Five-year fixed mortgage rates continued their upward march last week as the five-year Government of Canada (GoC) bond yield they are priced on hit its highest level in seven years. Meanwhile, five-year variable-rate discounts deepened, further widening the gap between five-year fixed and variable rates.

When I started working in the mortgage industry in 2005, variable rate mortgages saved you more money than fixed rate mortgages 95 out of the past 100 years. First time home buyers were worried about what their home costs would be and avoided variable rate mortgages (VRM’s) because of the risk of rates going up higher than the fixed rate, but experienced home owners often took a VRM at mortgage renewal time.

However, in the past 5 years, most people have gravitated towards fixed rates because the gap between fixed and variable rates was small enough that the cost of uncertainty outweighed the potential reward for most borrowers.

Once again , the gap is widening. While fixed rate mortgages are going up due to the bond yield, variable rate mortgages have moved in the other direction.  Two years ago a VRM would be offered at Prime rate + .20%,  but later it reverted to Prime – .30% . In recent months, rates have dropped even further with some lenders offering Prime -1.0% !  You now have a choice between a 5-year fixed rate of 3.44-3.59% depending on the lender and a variable rate with a discount that calculates out to 2.45% . With a gap this large, it’s worth considering if you are risk tolerant enough to have a VRM.

Even if you are skittish, you can ask your Dominion Lending Centres mortgage broker to notify you if rates are going up and switch you to a fixed rate if they go above a certain percentage. Will your bank do that for you? I don’t think so. Be sure to have this discussion with your broker when your mortgage comes up for renewal or if you are considering a home purchase.

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DAVID COOKE

Dominion Lending Centres – Accredited Mortgage Professional

As many of you may remember, this past October the Office of the Superintendent of Financial Institutions (OSFI) issued a revision to Guideline B-20 . The changes will go into effect on January 1, 2018 but lenders are expecting to roll this rules out to their consumers between December 7^th – 15^th, and will require conventional mortgage applicants to qualify at the Bank of Canada’s five-year benchmark rate or the customer’s mortgage interest rate +2%, whichever is greater.

OSFI is implementing these changes for all federally regulated financial institutions. What this means is that certain clients looking to purchase a home or refinance their current mortgage could have their borrowing power reduced.

 What to expect

It is expected that the average Canadian’s home purchasing power for any given income bracket will see their borrowing power and/or buying power reduced 15-25%. Here is an example of the impact the new rules will have on buying a home and refinancing a home.

 Purchasing a new home

When purchasing a new home with these new guidelines, borrowing power is also restricted. Using the scenario of a dual income family making a combined annual income of $85,000 the borrowing amount would be:

Refinancing a mortgage

A dual-income family with a combined annual income of $85,000.00. The current value of their home is $700,000. They have a remaining mortgage balance of $415,000 and lenders will refinance to a maximum of 80% LTV. The maximum amount available is: $560,000 minus the existing mortgage gives you $145,000 available in the equity of the home, provided you qualify to borrow it.

In transit purchase/refinance

If you have a current purchase or refinance in motion with a federally regulated institution you can expect something similar to the below. A note, these new guidelines are not being recognized by provincially regulated lenders (i.e credit unions) but are expected to follow these new guidelines in due time.

Source (TD Canada Trust)

These changes are significant and they will have different implications for different people. Whether you are refinancing or purchasing, these changes could potentially impact you. We advise that if you do have any questions, concerns or want to know more that you contact your Dominion Lending Centres mortgage specialist. They can advise on the best course of action for your unique situation and can help guide you through this next round of mortgage changes.

Life can definitely throw some challenging financial situations your way. As mortgage professionals, we can provide solutions and strategies during or after these challenging times in order to get you back on track. We have access to banks, trust companies and mortgage companies that specialize in this transitional period to help you move forward with the best mortgage plan for you. We protect your credit by negotiating with multiple lenders to find a solution for you.

If you have never owned a home and have had a consumer proposal, the good news is that you are already accustomed to the discipline of saving money every month. Should you choose to continue to grow your savings, those funds can then be put toward a down payment and re-establishing credit.

If you own a home already, there are lenders that will help you refinance and pay out your proposal earlier in order to accelerate your transition period.

After bankruptcy, different lenders will issue mortgages based on the amount of time since you were discharged, the amount of down payment on a purchase and/or the current equity in your home if your already own. Lenders then price their rates based on these aspects of your application.

At Dominion Lending Centres, we look forward to learning about your journey while protecting your credit and guiding you through the best strategy on a moving forward basis.

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Premier Kathleen Wynne surprised the market yesterday by announcing sweeping measures aimed at cooling the red-hot housing market a full week before Ontario Budget Day. The sixteen-measure package is largely intended to do three things: Cool demand; boost supply; and limit the increases in rents. 

No one doubts that something needed to be done to dampen speculative fervour and increase the supply of both rental properties and non-rental housing in the GTA and surrounding areas. While home prices have been rising in the GTA for more than a decade, the price gains hit an inflection point 2016 with hyperbolic price gains, exaggerated well beyond reasonable levels took hold, spiraling to a sellers’ strike, rampant speculation and frenzied demand.

In most of the region, the inventory-to-sales ratio fell to less than one-month’s supply as speculators compete with first-time and other buyers, driving prices to the stratosphere. Potential sellers held back, expecting prices to continue to rise at a 30% annual rate. Many of these potential sellers feared they wouldn’t find a suitable place to live as speculators increasingly are willing to buy properties with negative carry as capitalization rates fell, expecting to make a fast buck in a year or two. This has been compounded by non-resident foreign purchases, much of which could well lie vacant, further reducing supply and often damaging existing neighborhoods. Moreover, the market is further inflated by nefarious activities on the part of unethical market participant–activities that include “paper flipping”, rigged bidding, double-dealing and falsified income and asset statements–not to mention reselling properties pre-construction, which is technically legal but sometimes reportedly involves kick-backs to developers.

Clearly, this frenzy is unsustainable and something needed to be done to avert a crash landing–a result that is in no one’s interest as it would dramatically slow economic activity and job growth in the province and beyond. The question is: Will the Ontario Fair Housing Plan–comprised of 16 initiatives–generate a soft landing and do the job of balancing housing and rental supply and demand.

Risks and Uncertainties

The most troubling measure is the expansion of rent controls to all rental properties built after 1991–condo or purpose built. While it is good for existing tenants, the potential unintended consequences are concerning. Rent controls diminish the supply of rental stock and have adverse implications for existing home markets as investors (and speculators) dump their properties in response to heightened uncertainty and already compressed capitalization rates. This is especially negative for the condo market as investors have often provided the seed money for new developments. Toronto suffers from a dearth of purpose-built rental properties owing to the rent controls introduced many years ago. There has been a burgeoning rise in the development of such properties over the past year or so, but expanded rent controls might cause many lenders, investors and developers to reassess their plans.

Setting the rent-control cap at the rate of consumer inflation to a maximum of 2.5% while occupied by the same tenant would in no way provide a sufficient reward to offset the risk and capital necessary to build new supply. Any developer and investor would find the risk-reward trade-off insufficient. The cost of maintaining rental property is far greater than the 2% rate of inflation as utility costs, maintenance fees and property taxes have gone up by multiples of that rate, which is roughly equivalent to the return of risk-free government bonds.

Boost Rental Supply

The measures introduced to increase rental housing supply are welcome, but limited. Rebating a portion of development charges, lowering new property taxes on purpose-built rentals, unlocking available provincial land and streamlining the approval process will help to offset some of the negative effects of rent control, but they will no way offset them fully.

Already about 70% of Canadian households own their own home, which is probably close to long-run peak levels. Younger people and incoming residents are likely to need rental housing just as builders will need to set rents at sufficiently high levels to mitigate the effect of rent control on longer-term returns on investment, making housing less affordable for the very people the measures are intended to help. But, again, it is applauded by current tenants, particularly those living in relatively new housing.

Cooling Demand

The measures intended to cool demand by dampening speculation and discouraging vacant housing are welcome. The 15% non-resident speculation tax (NRST) in the Greater Golden Horseshoe (see map below) levied on non-citizen, non-permanent residents and foreign corporations (with some exclusions) makes sense, but we have inadequate data to judge the magnitude of its effect. If Vancouver’s experience is any guide, the NRST should reduce home price inflation by some measure.

A tax on vacant housing and land will likely increase the rental supply as most of these properties are owned by non-resident foreigners.

The prevention of paper flipping or reselling properties pre-construction is welcome.

Biggest Uncertainty: In my view, the biggest quandary is the impact of this sweeping package on market psychology as it ripples through the economy. The speculators will be the first to run for the hills, reducing demand and increasing supply–which, of course, is the intended consequence. But taking that a step further, boomers who have been holding off listing their homes will call their realtors to do so promptly if they perceive markets are softening, further increasing supply. And buyers could prudently suspend their home search, at least for a while, in the hopes that prices will fall, further diminishing demand. The real question then becomes, will there be a soft- or a hard-landing. Stay tuned, we will be watching these developments very closely.

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