How Does the Home Capital Crisis Affect Me?

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As of late, Home Capital Group is dominating the headlines. To quickly summarize, on April 19, the Ontario Securities Commission (OSC) claimed that brokers had falsified information on mortgage applications submitted to Home Trust. As a result, shares in the company dropped while customers withdrew more than $1 billion in deposits from Home Capital Group subsidiaries. The sudden lack of deposits forced Home Capital to secure a loan with less-than-favourable terms.

Since we wrote a detailed post on what’s happening with Home Capital Group, the company has tapped $1.4 billion from their $2 billion credit line and suspended their dividend. But, many people want to know how this news affects them personally and if there will be any effect on the hot housing markets in Canada. Here are the answers to some of the most common questions people are asking.

Does this mean we’re in a housing bubble?

There’s no definite answer to this question, so we need to look at the information currently available to us.

The accusation of falsified loan applications is worrisome since it sounds similar to what happened in the U.S. before the real estate crash in 2008, but things are a bit different in Canada.

Some big-city markets in Canada such as Vancouver and Toronto definitely seem to have home prices that are well beyond average income levels. However, some other cities have a stable and balanced market. But then again, Canadians are also facing higher household debt than ever before, so that’s definitely a topic of concern.

It’s possible that this recent revelation, as well as government intervention in British Columbia and Ontario, could slow down the hot housing market. But it’s still impossible to say if we’re in an actual real estate bubble or predict what will happen in the near future.

How does this affect my mortgage?

If your mortgage is with Home Capital Group, nothing changes. The amount you pay and your payment schedule stays the same since you have a legally binding contract.

But what happens if your lender goes bankrupt? Will customers lose their homes? In a worst-case scenario, the lender experiencing financial difficulties would sell their mortgage contracts to other lenders.

In fact, Home Capital announced this morning that a third party is offering to buy up to $1.5 billion of its mortgage assets.

So in this case, the only thing that would change for customers is the company or broker to which they’re paying their mortgage. The terms of your contract are still in effect and you are still obligated to pay your premium to this new company, unless you are willing to pay a penalty to break the contract.

Once your contract term is up, you will have the freedom to renegotiate again. If you don’t like what your current lender is offering, you can always take your business elsewhere.

Will mortgage rates increase?

Regardless of the Home Capital situation, it’s always possible that your mortgage rate could change, especially if you have a variable rate mortgage.

The Bank of Canada currently has the overnight rate at 1/2 per cent. This rate has remained quite steady for some time, but that doesn’t mean interest rates (and in turn, mortgage rates) won’t go up in the future. Note that interest rates are near record lows so the only way from here is up – eventually rates will increase. If you are concerned about how changes in overall mortgage rates could personally affect you, read your mortgage contract and talk to your mortgage professional for clarity.

I want to apply for a mortgage. How does this affect me?

People who are looking for a mortgage could be affected the most, but this might be a good thing. Considering recent events, lenders will likely pay more attention to the application process, making it a bit more rigorous for applicants. They want to ensure they’re lending to people who will be able to repay the loans.

Home Capital Group is Canada’s largest alternative mortgage lender so some people who didn’t qualify for a traditional mortgage may have relied on them to become homeowners. For the time being, some mortgage brokers are avoiding putting in loan applications with Home Capital Group until there is a bit more clarity.

No one knows for sure what will happen to the Canadian housing market in the near future, but in the meantime, prices in big cities like Toronto and Vancouver continue to rise. If you’re a homeowner or potential homeowner, be sure to do your research before making any decisions on acquiring or renewing a mortgage.

Related Topics

Economic News / Mortgages / Personal Finance / RSM News

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