The guideline and policy changes announced to the secured lending industry last week are making their mark. From mortgage brokers to lenders and – most importantly – the Canadian consumer, many are beginning to feel the effects.
Although most agree that something needed to change to help stunt the average Canadian debt-to-income ratio which currently sits at a whopping 151 per cent, all are feeling discouraged after the alternative to raising rates.
The Aftermath in the Broker World
Maybe established brokers who sit on a book of business filled with clients with significant equity in their homes and strong household income above the national average aren’t too worried about how these changes will affect them. However, new agents who heavily rely on the first time home buyer and refinance clientele are biting their nails.
Experts are predicting that the new rules will force between 10 and 15 per cent of mortgage agents out of the business, and these new mortgage rules will have a direct impact on their business and overall performance. Click here to review the changes that were announced last week by Finance Minister, Jim Flaherty.
Cooling the Condo Market?
With the said changes launching in less than two weeks, first time home buyers are faced with barriers to entry – and some may even be kissing home ownership goodbye. Many first time home buyers rely heavily on CMHC mortgage default insurance, which on July 9th, will reduce the maximum amortization offered to 25 years and ensure debt servicing ratios remain in-check. The goal? Decreasing the amount of overextended borrowers.
The reality that more and more first time home buyers are facing is the question of affordability, and the green light from lenders as they walk the tight-rope line of approval. As domestic buyers are forced out of an already pricey condo market, further exposure to foreign investment is a plausible consequence. Foreign investors often make purchases with well over 20 per cent down and are considerably under the maximum amortization level when compared to the shallow savings pockets of the Canadian consumer. The next question is where the equilibrium for monthly rental prices will settle based on an increased demand for this type of unit. The fundamental principles of economics suggest up!
Bringing the Hammer Down Early
Oh I’m sorry, did I say July 9th? Technically the new rules set by the Government do not require full compliance until that day; however some lenders have issued notices stating that their guidelines will change as early as July 3rd! The sense of urgency continues as brokers scramble to gather mortgage applications for submission under the nearing deadline. Moving up the date will prevent last minute overload to underwriters, which would come at the expense of client satisfaction.
The Quest for Affordability
Sure, the market is ultimately driven by payment affordability, meaning a reduction in buying power weighs heavily on prices. If you can’t afford the payments based on your current debt levels and debt servicing abilities, you can’t afford the home. If this theme persists among prospective home buyers, the sellers will be forced to stay put and take their homes off of the market or lower their prices. This could take some time though – so what if you’re looking to buy now vs. after a potential price correction down the road? If only there was a solution to price out where to buy …
What’s One More Increase in Costs… Really?
All this change thrusts the great suburb vs. city affordability debate back into the spotlight – especially in the 416/905 with the $30-billion transit expansion proposed by City of Toronto Councillor Karen Stintz.This multi-billion-dollar project would expand subway train lines, 10 new LRT lines and 5 new bus and street car lines, beginning with the Scarborough subway. For a complete list of details, check out the coverage from the Globe and Mail.
This proposal calls on the provincial government to fork over one third of the funding costs, and the second third from Ottawa. Who’ll be picking up the tab for the final third? You guessed it… the tax payers! A harsh reminder that nothing comes for free and the decision is ultimately in the hands of the government. A change in municipal property tax laws would be required to permit a move away from property taxes as revenue neutral. Bottom line: the average Toronto home owner would experience an increase in annual property taxes of $180 by 2016 once the plan is in full swing. This is equivalent to a 1.9 per cent increase year over year … independent of any other/additional property tax hikes.
RateSupermarket.ca Week in Review
There were minimal changes made to the best mortgage rates page this week as many rates held steady. The only note-worthy change was to the 5 year variable rate which increased by 15 basis points to settle at Prime – 0.20, or 2.80 per cent effectively.
Derek Burleton – VP and Deputy Chief Economist from TD Bank, does not anticipate that rates are heading anywhere fast this year and maybe not until two years down the road. The risk with having rates stay so low for so long is that people will set their long-term financial goals and strategies based on the low interest rate environment. But on the other hand, the BOC cannot raise rates if the US Federal Reserve keeps their rates near zero per cent as this would drastically increase the value of the Canadian Dollar relative to the American Dollar. Until the global financial risks become less of a concern, a low rate environment will persist.
Do you want the inside edge when best mortgage rates change? Be the first to know and sign up for RateAlert, RateSupermarket.ca will e-mail you a daily digest of the mortgage rates that have changed in your area!
Once again topping popularity charts for mortgage searches is the 5 year fixed closed rate and the 5 year variable rate. Just under half of RateSupermarket.ca’s visitors are looking for a good deal (45.8 per cent) on a 5 year fixed rate. Whereas 29.8 per cent are searching for a 5 year variable rate and 5.9 per cent for a 10 year fixed rate.