More Changes to Come
It seems that every month now there are new principles and policies that are being set out by regulatory agencies in Canada which make it increasingly difficult for consumers to qualify for mortgages. Is this a bad thing? Not really, in my opinion! In March 2011 there was a decrease in the maximum amortization for new high ratio mortgages from 35 years down to 30 years and then only a month later in April 2011 CMHC insurance was no longer available for Home Equity Lines of Credit (HELOCs). And most recently, at the beginning of March 2012 FCAC made changes to the disclosure requirements for penalty calculations.
We all saw what happened to our neighbours south of the boarder when mortgages were granted to every man, woman and child (so it seemed). When markets cooled off and interest rates went up back to “normal”; foreclosures happened and many Americans were fighting to keep their heads above water.
OSFI Releases Draft Guideline on Mortgage Underwriting Principles
Office of the Superintendent of Financial Institutions (OSFI) is an independent agency of the Government of Canada which reports to the Ministry of Finance and is the primary watchdog of federally regulated deposit taking institutions, insurance companies and pension plans. They aim to create and maintain a competitive and resilient financial system in Canada.
Earlier this week on March 19th, OSFI issued a draft aiming to tighten the mortgage underwriting process and lending guidelines and are looking for industry personnel and other parties involved to provide feedback towards these proposed best practice changes.
The Proposal for New Mortgage Underwriting Principles
These enhanced rules would require institutions to take a more in depth look at the borrower and subject property during the underwriting and adjudication process. Specifically:
- “the borrower’s identity, background and demonstrated willingness to service their debt obligations on a timely basis
- the borrower’s capacity to service their debt obligations on a timely basis
- the underlying property value/collateral and management process”
(To view the entire draft guideline click here).
What Happened in the States Stays in the States!
There were many attributing factors during the U.S. subprime mortgage crises which added to the ultimate demise of the American economy and the repercussions were felt globally. Stating the obvious, mortgages were approved to those who had less than stellar credit ratings and thus were defaulting on their mortgages. The inadequate borrower paired with the boom and bust of the housing market in the states was truly devastating and left many drowning in underwater mortgages.
The fear for the Canadian economy lies in the future once all of these 5 year fixed mortgages have matured. Sure your mortgage payments are affordable today and for the near term while your interest rate lies at an all-time low (2.99 per cent), but what happens 4 and 5 years down the road upon maturity? What happens if interest rates are higher and your payments increase? Yes, you could always refinance your mortgage and increase the amortization in order to make your home affordable but then you’re back at square one with a fully amortized mortgage. The other concern is that the increased interest rates 4 and 5 years down the road will coincide with a correction or burst to the overpriced markets and said housing bubbles namely in Toronto and Vancouver, leaving borrowers up the creek without a paddle.
Do the Math!
Whenever you negotiate a mortgage you should first ask yourself where you think you will be one, three and five years down the road. Will you be in the same home? Will your family be larger? Will your income increase? Will you want or need to upgrade, or maybe even downgrade? And most importantly: if interest rates increase, can you still afford your home and maintain payments? You can figure this last one out in two simple steps:
Step One: input your information into our mortgage calculator and see what your balance will be at the end of the said term using the amortization schedule below the amortization graph. Using an example of $300,000 mortgage amount at 2.99 per cent over 25 years, your balance upon maturity would be $256,374.33. Your monthly payments would be $1,418.20.
Step Two: take your maturity balance ($256,374.33) and input a higher rate (6.28% – this is the average 5 year fixed rate over the last 10 year period) maintaining the same amortization (now 20 years). You might be surprised to see that although you’ve paid off nearly $44,000 off of your principal balance your new monthly payment is $1,866.35. This gives you something to think about!
RateSupermarket.ca Week in Review
No big changes at all in rates after the 2.99 per cent rate hit the market last week. The only change that we’ve seen over the last week on our best mortgage rates page was the 1 year fixed rate which dropped 0.05 per cent, or 5 basis points.
The 5 year variable rate is still the most popular search. 44.9 per cent of RateSupermarket.ca’s visitors are searching for the 5 year variable rate. Still holding the number two spot for most frequent searches is the 5 year fixed rate at 40.3 per cent. Following the 5 year rates are the 1 year fixed closed rate (4.4 per cent), 2 year fixed closed (4.3 per cent) and 10 year fixed (2.3 per cent).