Thursday 4 August 2016
The purpose of this nice and tidy piece of government correspondence is to inform the public that OSFI will be upping their game, paying closer attention to mortgage underwriting policies. And although no hard and fast rule changes were announced, an announcement of “hey, we are paying really close attention here” is typically not made unless there has been at least some thought about what the next steps might be (if required).
So let’s take a look at some of the potential changes the government could make to mortgage qualification.
Qualifying All Terms at the Benchmark Rate
As it stands right now, variable rate mortgages and fixed rate mortgages with terms of less than five years are qualified using the benchmark rate. The benchmark rate is set higher than the actual contract rate and is used to “stress test” mortgage applications.
In our current low interest rate environment, many Canadians see the five year fixed mortgage as a good choice simply because it qualifies using the contract rate instead of the benchmark rate. This means using the five year rate, borrowers can qualify for a lot more house compared to a shorter fixed term or variable rate mortgage.
Forcing all mortgages to be qualified at the benchmark rate could be on the horizon and would most likely lessen the appeal of the five year fixed rate.
Increasing the Benchmark Rate
If the goal is to tighten mortgage qualification, a simple way to do that would be to increase the benchmark slowly but surely. The higher the qualifying rate, the less you qualify for. Plain and simple. However as this might have other economic ramifications, we’ll just have to wait and see if this is in the government playbook.
Lower Debt Service Ratios
In order to qualify for a mortgage, you take your principal, interest, taxes, and heat and divide by your annual income, this is called your gross debt service ratio or GDS. When you add your other debt obligations to this calculation, it becomes your total debt service ratio or TDS.
Currently, for insured mortgages in Canada, your maximum GDS is limited to 39% while your TDS is capped at 42%.
A simple tweak to these numbers would have a pretty significant impact.
A Flat 10% Down Payment
If you remember, back in February of 2016, the government increased the minimum down payment amount. When purchasing a property, the first $500,000 requires a minimum of 5% down, whereas the portion of the purchase price above $500,000 now requires a 10% down payment.
Seeing as though the government just made these changes, it doesn’t seem likely that they would scrap them and simply introduce a flat 10% downpayment across the board, but you never know!
Regardless of what future changes are made to mortgage qualifications (if any) to address “our current economic environment”, you can count on us to make sure you are kept in the know.
If you need anything, please let us know, we’d love to hear from you!
Today's post courtesy of:
Mortgage Agent Lic#M08004925
Dominion Lending Centres Homestead Financial (Lic#11711)
Wednesday 3 August 2016
In terms of their preferred housing type, half of gen Y respondents said they are likely to purchase a detached house (51%), followed by 'condo/apartment' (28%), 'semi-detached house' (18%) and 'row-house/townhouse' (13%). Similarly, the majority of gen X respondents selected 'detached house' (63%) as the housing type they are most likely to buy. Semi-detached houses were the second most popular choice (26%), followed by 'condo/apartment' and 'row house/townhouse' (each at 17%).
"Based on their intentions to buy, and the kind of real estate they're looking at, it is evident that 'stage-of-life' is a motivating factor for gen Y," says Ray Ferris, president of OREA. "Also, given the strength of real estate markets lately, it is understandable that a growing number of millennials would like to own a home and why so many believe real estate is a good investment."
'Desire to own a home of my own' (38%) is gen Y's main motivator for purchasing a home in the next two years, followed by the 'desire for a larger home' (28%). 'Long-term investment value' made it in the top three for both gen Y and X, but for the latter group it was the biggest driver (35% compared to 28% for gen Y). For gen X, 'desire to own a home of my own' (28%) and 'change in family situation' (26%) made it into the list of top three reasons for buying a home.
Furthermore, a larger number of Ontario's younger generations (X and Y) agree that real estate is a good investment -- 81% of gen X and 77% of gen Y said it is a good investment, compared to 72% and 70% who said so last year. Moreover, the perception gap is narrowing between generations, as 85% of baby boomers admit to real estate being a good investment.
"This uptick in consumer confidence is likely driven by the very strong gains we've seen in home values in the last year," says Ferris. "For those gen Ys and Xs who plan to sell, they will surely experience those gains themselves."
One in four gen Ys (25%) say they are likely to sell their home in the next two years (up 15 points from one year ago), and 15% of gen X plans to do so (up eight points). In comparison, 12% of baby boomers (up only three points from the previous year) say they are likely to sell their homes within the next two years.
These are some of the findings of an Ipsos poll conducted between May 31 and June 2, 2016, on behalf of the Ontario Real Estate Association (OREA). For this survey, a sample of 1,006 Ontarians from Ipsos' online panel was interviewed online. Weighting was then employed to balance demographics to ensure that the sample's composition reflects that of the adult population according to Census data and to provide results intended to approximate the sample universe. The precision of Ipsos online polls is measured using a credibility interval. In this case, the poll is accurate to within +/ - 3.5 percentage points, 19 times out of 20, had all Ontario adults been polled. The credibility interval will be wider among subsets of the population. All sample surveys and polls may be subject to other sources of error, including, but not limited to coverage error, and measurement error.
About The Ontario Home Ownership Index
The Ontario Home Ownership Index is designed to reflect Ontarians' overall views of the residential real estate market in Ontario, and incorporates measures such as Ontarians' perceptions of whether the market in their neighbourhood, city, and Ontario, respectively, have improved or worsened in the last year and looking ahead into the future, whether home ownership is important to them and whether it is a good investment in the long-term. The first wave of the index, conducted in the fall 2013, was set to a baseline of 100 points.
About the Ontario Real Estate Association
The Ontario Real Estate Association represents over 64,000 brokers and salespeople who are members of the 40 real estate boards throughout the province. OREA serves its REALTOR® members through a wide variety of professional publications, educational programs, advocacy, and other services. www.OREA.com
(1) For the purposes of this study, Generation X is defined as being 'born 1965-1980'; Generation Y, born 1981-1995.