Fall Survey Highlights Stress Test Fallout

Fall Survey Highlights Stress Test Fallout

OSFI’s forthcoming stress test for all uninsured mortgages after January 1 will have far-reaching effects across the mortgage industry, potentially removing up to 50,000 buyers from the real estate market each year.

That’s one of many key findings from Mortgage Professionals Canada’s Annual State of the Residential Mortgage Market survey, released this week by the association’s chief economist Will Dunning.

“The market is already slowing under the weight of increased interest rates, and policies aimed at suppressing the market further might be adding to economic risks,” he said.

Like in years past, this report dishes up a healthy serving of relevant and insightful industry statistics. We’ve combed them over and have included some of the most pertinent below. (Data points of special interest appear in blue.)

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New OSFI Regulations

  • 18%: The percentage of prospective homebuyers who require a mortgage and who otherwise would have had reasonable prospects of completing their desired transactions, that are expected to fail the stress test and therefore not be able to make their anticipated purchase
  • 91%: The percentage of new mortgages, across all channels, that will be subject to some form of stress testing
  • 6.8% (or $31,000): The amount that potential homebuyers will need to reduce their target price in order to pass the stress test
    • 20%: The percentage of buyers who will have to adjust their target price by less than 2.5%
  • 40-50%: The percentage of buyers who will fail the stress test, that are expected to be unable to find an alternative for which they can qualify
  • 100,000: The number of prospective buyers who previously could have qualified for financing, who will now be disqualified
  • 50,000-60,000: The number of buyers who will still be able to make a purchase, though one that is “less attractive to them”
  • 40,000-50,000: The number of prospective buyers who will be removed from home ownership entirely
  • 50,000-100,000: The potential number of renewers each year who “may find themselves unnecessarily vulnerable” in their mortgage renewals as they will be unable to negotiate with other federally regulated lenders
    • “In some cases, these renewing borrowers may be forced to accept uncompetitive rates from their current lenders,” Dunning notes

Mortgage Types and Amortization Periods

  • 68%: Percentage of mortgage in Canada that have fixed interest rates (72% for mortgages on homes purchased during 2016 or 2017)
  • 28%: Percentage of mortgages that have variable or adjustable rates (24% for mortgages taken out in 2016/2017)
  • 4%: Percentage that are a combination of fixed and variable, known as “hybrid” mortgages
  • 86%: Percentage of mortgages with and amortization period of 25 years or less (81% for home purchased between 2014 and 2017)
  • 14%: Percentage with extended amortizations of more than 25 years (19% for recent purchases between 2014 and 2017)

Actions that Accelerate Repayment

  • ~33%: Percentage of overall mortgage holders who voluntarily take action to shorten their amortization periods (vs. 38% of recent buyers)
  • For buyers who purchased a home between 2014 and 2017:
    • 18% made a lump-sum payment (the average payment was $19,500)
    • 16% increased the amount of their payment (the average amount was $440 more a month)
    • 10% increased payment frequency

Mortgage Sources

  • 46%: Percentage of borrowers who took out a new mortgage during 2016 or 2017 who obtained the mortgage from a Canadian bank (vs. 61% of total mortgages)
  • 39%: Percentage of recent mortgages that were arranged by a mortgage broker (vs. 27% of overall mortgages)
  • 12%: Percentage of recent borrowers who obtained their mortgage through a credit union (vs. 8% of all mortgages)

Interest Rates

  • 2.96%: The average mortgage interest rate in Canada
    • A small drop from the 3.02% average recorded last year, though down substantially from the 3.50% average rate in 2013
  • 2.90%: The average interest rate for mortgages on homes purchased during 2017
  • 2.68%: The average rate for mortgages renewed in 2017
  • 51%: Of those who renewed in 2017, percentage who saw their interest rate drop
    • Among all borrowers who renewed in 2017, their rates dropped an average of 0.19%
  • 2.72%: The average actual rate for a 5-year fixed mortgage in 2017, about two percentage points lower than the posted rates, which averaged 4.72%

Miscellaneous

  • 0.24% (1 in 401 borrowers): The current mortgage arrears rate in Canada (as of August 2017)
  • $1,486: The average monthly mortgage payment ($1,568 for recent purchases made from 2014 to 2017)

Equity

  • 62%: The average percentage of home equity for homeowners who have a mortgage but no HELOC
  • 58%: The average equity ratio for owners with both a mortgage and a HELOC
  • 81%: The equity ratio for those without a mortgage but with a HELOC
  • 91%: Percentage of homeowners who have 25% or more equity in their homes
  • 53%: Among recent buyers who bought their home from 2014 to 2017, the percentage with 25% or more equity in their homes

Equity Takeout

  • 9% (860,000): Percentage of homeowners who took equity out of their home in the past year
  • $54,500: The average amount of equity taken out
  • $47 billion: The total equity takeout over the past year
  • $28 billion was via mortgages and $17 billion was via HELOCs
  • Most common uses for the funds include:
    • 26% (10.7 billion): For purchases (including education)
    • 22% ($9 billion): For home renovation and repair
    • 21% ($8.7 billion): For debt consolidation and repayment
    • 21% ($8.4 billion): For investments
    • 10% ($4.2 billion): For “other” purposes
    • Equity takeout was most common among homeowners who purchased their home during 2000 to 2009

Sources of Down payments

  • 26%: The average down payment made by first-time buyers from 2014 to 2017, as a percentage of home price
    • This is a significant increase from previous surveys, where the average down payment was consistently around 20%. Dunning writes that most of these buyers appear to have increased their down payments to avoid the need for mortgage insurance
  • The top sources of these down payment funds for homes bought from 2014 to 2017 were:
    • 92%: Personal savings
    • 43%: Gifts from parents or other family members (vs. 23% from 2010-2013)
    • 19%: Loan from parents or other family members (vs. 12% from 2010-2013)
    • 27%: Loan from a financial institution
    • 29%: Withdrawal from RRSP
  • 105 weeks: The amount of working time at the average wage needed to amass a 20% down payment on an average-priced home
    • This is up from 93 weeks in 2014 and 53 weeks two decades ago

Homeownership as “Forced Saving”

  • 50%: Approximate percentage of the first mortgage payment that goes towards principal repayment (based on current rates)
    • 10 years ago this share was about 25%
    • Dunning notes that rapid repayment of principal means that, “once the mortgage loan is made, risk diminishes rapidly”
    • He added that most affordability analyses use the posted rate, “which gives a distorted impression of the current level of affordability, and of how current affordability compares to the past”

A Falling Homeownership Rate

  • 67.8%: The homeownership rate in Canada in 2016
    • Down from 69% in 2011
  • Ownership rates fell for the three youngest age groups of buyers (first-time buyers) by more than 4%
  • Dunning attributes this “disappointing” change to:
    • The increased difficulty of saving down payments
    • The elevated rate of “forced saving”
    • Five sets of mortgage insurance policy changes by the federal government that have made it more difficult to buy

Consumer Sentiment

  • 7.15: The average score (on a scale of 1 to 10 where 1 indicated complete disagreement) with the following statement: “Low interest rates have meant that a lot of Canadians became homeowners over the past few years who probably should not be homeowners.” (Up from an average score of 6.98 in previous surveys)
  • 7.15: Average score in response to the statement that “real estate in Canada is a good long-term investment” (down from the previous average of 7.28)
  • 90%: The percentage of homeowners who are happy with their decision to buy a home
  • 7%: Of those who regret their decision to buy, the regret pertains to the particular property purchased
  • Just 4% regret their decision to buy in general

Consumers’ Comfort with Technology

  • 65%: Percentage of mortgage consumers who are “moderately” or “quite” comfortable with texting or instant messaging their mortgage professional with questions or concerns (77% of those aged 18-24)
  • 47%: Percentage who are moderately or quite comfortable with being served by an online digital mortgage advisor (i.e., a chatbot) when applying for a mortgage (vs. 58% of those aged 18-24)
    • 40% are “uncomfortable” while 27% are “moderately uncomfortable”
  • 50%: Percentage who are moderately or quite comfortable with applying for a mortgage through an app on their mobile device (vs. 73% for those aged 18-24)
    • 36% are uncomfortable while 26% are moderately uncomfortable
  • Dunning notes that comfort levels are greatest for the youngest age groups, but surprisingly also among those aged 65 and older

Outlook for the Mortgage Market

  • Data on housing starts suggests housing completions in 2018 will increase slightly compared to 2017. “This factor, therefore, will tend to increase the growth rate for mortgage credit,” Dunning writes.
  • “Another significant factor is that low interest rates mean that consumers pay less for interest and, therefore, are able to pay off principal more rapidly,” he noted. “Current low interest rates have, therefore, tended to reduce the growth rate for mortgage debt.”
  • 5.9%: The current year-over-year rate of mortgage growth (as of August)
    • Vs. an average rate of 7.3% per year over the past 12 years
    • Dunning expects the growth rate to slow to 5.6% by the end of 2017 and 5.5% for 2018

 

 

This article was written by Steve Huebl of Canadian Mortgage Trends. It was originally published here on December 8 2017.

Bank of Canada Rate Announcement Dec 6th, 2017

Bank of Canada Rate Announcement Dec 6th, 2017

The Bank of Canada today maintained its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economy is evolving largely as expected in the Bank’s October Monetary Policy Report (MPR). In the United States, growth in the third quarter was stronger than forecast but is still expected to moderate in the months ahead. Growth has firmed in other advanced economies. Meanwhile, oil prices have moved higher and financial conditions have eased. The global outlook remains subject to considerable uncertainty, notably about geopolitical developments and trade policies.

Recent Canadian data are in line with October’s outlook, which was for growth to moderate while remaining above potential in the second half of 2017. Employment growth has been very strong and wages have shown some improvement, supporting robust consumer spending in the third quarter. Business investment continued to contribute to growth after a strong first half, and public infrastructure spending is becoming more evident in the data. Following exceptionally strong growth earlier in 2017, exports declined by more than was expected in the third quarter. However,  the latest trade data support the MPR projection that export growth will resume as foreign demand strengthens. Housing has continued to moderate, as expected.

Inflation has been slightly higher than anticipated and will continue to be boosted in the short term by temporary factors, particularly gasoline prices. Measures of core inflation have edged up in recent months, reflecting the continued absorption of economic slack. Revisions to past quarterly national accounts have resulted in a higher level of GDP. However, this is unlikely to have significant implications for the output gap because the revisions also imply a higher level of potential output. Meanwhile, despite rising employment and participation rates, other indicators point to ongoing­ – albeit diminishing – slack in the labour market.

Based on the outlook for inflation and the evolution of the risks and uncertainties identified in October’s MPR, Governing Council judges that the current stance of monetary policy remains appropriate. While higher interest rates will likely be required over time, Governing Council will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.

As this was the last announcement in 2017, here are the announcements dates set out for 2018.

  • January 17th 2018*
  • March 7th 2018
  • April 18th 2018*
  • May 30th 2018
  • July 11th 2018*
  • September 5th 2018
  • October 24th 2018*
  • December 5th 2018

*Monetary Policy Report published

Payment Frequency, Does it Really Make a Difference?

Payment Frequency, Does it Really Make a Difference?

It has been said that there are two certainties in life; death and taxes. Well, as it relates to your mortgage, the single certainty is that you will pay back what you borrowed, plus interest. However, how you make your mortgage payments, the payment frequency, is somewhat up to you!  The following is a look at the different types of payment frequencies and how they will impact you and your bottom line. 

Here are the 6 main payment frequency types

  1. Monthly payments – 12 payments per year
  2. Semi-Monthly payments – 24 payments per year
  3. Bi-weekly payments – 26 payments per year
  4. Weekly payments – 52 payments per year
  5. Accelerated bi-weekly payments – 26 payments per year
  6. Accelerated weekly payments – 52 payments per year

Options one through four are designed to match your payment frequency with your employer. So if you get paid monthly, it makes sense to arrange your mortgage payments to come out a few days after payday. If you’re paid every second Friday, it might make sense to have your mortgage payments match your payday! These are lifestyle choices, and will of course pay down your mortgage as agreed in your mortgage contract, and will run the full length of your amortization. 

However, options five and six have that word accelerated attached… and they do just that, they accelerate how fast you are able to pay down your mortgage. Here’s how that works. 

With the accelerated bi-weekly payment frequency, you make 26 payments in the year, but instead of making the total annual payment divided by 26 payments, you divide the total annual payment by 24 payments (as if the payments were being set as semi-monthly) and you make 26 payments at the higher amount. 

So let’s say your monthly payment is $2000.

Bi-weekly payment : $2000 x 12 / 26 = $923.07

Accelerated bi-weekly payment $2000 x 12 / 24 = $1000

You see, by making the accelerated bi-weekly payments, it’s like you’re actually making two extra payments each year. It’s these extra payments that add up and reduce your mortgage principal, which then saves you interest on the total life of your mortgage. 

The payments for accelerated weekly work the same way, it’s just that you’d be making 52 payments a year instead of 26. 

Essentially by choosing an accelerated option for your payment frequency, you are lowering the overall cost of borrowing, and making small extra payments as part of your regular cash flow. 

Now, It’s hard to nail down exactly how much interest you would save over the course of a 25 year amortization, because your total mortgage is broken up into terms with different interest rates along the way. However, given todays rates, an accelerated bi-weekly payment schedule could reduce your amortization by up to three and a half years.

If you’d like to have a look at some of the mortgage numbers as they relate to you, please don’t hesitate to contact us anytime, we’d love to work with you and help you find the mortgage (and the mortgage payment frequency) that best suits your needs. 

Buying Your First Home in Canada

Buying Your First Home in Canada

What Newcomers Need to know!

The reason we have a blog and share information is to educate our clients and prospective clients about mortgages. Obviously there is a lot to know about mortgages, financing, and buying property, and there are a lot of great ways for us to share this information with you.

However there is also information that has been produced by lenders, insurers and associations that is worth sharing as well. So we use our blog to not only share our ideas, but also great information we come across.

Here is a document produced by CMHC that outlines some of the things you need to know about buying your first home in Canada if you have recently immigrated here. Of course if you have any questions specific to your situation, we would love to talk with you and help you figure out a plan to buy your first home…

Contact us anytime!

CMHC Buying Your First Home

Bank of Canada Rate Announcement Sept 6th, 2017

Bank of Canada Rate Announcement Sept 6th, 2017

The following is the Bank of Canada rate announcement released this morning, if you have any questions about what this rate increase means for you and your mortgage, please don’t hesitate to contact us anytime. If you’re a fixed rate mortgage holder, this change doesn’t impact you, however if you are a variable rate mortgage holder, you can expect to see an increase in bank prime, most likely by a 1/4 per cent. 

The Bank of Canada is raising its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Recent economic data have been stronger than expected, supporting the Bank’s view that growth in Canada is becoming more broadly-based and self-sustaining. Consumer spending remains robust, underpinned by continued solid employment and income growth.  There has also been more widespread strength in business investment and in exports. Meanwhile, the housing sector appears to be cooling in some markets in response to recent changes in tax and housing finance policies. The Bank continues to expect a moderation in the pace of economic growth in the second half of 2017, for the reasons described in the July Monetary Policy Report (MPR), but the level of GDP is now higher than the Bank had expected.

The global economic expansion is becoming more synchronous, as anticipated in July, with stronger-than-expected indicators of growth, including higher industrial commodity prices. However, significant geopolitical risks and uncertainties around international trade and fiscal policies remain, leading to a weaker US dollar against many major currencies. In this context, the Canadian dollar has appreciated, also reflecting the relative strength of Canada’s economy.

While inflation remains below the 2 per cent target, it has evolved largely as expected in July. There has been a slight increase in both total CPI and the Bank’s core measures of inflation, consistent with the dissipating negative impact of temporary price shocks and the absorption of economic slack. Nonetheless, there remains some excess capacity in Canada’s labour market, and wage and price pressures are still more subdued than historical relationships would suggest, as observed in some other advanced economies.

Given the stronger-than-expected economic performance, Governing Council judges that today’s removal of some of the considerable monetary policy stimulus in place is warranted. Future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation. Particular focus will be given to the evolution of the economy’s potential, and to labour market conditions. Furthermore, given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates.

Here are the announcements dates set out for the remainder of 2017 and the complete schedule for 2018.

  • October 25th 2017*
  • December 6th 2017
  • January 17th 2018*
  • March 7th 2018
  • April 18th 2018*
  • May 30th 2018
  • July 11th 2018*
  • September 5th 2018
  • October 24th 2018*
  • December 5th 2018

*Monetary Policy Report published

All rate announcements will be made at 10:00 (ET), and the Monetary Policy Report will continue to be published concurrently with the January, April, July and October rate announcements.

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