Actions taken by the Canadian Banks and the Canadian Government will make renewing your mortgage more costly than ever before. Homeowners looking to access the equity in their homes will discover that new underwriting guidelines now limit their ability to borrow regardless of how much equity they have in their homes.
Today’s newsletter will focus on four factors that will make shopping at mortgage renewal time harder than before and what we can do to help.
Banks Are Increasing Posted Mortgage Rates
Canadian Banks have been increasing their “posted” fixed mortgage rates. Although our Banks explain that they must increase these rates as funding costs tick higher, the jump in mortgage rates is still almost double the increase in the bond yields that drive mortgage funding costs for the banks. We believe the reason for the sudden increase is twofold.
First off, since most borrowers now qualify for their mortgage based on the 5 year posted rates, increasing those rates will reduce the amount of mortgage Canadians will be able to qualify for. This means fewer people will qualify for the mortgage they already have. This will make moving to a new lender at maturity far more difficult for almost 30% of Canadians. On a totally unrelated note: This year about 47% of mortgages are renewing.
Secondly, by increasing posted rates banks can hike the penalties they charge customers who are discharging their mortgage before maturity. Interest Rate Differential (IRD) is the penalty that a consumer pays to discharge early and a higher posted rate means a juicier penalty for the bank. For a closer look at how this works click here.
Bank of Canada Increasing Rates
On the surface there is a lot of positive economic news in Canada. GDP just had a really strong month with oil and manufacturing leading the charge and unemployment is at its lowest rate in 40 years. This will likely lead to the Bank of Canada (BoC) to boost the overnight rate at least once more this year, unless of course the economy weakens before that. The Governor of the Bank of Canada is well aware of the impact that increasing rates will have on borrowers. Yesterday he indicated that more accommodative policy may still be required, saying, “It seems like a long time ago but we’re still actually climbing that same hill, so we need to get the job done.”
To illustrate the sensitivity to rates in the market, just consider a few stats:
– Interest paid on debt by Canadians increased by 9.2% in the last 3 months of 2017.
– Debt payments now represent 14% of disposable income.
– Credit card delinquencies for 2 major firms have reached the highest rate since 2008.
– Retail Sales posted the largest quarterly drop since the 2008 recession.
The BoC is performing a balancing act of increasing rates to slow down a red hot housing market and inflation while still keeping the economy chugging along in the face of rising debt costs. The BoC appears to be doing a great job in the face of the many Government policies aimed at reducing housing prices. The risks to housing prices are certainly not lost on the Canadian Banks who have begun tightening capital.
Tougher Underwriting and Bank Trickery
In November of 2016 CMHC withdrew from insuring low risk mortgages for people who had more than 20% equity in their homes. This eliminated any competition the banks faced from Mortgage Finance Companies in this highly coveted market. Over the 16 months that followed the Banks have systematically hiked mortgage rates and boosted underwriting requirements.
Today, regardless of how much equity you may have built up in your home or what you plan on doing with that equity, you will face a far more rigorous test to judge whether or not you should be able to access that equity. Reports show that Canadians are being driven to borrow home equity loans and second mortgages at higher rates as banks realize they no longer have to compete on rate or loan amount to keep their existing clients.
Government Policies for Affordable Housing
It’s a no brainer for a government to tout the benefits of affordable housing for all. By taxing homebuyers both foreign and domestic, the government can wag their finger at the lack of affordable housing while collecting large sums of tax revenues. The rapid, consistent and prolonged increase in housing prices in Toronto and Vancouver, amongst other Canadian cities, is a result of low interest rates and increased foreign demand. The massive year over year increases have fueled our economy and created an unrealistic reliance on consumer debt, but when Federal, Provincial and Municipal levels of government all get involved in trying to effect a change, one only hopes someone has a plan in place if they fall too far.
So…..What Should you do?
The actions being taken by our Government and Banks are aimed to slow down this unsustainable run up in real estate prices. Reducing the borrowing capabilities of the Canadian consumer, in the face of what could be a dramatic drop in real estate prices, seems prudent, but when you are looking to access the equity in your home it probably doesn’t seem fair.
If you are looking for an unbiased assessment of the options available to you please reach out to us by email or phone. If you find yourself looking for a Home Equity Loan let us help you make sure that the numbers make sense. To price out a Home Equity Loan on line you can check out Cannect.ca. This is a website we created to help Torontonians access the equity in their homes. We use a proprietary technology to identify the value of your home and the equity you have available, in seconds you receive an online quote. Ask someone at MorCan Direct to walk you through the process or check it out for yourself.