Wednesday, October 30, 2013
Is the Process of Securing Financing Slowing?
There have been some serious shifts in the process of qualifying for a mortgage when considering buying a new home. The catalyst for this change in the mortgage rules really started back in 2006 when the markets across Canada - and specifically in Calgary - shot up in an unprecedented hurry and then descended almost as quickly in 2007-2009. Since 2008, the Government has lowered the maximum amortization period from 40 to 25 years, reduced the gross and total debt service ratios and late last year regulated a higher qualification mortgage rate. Many of these restrictions appear to be aimed at cooling the housing market and limiting Ottawa's exposure in the case that house prices slump. "If we don't get the softness we are expecting, quite frankly I think they are already talking about more restrictions." Benjamin Tal, CIBC Deputy Chief Economist
The Federal Housing Agency has served notice that it is limiting guarantees it offers financial institutions to $350 million per lender under its National Housing Act Mortgage-Backed Securities program. Earlier this year, CMHC was given the okay by Ottawa to guarantee up to $85 billion for 2013 and those commitments reached $66 billion by the end of July. Even with the restrictions that these policies have spurred, Ottawa may feel they need to implement further policy to cool a market that has remained surprisingly resilient. "The consistent policy of this government has been to restrict or curtail its exposure - I would even say involvement - in the overall mortgage market." Jim Murphy, Chief Executive of the Canadian Association of Accredited Mortgage Professionals.
Getting financing certainly has become more rigorous over the past few weeks, months and years, and for the 15% of self-employed Canadians (and even higher ratio in Calgary) it's harder still. In past there have been programs for entrepreneurs that used "stated income" and a more relaxed qualification process that has recently been tightened. Changing attitudes among lenders make it more difficult for the self-employed to deal with top-tier banks, and the trade off is often higher interest rates. Lenders care more than ever about up-front equity, meaning they are requiring a larger down payment to soften their risk.
There have been signs this year that the housing market is in recovery mode. Many analysts consider this a short term blip caused by consumers rushing to buy in order to take advantage of pre-approved mortgages signed 120 days ago when long-term rates were lower. But with the Bank of Canada signaling last week that it won't be raising rates, consumers can potentially take their foot off the gas. With no panic to buy, the question is whether people will be encouraged to continue to take on more debt or slow down their spending, especially if the economy wanes.
A major concern for Finance Minister Jim Flaherty has been the ever increasing debt load of Canadians. That, in combination with the recent downgrades to the Bank of Canada's growth forecasts, may give the government no choice but to further tighten lending rules.
It is difficult to understand fully how all of this will affect the real estate market, and many economists and analysts in the field are hesitant to make predictions on the housing market as so many experts have been so wrong for so long! I would suggest that we should pay close attention to the micro-markets within our area for indicators of a slowing or heated market. However, from all indicators up to now, I would expect the probability of a simmering market a very good possibility.
If you are considering buying or selling real estate, it would be prudent to align yourself with a real estate professional with a good understanding of these variables and with experience in the industry. I would be happy to chat with you about your real estate intentions and assist you in putting together a well researched strategy to help you achieve your goals!
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There is no doubt that it is becoming increasingly difficult for Canadians to qualify for insured mortgages. This is mainly due to the changes which were made regarding the maximum allowable amortization period. As far as maximum GDS and TDS ratios are concerned, from the time I started doing mortgages in 2010 up until today, 35 and 42 are the numbers I use when working with my clients. I use these numbers for two reasons. First of all, meeting these guidelines means the deal will be acceptable to most lenders, whose qualifying criteria have tended to and continue to be more stringent than those dictated by Ottawa. Secondly, these numbers represent a monthly debt obligation that most people are able to meet comfortably.
ReplyDeleteConsider qualifying at the aforementioned debt servicing ratios for a mortgage on a $300,000 home with 5% down at a rate of 3.5% :
In 2010, with an amortization of 40 years a home buyer would be looking at a monthly mortgage payment of $1130 and would have qualified with a yearly income of $38,742
Today, the maximum amortization of 25 years means a monthly payment of $1462 and a qualifying income of $50,126.
This means that home-buyers need to be making 25% more just to afford the same home and that a segment of the population has potentially been priced out of the market. Settling for a lower-priced home or saving up to make a larger down payment has become the reality for many. For those who are able to come up with a 20% down payment, it's still possible to amortize a mortgage up to 35 years.
As for the self-employed seeking to qualify for a mortgage - at tax time they need to keep in mind the trade-offs involved in writing down their income. Ultimately, a wise choice has to be made concerning whether it is better to be paying taxes or having to save for a larger down payment and paying more interest.
Consider 2 clients who have both grossed $100,000 in a calendar year and wish to qualify for the example mortgage cited above. Assume both can legitimately write off $60,000.
Client A writes off the entire $60,000, and needs to use a stated income progam to qualify for a mortgage. He then needs to come up with at least 25% down and ends up with an interest rate of 4.4%.
Client B elects to write off just $40,000 this year and easily qualifies to put down 5% on a mortgage at 3.5%.
Who's further ahead? Well, that all depends on personal preferences and advice from both your accountant and a trusted mortgage advisor.
Hey Randy... interesting stuff here. I certainly appreciate your comments and further contribution to this topic. Wow, what really stands out for me is the fact one would need to be pulling in 25% more income to qualify for the same budget only three years ago! I wonder how many of us have increased our income that much over a three year period! And keep in mind the price of that home has changed quite a bit over these three particular years... you need to be making 25% more and you will be settling for less of a home!
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