Seeking the advice of a mortgage professional is becoming more important with each mortgage change that hits the Canadian market. In the past few years we have seen the Government institute guidelines for Lenders that are aimed at slowing the Canadian housing market and reducing household debt. It is important that Consumers understand how each of these changes has affected mortgages. In the past few years we have seen amortizations shorten, qualifying rates increase and lending policies tighten. The Canadian housing market may now be showing some signs of slowing. The question is, have these changes had the desired effect on making Canadian debt more secure now? Are we able to withstand an increase in interest rates and/or a decrease in housing prices?
The most recent changes made by the Canadian Government have had two less than desirable effects on the consumer.
First of all, the competition for mainstream Bank lenders is decreasing. By capping the exposure of CMHC to non-insured mortgages (these are mortgages where consumers hold equity positions in their homes in excess of 20% of the value of the home) the Government has driven more business into the hands of the Big Canadian Banks. It is only the Big Banks with their large balance sheets chalked full of our savings that can profitably hold mortgages that are not insured. Smaller lenders must insure their mortgages in order to sell them on the open market. Forcing smaller lenders with lesser balance sheets, to purchase insurance for mortgages that are less risky, remember these are only the mortgages where the consumer has greater than 20% equity in the property. This simply increases the costs borne by the consumer.
Banks are using their competitors increased costs to increase their mortgage rates and increase profit margins as smaller lenders struggle to compete. Increasing mortgage rates by manipulating the market is quite clever, and will no doubt have the desired effect of reducing borrowing, but only at the expense of the Canadian consumer and the profit of the Canadian Banks. The real fly in the ointment here is that it is the large Canadian Banks, who did not really require the CMHC bulk insurance program, used up a great portion of the limited insurance from 2008 to now. That’s right when the economy started to tank in the fall of 2008 the Canadian Banks began to insure even their low risk mortgages. Without access to this insurance we will no doubt see borrowing costs slowly rise for all consumers.
Secondly, they have all but eliminated one form of very important mortgage lending: Mortgages for people who are self-employed. It is now becoming very difficult for people who cannot prove their income to qualify for a mortgage. Regardless of the net worth of a borrower, or the amount of down payment they may have a Borrower who is unable to prove their annual income will have a very difficult time qualifying for a mortgage in today’s environment.
In a recent radio interview I discussed what appears to be a deficiency in the new guidelines. How can it be that someone who has been working at their new job for 3 months, has limited assets, and a 5% down payment can be given a lower risk designation than a customer who has been self-employed for 10 years with a 20% down payment? Is income the most important factor when qualifying for a mortgage?
Apparently it is now. With the removal of CMHC insurance for self-employed Canadians there are no lenders willing to offer prime rates to Canadians unable to prove their income. This trend is driving the Subprime mortgage market that we are hearing about. Is this market really subprime? We don’t think so.
Canadians should be more cautious when refinancing, renewing, or financing the purchase of a new home than ever before. The Banks and the Canadian Government are exerting more control on the mortgage market now than ever before. The popularity of Mortgage Brokers is increasing in the face of all of these changes as Consumers scramble to get their bearings and make sense of it all.
Our message to Canadian Consumers has not changed: Seek out sound, unbiased mortgage advice. Don’t trust your Bank implicitly when negotiating your mortgage, look around, make sure you are getting the advice and the mortgage that you are entitled too.