable mortgages must meet the standard affordability tests (Gross Debt Service and Total Debt Service) “as if” the interest rate is the Benchmark Rate. Also referred to as a “stress test”.  Designed to ensure that borrowers and the housing market can sustain higher interest rates.
• Bridge Financing: (Also referred to as Interim Financing) A loan against a property being sold allowing the owner to use their equity to purchase a new property and take possession of the new property before the Closing Date of the sale.  There must be a firm sale of the property being sold.
• Closed Mortgage: A mortgage whose term cannot be altered until maturity, unless the lender agrees and the borrower agrees to pay a fee called a pre-payment penalty.
• Collateral Charges: Unlike a standard mortgage, a collateral charge is often re-advanceable, meaning the lender can lend you more money after closing without you needing to refinance and pay a lawyer. A collateral charge may not be transferable -- it cannot be assigned (switched) to a new lender like a regular mortgage.
• Deposit: Money placed under the care of a third party (real estate representative, lawyer or notary) by the purchaser when he makes an Offer to Purchase. The money is paid to the vendor upon closing the sale or returned if the conditions are not satisfied. This is typically held in trust.
• Downpayment: The part of the home purchase money that is not paid out of the mortgage loan.
• Equity: The total value of the owner’s interest in a property, calculated as the value of the home less the total outstanding obligations.
• Fixed Rate Mortgage: A mortgage for which the rate of interest is fixed for a specific period of time (See term).
• Gross Debt Service Ratio (GDS): The percentage of the borrower’s gross monthly income that is used for monthly housing payments (principal, interest, taxes, heating costs, and half of any condominium fees).
• HELOC: A home equity line of credit (pronounced hee-lock) is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's equity in his/her house. These are often re-advanceable.
• Insurable Mortgage: This type of mortgage can now be considered the new “insured mortgage”. These are still eligible for default insurance but may be portfolio-insured at the lender’s expense or high-ratio insured at the client’s expense.
• Insured Mortgage: A mortgage transaction where the default insurance premium is paid by the client, as is typical in a high-ratio mortgage. 
• Interest Rate Differential (IRD): A compensation charge that may apply if you pay off your mortgage prior to the maturity date, or pay the mortgage principal down beyond the amount of your prepayment privileges, usually in a fixed-rate mortgage.
• Loan-to-Value: The amount of the mortgage loan compared to the value of the property.
• Monoline Lender: Monoline lenders focus on just mortgages as opposed to banks and credit unions which offer a variety of services. 
• Mortgage Default Insurance: If you have a high-ratio mortgage (more than 80% of the lending value of the property) your lender will probably require that you purchase mortgage loan insurance, which is available from CMHC, Genworth Canada or Canada Guaranty.
• Mortgage Life Insurance: Provides coverage for your family should you die before your mortgage is paid off. This insurance can be purchased through your mortgage professional.
• Open Mortgage: Allows the borrower to pay any amount of the principal, including the entire balance, off at any time without penalty. You may pay a higher interest rate for the flexibility of an Open Mortgage, but perhaps warranted if a sale is anticipated or in the case of buying property to fix up and sell.
• Portable Mortgage: A mortgage with an option that allows a buyer to transfer a current mortgage to a new property. (Subject to full borrower and property approval)
• Qualifying Rates: The rate used to qualify a borrower for a mortgage. Lenders use these rates to calculate your debt-service ratio, which is the ratio between your debt and income. This serves as a gauge of your ultimate ability to repay the obligation over the life of the mortgage.
• Stress test and Stress Test Rate: Similar to Benchmark Rate and used for uninsurable mortgages. The Stress Test rate is the higher of the contract rate plus a government defined increment, currently at 200 basis points, or the current Benchmark Rate. All uninsurable mortgages must meet the standard affordability tests (Gross Debt Service and Total Debt Service) “as if” the interest rate is the Stress Test rate. Designed to ensure that borrowers and the housing market can sustain higher interest rates.
• Term: The length of time that mortgage conditions, including the interest rate you pay, are in effect. At the end of the term, the borrower (you) can pay off the mortgage or renew for another term. Mortgage terms can range from six months to ten years; the most common is 5 years.
• Un-insurable Mortgage: These mortgages are not eligible for default insurance and apply to refinances, rental properties, stated income clients, and on purchases greater than $1M.
• Variable Rate Mortgage (VRM): A type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan.  The interest rate resets based on the lender’s Prime rate plus or minus a variance.  With most VRM mortgages, different from ARM mortgages (Adjustable Rate Mortgage), the mortgage payment does not adjust automatically change with each change in interest rate.  The lender typically reminds you that you may adjust the payment by contacting them. 

Of course there are more, but these seem to be the ones that homebuyers often ask about. If you need clarification or have question, contact your mortgage professional.

Buying a house doesn’t have to be stressful

Buying a house should be an exciting time but it can get pretty stressful, not only for first time home buyers, but for move-up buyers as well.

The number one worry is finding problems after moving in. The next worry is that prices will drop and the house won’t be worth the original purchase price.

You can reduce some of that stress and worry by putting together a team of experts who will guide you through the entire process. 

It starts with a mortgage professional who will take a look at your finances, including your credit score, to qualify you for a mortgage. A lot of information about you and your credit management abilities come up during this process. For example, derogatory items may be on your report, but that doesn’t necessarily deny your ability to qualify for a mortgage. Everyone’s situation is different and a mortgage agent is familiar with most situations, and can offer options.

Once you know the amount of house you qualify for, you can confidently work with a Realtor to find the right home for you. On average, home buyers spend five months house-hunting and visit 10 locations before deciding to buy. It’s certainly a good idea to take your time to make sure to get the house that’s right for you. 

Interestingly, a 2013 BMO Psychology of House Hunting report found that 33% of home buyers felt rushed into making a purchase – that increased to 39% for first timers. Sixty-eight per cent were prepared to settle for a home that was less than perfect. Four-fifths of prospective buyers said they know a home is right for them as soon as they step inside. So, you may not be alone.

Once you’ve put together the Offer to Purchase with a Realtor, working with a trusted lawyer is the best way to make sure there are no surprises at closing. The bottom line is to take your time, work with professionals and do some research. 

Here are the suggested steps to make sure you get on the right track and into your new home:

• Determine the location and the type of home to suit your  needs. Most people will have an idea of where they want to purchase their new home based largely on familiarity and convenience. For example, living close to work or schools might be a priority, or selecting a certain area of town with parks and amenities, and/or walkability scores. This is also a good time to think about how much you want to spend and what you can afford.
•  Get your finances in order. During the pre-approval process is a good time to make sure you have the finances to cover your down payment and disbursements on your anticipated purchase.
•  Start your home search. How you find the perfect property is entirely up to you. Many home buyers enlist the services of a Realtor. It’s important to only look at homes within your budget.
• Hire professional services. You will need a lawyer to complete a real estate transaction. A real estate lawyer ensures your paperwork is correct and that the transaction is complete. They will review the contract and mortgage documents, conduct a title search, purchase title insurance on your behalf, register the property in your name, get signatures, prepare a Statement of Adjustments that shows the amount you will pay in closing costs, and collect and disburse fees.
•  Hire a  home inspector. Home inspections have become part of the homebuying process for both new home purchases or resales. It might seem like a waste of money to pay for a home inspection for a newly-constructed home, but you might consider getting an inspection a few months before the expiration of the New Home Warranty.  Better safe than sorry.
• Insurance Agent. Lenders also require you to have fire insurance so an insurance agent will help you find the best coverage and the best price.
• Make an offer. This is done by presenting the seller with an Offer to Purchase. Sellers have the right to accept, reject or put in a counter offer. Remember to include all necessary details in your purchase offer. The deposit will be paid, in trust, to the Realtor.

If you’re planning on purchasing a first home or a new home, then get started with a mortgage professional.

Important Mortgage Features to Consider

Real estate continues to be a hot commodity in most parts of the country, despite the many changes we’ve gone through over the last few years. Prices in some areas are up and listings are in short supply in other areas, but the housing market overall has been moderating over the last year, and analysts are forecasting a balanced market for the rest of 2019 and into 2020.

Interest rates are comparatively low and competition among lenders to offer favourable rates is high.  It’s always a good idea to read the fine print to make sure you’re getting the best mortgage product, at the best rate, for your particular need.

Because lenders do differ, it’s important to know what features are important to you before deciding on a lender. Here are six characteristics of mortgages to assist home buyers assess their offers:

1. Blend and Extend. The “increase and blend” option has been around for almost 20 years and may be an option in some situations. For example, if your current lender doesn’t allow a change in the maturity date, then you’re locked into the remaining time left on the term.  While that’s not the end of the world, in a rising rate environment this can be inconvenient. If you’re moving up, and buying at your maximum loan-to-value, you probably don’t want just a 1 to 2-year term, and with the new benchmark rule, you may not even qualify.  If rates have dropped since the original mortgage you could run into the “Interest Rate Differential” (IRD), which might be too large and you can’t move.  
2. Early Payout Penalty Calculation. Some chartered Banks are known for their extremely large IRD penalties.  If you don’t know whether you’ll keep the mortgage for the entire term then make sure you understand the payout penalty. 
3. Mortgage Registration. Is the mortgage registered as a non-standard charge, either a running account, or a collateral charge? If so, then it becomes challenging to switch this mortgage out to take advantage of lower rates, although collateral switches are becoming more widely available. Consider this scenario: If the lending institution knows you will have to incur $1,000 or more in possible costs, as well as put in the time and effort to complete a refinance with another lender, then there might be little incentive to offer you best rates at renewal time when a small rate reduction might be enough to keep your business. On the other hand, there are advantages such as making it easier to qualify with fewer expenses down the road if you need to access additional funds.
4. Pre-Payment Privileges. Is the lender offering 10/10, 15/15, or 20/20?  That means allowing prepayments of 10%, 15 % or 20% annually on the outstanding balance of the mortgage.  Also, can these lump sum payments be made anytime per year or only at the mortgage anniversary? And how easy is it to make lump sum payments? Do you have to go into the branch, call a 1-800 number? Or can you simply go online and do it.  These are important factors to consider.
5. Porting Features. This feature can vary from lender to lender. Read the fine print, especially if you know you might need to move before the mortgage maturity date. Some lenders require a sale and purchase to occur on the same day in a port, which can be inconvenient. A more flexible, and available program allows typically up to 60 days gap or 60 days overlap; and then there can be exceptions allowing longer periods beyond that.
6. Online Access. All of the chartered Banks offer online access as do a number of monoline lenders. Generally online access allows you to see your balance, make additional lump sum payments, or make a payment increase. This can be a time-saving feature for tech-savvy consumers. 

There is more to getting a mortgage than just rate. Talk to a mortgage broker first who can help you navigate the mortgage terms and who can help you find the best product for your needs.

Mortgage fraud becoming more common

Real Estate and mortgage fraud is a growing concern to the industry as high prices in some markets have squeezed buyers and attracted perpetrators. The victims of fraud can include homeowners who find their homes have had mortgages placed against them by unknown individuals. Other victims include buyers in neighbourhoods or in condo complexes whose homes have been artificially inflated or deflated.

Issues of fraud can range from prospective home buyers submitting fake or altered documents including letters of employment, bank statements or tax returns, to money laundering schemes, identity fraud and title fraud.

While some may consider upping the rental received on a basement suite or deciding to leave something out of their mortgage application as harmless “white lies,” that are not doing anyone any harm, the reality is that any type of fraud puts everyone at risk -- lenders, insurers, consumers, and the economy.

In a recent Mortgage Professional Canada Fraud Summit a panel of experts weighed in on the state of fraud in Canada and what’s being done to mitigate risk for all involved.

In an online survey, Equifax found that 84% of Canadians felt the country’s housing market had become too expensive for first-time home buyers. Sixteen per cent thought mortgage fraud was a “victimless” crime. And 8% admitted to making false statements on their own applications.

Why is fraud becoming more common?

The Canadian mortgage industry’s rules and guidelines have become more complex. As prices increase, coupled with short housing supply, some Canadians feel they need to get into the market fast, even if they can’t qualify in the standard way.

In a hi-tech world it’s not always the case that lenders and borrowers meet face-to-face and more and more applications are received over the Internet, fax or e-mail. Then there’s also pressure from consumers to have those deals close quickly.

Types of Fraud

There are two general categories of fraud:

• Fraud for shelter – There may be no intention to default but an individual commits fraud in order to get a mortgage on a home they could not otherwise obtain or afford.
• Fraud for profit -- There is an intent to default and/or flip the property, then walk away with the proceeds. For example, title fraud  -- a fraudster assumes the identity of a homeowner, then proceeds to use forged documents to transfer ownership of a property and will use fake identification to get the mortgage on the property, then walks away with the money. 

How do they do it?

Actually, there are many ways but banks and non-bank lenders watch for three of the most frequent methods:

Falsifying Owner Occupancy

This is quite easy to --a rental property requires a 20% down payment or more. However, if a buyer says they’re purchasing an owner-occupied home, with a 5% down payment, then turns around and rents it, there’s not a lot that can be done about that in advance of funding.

Playing with debt

If someone can’t qualify for a mortgage due to a high debt load, they may ask friends or family members to loan them the money to pay off debt, which, of course, does not show up on a credit check. But they still owe the debt.

Lender also look more critically at the following: Private purchases and sales, high ratio mortgages, equity gifts, powers of attorney, recent activity on a title and if the property is free and clear.

The costs of mortgage fraud

There are financial costs --insurer payouts for defaulted loans and police and court costs to deal with offenders. Then there are the costs to the individuals who were not aware of the fraud and who are in danger of losing their homes. There is a reputational risk for all mortgage brokers and the erosion of consumer trust.

What’s next

Detecting fraud has become a priority for the mortgage industry. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is investing in automation with a focus on fraud for commission, increasing income verification intelligence and improving Fraud Trending Reports.

Also, compliance is getting stricter and lenders and insurers are becoming more sophisticated and more hi-tech. They have the ability to model applications and behaviours, which offers a multi-view of a borrower. There is also pattern recognition software used by insurers. 

But, fraudsters don’t go away, they come up with more elaborate schemes. The industry and consumers need to stay on top of it all. So, educate yourself about fraud to better protect yourself.

Buying homes in the millennial age

Late last Fall, Mortgage Professionals Canada (MPC) polled 2000 Canadians -- 540 were millennials (18-34-year-olds) -- across the country to get their feedback about the mortgage industry, mortgage brokers and the housing market in general.

Not surprisingly, millennials see the housing market quite differently than their parents and approach home ownership from the view of generating income.

Overall, four-in-ten agree that real estate is a good long-term investment and classify a mortgage as “good debt”.

Thirty-four per cent of First Time Home Buyers think that generating income from the property is important and 21% plan to rent out a part of their home. New homebuyers who renovated did so to add a rental space.

Now considered the “new normal” generating income from a property is more important these days to young people, whether as a direct investment or to help pay off their mortgage by renting out a portion of their own home.

Where does the down payment come from?

The rising costs of home ownership has been a barrier for many millennial home buyers who are challenged to come up with the down payment. However, their strategies are not unusual and are similar to the ways the boomer generation came up with their down payments. Here are the top three sources:

1. Personal savings (60%)

2. Gift from parents or other family members (19%)

3. RRSP withdrawal (12%)

However, in today’s market, it’s more like a race -- save for a down payment, then try to buy something before prices are unreachable. 

Importance of home ownership

A 2016 poll by CIBC found that home ownerships is important to young buyers, like most Canadians. According to the poll,  85% view home ownership as a priority.

More good news – millennials are well-prepared for home ownership but were a bit surprised that costs were slightly more than they expected. 

Who to call for a mortgage?

So, who do millennials call when they want a mortgage, mortgage broker or bank? Well, they’re almost equal-- 33% use their usual bank and 29% get a referral from family and friends as well as Realtors for a mortgage professional. Here are the top five reasons millennials like working with a mortgage broker:

1. To get the best rate

2. To get multiple quotes

3. To help with the paperwork

4. To get help with the process

5. Better customer service

Overall satisfaction with working with a mortgage broker is higher than those who worked with a bank – 78% compared to 69%.

While it’s true that mortgage broker share is trending upwards, there are still some challenges for the industry. The main challenge is broker awareness – millennials don’t seem to know how brokers can help them. 

However, once a home buyer works with a broker they tend to use that same broker again, if the broker continues to stay in contact. Seventy-seven per cent of 18-34-year-olds would like to contacted after the deal is finalized. That contact can be via newsletters, periodic updates about the mortgage industry, in-person meetings and/or phone calls.

Help for first time home buyers

Affordability is the key for millennials and in Ontario and BC they are getting a bit of help. The Ontario government is doubling the rebate on the land transfer tax for first-time homebuyers to $4,000.  

The Ontario Real Estate Association said the increased rebates of the land transfer tax will help more young families achieve their dreams of home ownership.

In BC, first-time homebuyers have access to an interest-free loan from the B.C. government. This new provincially-backed loan program matches the amount a first-time buyer has saved for a down payment -- up to $37,500, or five per cent of the home’s purchase price.

Bottom line: There is continued optimism about the housing market.

10 crystal ball predictions for 2017

We are living in uncertain times..again. So, what can Canadians look forward to in the upcoming year – the unpredictable, for sure; however, there are a few trends we can pretty much bank on – maybe.

1.  Fixed rate mortgages are increasing. Since the U.S. election we have already seen some upward pressure on bond yields, which is one of the reasons fixed rates have increased.  The U.S. Federal Reserve has already started to raise its rates. This may put pressure on the Bank of Canada (BoC) to start raising the overnight rate in 2017 and into 2018. 
2. Trade disputes with the US. The incoming president of the US has already said he will get tough on trade deals. Our softwood-lumber agreement will soon expire and you can be sure that will be a tough negotiation.
3.  Oil prices may be higher – this is already happening, which may lead to improvements in  the economies of Alberta and Saskatchewan.
4.  Provincial growth. Royal Bank of Canada expects Ontario and Manitoba to be co-leaders in economic growth in 2017 while Alberta could place third and British Columbia and Saskatchewan may tie for fourth spot.
5.  The battered loonie may make some gains. Economist Todd Hirsch predicts the Canadian dollar will dip 70 cents early in the year, but will finish out the year at 78 cents. He also predicts the Federal Reserve will raise rates three times in 2017, while the Bank of Canada will sit on the sidelines until 2018. However, the loonie should stabilize and regain some ground toward the end of the year.
6.  Economy will expand to 2%. Bank of Montreal economist Douglas Porter predicts that the federal government’s long-awaited infrastructure stimulus measures should boost the economy.
7.  Changes to NAFTA & TPP. This could have a negative impact on Canada’s growth.  The bulk of Canada’s exports go to the US. However, the new president hasn’t said too much about Canada, yet. In a best-case scenario, our trade ties could get stronger.
8.  The pace of home prices will slow, especially in B.C. The latest numbers from the Canadian Real Estate Association (CREA) and the freshest reading of the Teranet-National Bank home price index are already showing this trend. An ample supply of listings relative to demand is anticipated to keep price gains in check.
9.  Help for first-time homebuyers. CREA predicts that housing sales, nationally, will decline, especially in BC and Ontario due affordability issues and tightened mortgage regulations. However, both provinces have introduced measures for first-time homebuyers to help with affordability.
10.  Housing sales will rise by 3.5% in Alberta. This is a hopeful prediction for the hard-hit province.  Sales are also forecast to improve modestly in Manitoba and New Brunswick. Sales will ease  slightly in Saskatchewan, Nova Scotia, Prince Edward Island and Newfoundland and Labrador.

Happy New Year!

The state of the mortgage industry

By Mark Kerzner, President, TMG The Mortgage Group

Perhaps it's just that I am feeling a little nostalgic today or perhaps it's the Toronto heat and humidity starting to get to me, but I was curious to see just how far we, as a mortgage industry, have come over the past number of years.

There are many of you who were not working in this industry at the end of the last decade, a time when institutional 'A' lending included beacon scores of 620 or higher. In fact, there was a 'sandbox' that allowed lenders to extend as much as 3% of their loans to clients who had beacon scores as low as 580.

At the same time 'A' lenders were able to provide loans on stated income; 65% equity deals were commonplace; rentals and refinances could be had up to 95% loan-to-value; mortgagors could amortize to 40 years and purchasers could borrow with $0 down.

Perhaps we went too far.

On the policy side

When the Global Financial Crisis (GFC) hit, we witnessed a market collapse in the United States. Canadian regulators, policy makers and government did not want to expose us to the same fate. They enacted a series of regulation and policy changes, which did a good job to ensure prudent lending practices.

• Amortization terms were reduced 
• Loan-to-value limits were changed for refinances and rental properties. 
• Restrictions on lines of credit limits were introduced
• There were more stringent underwriting guidelines, including higher beacon scores.
• And so on… 

And while recoveries were muted in other countries, our economy, fueled by a buoyant resource sector and low interest rates, allowed our housing market to remain robust. With low interest rates and a healthy housing market, prices continued to rise.

The increase in home values has been most noticeable in Toronto and Vancouver. Policy makers and regulators who were once viewing decisions based on ensuring strong credit standards are now also viewing decisions under the microscope of appreciating prices and increasing debt levels.

In the early winter of 2015/6, we saw the introduction of larger down payment requirements for higher-valued homes. We are now hearing about increased capital requirements for homes in certain geographic areas and most recently, there have been suggestions that we deal with supply side constraints with demand side policy restrictions. These latest recommendations are all in an effort to help slow down a housing market to prevent a potential crash.

On the mortgage supply side

Around the same time as the GFC started to impact liquidity, lending guidelines, etc., the composition of the Canadian lending environment also started to change.

First, a number of alternative lenders left the market; for example: Accredited and GE Money. Then, a number of 'A' lenders either shut down or stopped originating loans through mortgage brokers such as FirstLine, HSBC, ING, VanCity.

While we have lost a number of lenders, which has the potential to impact competition and ultimately the rates offered to clients, a number of new entrants have entered the market as well. RMG emerged stronger than before as well as Marathon Mortgages and Manulife Financial, to name a few.

And while guideline changes have made it much harder for many borrowers to qualify for 'A' lending products, there has been a resurgence in the alternative and private lending markets to fill that void.

Putting the two sides together

When I look back on our industry I feel a huge sense of pride. We have navigated through constant change with leadership and professionalism. In fact, broker share has grown from approximately 23% to 30% during these tumultuous times.

The strength of the mortgage broker channel is leading to consumers saving significantly on their mortgage costs as well. A 2011 study by the Bank of Canada said the average discount of borrowers who use a broker was 19 bps.

Even if that number of 19 basis points is overstating today’s savings and we reduce it by nearly half, say to 10 basis points, that means that of the approximate $75B in total mortgages originated by brokers, Canadians save nearly $75,000,000 (per year) in their mortgage payments.

Furthermore if the entire mortgage market is $225B in annual mortgage production and the remaining $150B not originated by brokers saved only 5 bps on their mortgage transactions due to the competition enabled by the broker channel, Canadians saved a further $75M in payments annually. Those funds could be used for spending or to pay down more expensive forms of debt.

The mortgage industry was once thought to be a low risk, moderate return business for the banks. It certainly was not front page news. Today, discussion about interest rates, home values, qualifications, and economic drivers from housing seems to be part of our regular conversation. As Canadians access more and more information, they continue to select mortgage brokers to present them with options to help them secure home financing solutions best suited for their unique needs.

Top Six Mortgage Features

Real estate is a still a hot commodity in most parts of the country, and it’s also a competitive market. Prices are rising and listings are in short supply. And everyone wants your business -- from realtors to mortgage lenders. Interest rates are low and competition among lenders to offer favourable rates is high.  However, it’s always a good idea to read the fine print of these” low rates” to see if they are the best rate for your situation.

Steve Nipius, TMG’s Deal Centre Manager has complied his Top Six Strategies to assist home buyers assess their mortgage offers to make sure they’re getting what they need. It’s important for consumers to understand what features are important to them before deciding on a lender based on interest rate alone.

Take a look at some of the features you might consider:

1.  Blend and Extend. The introduction of the Benchmark qualification rate a few years ago has encouraged more lenders to offer this feature, whether on a refinance or a port and increase. For example, if your current lender doesn’t allow a change in the maturity date, then you’re locked into the remaining time left on the term.  While that’s not the end of the world, in a rising rate environment this can be extremely inconvenient. If you’re moving up, and buying at your maximum loan-to-value, you probably don’t want just a 1 to 2 year term and with the new benchmark rule, you may not even qualify.  If rates have dropped since the original mortgage you could run into the dreaded “Interest Rate Differential” (IRD) which might be too large and you can’t move.  Lenders that allow a blend and extend simply blend your current rate with the now current rate. 
2.  Early Payout Penalty Calculation. Some chartered Banks are known for their extremely large IRD penalties. The wording in some other no-frills products refers to the payout penalty as the greater of 3% of the balance or IRD -- this would mean a $15,000 minimum penalty on a $500,000 mortgage. Some lenders also carry large re-investment fees. If you don’t know you’ll keep the mortgage for the entire term then make sure to read the fine print in your mortgage documents, especially as it pertains to the payout penalty.
3.  Mortgage Registration. Is the mortgage registered as a non-standard charge, either a running account, or a collateral charge? If so, then it becomes almost harder to switch this mortgage out to take advantage of lower rates. Consider this scenario: If the lending institution knows you will have to incur $1,000 or more in possible costs, as well as put in the time and effort to complete a refinance with another lender, then there is little incentive to offer you best rates at renewal time when a small rate reduction might be enough to keep your business.   
4. Pre-Payment Privileges. Is the lender offering 15/15, or 20/20?  That means allowing prepayments of 15 % or 20% annually on the outstanding balance of the mortgage.  Also, can these lump sum payments be made anytime per year or only at the mortgage anniversary? And how easy is it to make lump sum payments? Do you have to go into the branch, call a 1-800 number? Or can you simply go online and do it.  These are important factors to consider.
5. Porting Features. This feature can vary from lender to lender. Read the fine print, especially if you know you might before the mortgage maturity date. 
6. Online Access. All of the chartered Banks offer online access as do a number of mortgage banks, including First National and Street Capital. Generally online access allows you to see your balance, make additional lump sum payments, or make a payment increase. This can be a time-saving feature for tech-savvy consumers.

Yes, there is more to getting a mortgage than just rate. Talk to a mortgage broker first who can help you navigate the mortgage terms and who can help you find the best product for you needs.

Creating a competitive lending environment

The ongoing government policies that have intended to slow the housing market have certainly shown their desired effects over the past few years.  We have seen changes to amortizations, debt service ratios; reduction in the maximum amount Canadians can borrow to refinance their current homes from 85% to 80% loan-to-value, and limits on the maximum loan-to-value on HELOCs to 65%. The hardest hit was first-time homebuyers. And the most recent changes affected investors, those who purchase second homes, and the self-employed.

However, recent economic conditions suggest that mortgage activity will trend upwards for the near future as a modest rise in employment -- 1.2% in 2014 and 1.9% in 2015 according to CMHC’s most recent Housing Market Outlook -- and disposable income is projected to support housing activity.

House prices in many markets are still increasing and sales are healthy in most parts of the country. This is causing concern for Canada’s top banking regulator. Mark Zelmer, deputy superintendent of the Office of the Superintendent of Financial Institutions (OSFI), in a speech last week, focused on the continuing growth in household debt relative to income.

“I would not presume to claim that borrowers are acting irrationally or do not know what they are doing. But, by the same token, it is clear that the ability of the household sector as a whole to absorb major shocks is less now than it was a decade ago,” Zelmer said in a prepared speech.

Zelmer also said stress tests that show Canadian banks are prepared for a downturn, should not be viewed as overarching “safe harbours” because they are based on models and arbitrary assumptions. “Boards and senior management of financial institutions need to apply judgment in a forward-looking manner and not become too complacent in their capital planning exercises,” he said.

While the mortgage rule changes have created a tighter lending environment among the Big Banks, smaller institutional lenders are developing mortgage products to fill the void. Banks do carry a slight competitive edge in the market because they can cross sell to customers. However, smaller lenders are becoming more innovative with their product offerings, which is good news for consumers.

According to Paul Grewal, president of Street Capital Corporation, smaller lenders are continuously looking at different ways to provide a broader product line in order to differentiate itself from the competition.

“Market competition is always fierce and a healthy component of any industry. Although recent mortgage regulation changes have not reduced market competition as a whole, the industry is definitely changing.”
It’s not surprising that OFSI is speaking out now. The spring mortgage market is always a time of high competition and as a result, lower mortgage rates are being offered across the industry. “Competition is always beneficial to consumers -- more choice, more competitive pricing and more product selection are being offered,” Grewal said.

Street Capital is currently in the process of restructuring to become a bank, which will enable the lender to offer new products and services like credit cards and GICs through the mortgage broker channel. This, in turn, will help create a competitive environment for mortgage brokers who will be able to diversify their offerings to consumers.

Hassan Shaikh, Assistant Vice President, Investments, for MCAN Mortgage Corporation, agrees that innovation is key to ensuring a competitive environment that will benefit consumers.
“We, as lenders, have to bring something to the table; one factor might be competitive interest rates,” he said. “However, there are many factors.”

Some of the other factors are those that a consumer won’t see directly but will feel the effects. For example, Shaikh mentions turnaround times and relationship management as two important factors. A smaller lender is better able to move on mortgage transaction quickly, which has a distinct advantage for a certain type of client.

Also, by having built a strong relationship with an underwriter, a broker will have the added benefit of working with a processing team who will try to get an approval on the more difficult deals. This makes the broker invaluable to his client.

Overall, consumers are the beneficiaries of a competitive environment. The introduction of new mortgage rules was the genesis for change, and for a time, it looked as if the competitive environment had been eroded. The industry lost lenders; lenders eliminated many of their product offerings; and the pool of potential home buyers was reduced.

However, smaller lenders and new specialized lenders have stepped up to the plate and the industry is, once again, competitive.