Fall Survey Highlights Stress Test Fallout

Marci • December 11, 2017

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.

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Alternative Lending Provides You With Options

By Marci Deane • February 19, 2025
Alternative lending refers to any lending practices that fall outside the normal banking channels. Alternative lenders think outside the box and offer solutions to Canadians who wouldn’t otherwise qualify for traditional mortgage financing. In an ideal world, we’d all qualify for the best mortgage terms available. However, this isn’t the case. Securing the most favourable terms depends on your financial situation. Here are a few circumstances where alternative lending might make sense for you. Damaged Credit Bad credit doesn’t disqualify you from mortgage financing. Many alternative lenders look at the strength of your employment, income, and your downpayment or equity to offer you mortgage financing. Credit is important, but it’s not everything, especially if there is a reasonable explanation for the damaged credit. When dealing with alternative lending, the interest rates will be a little higher than traditional mortgage financing. But if the choice is between buying a property or not, or getting a mortgage or not, having options is a good thing. Alternative lenders provide you with mortgage options. That’s what they do best. So, if you have damaged credit, consider using an alternative lender to provide you with a short-term mortgage option. This will give you time to establish better credit and secure a mortgage with more favourable terms. Use an alternative lender to bridge that gap! Self-Employment If you run your own business, you most likely have considerable write-offs that make sense for tax planning reasons but don’t do so much for your verifiable income. Traditional lenders want to see verifiable income; alternative lenders can be considerably more understanding and offer competitive products. As interest rates on alternative lending aren’t that far from traditional lending, alternative lending has become the home for most serious self-employed Canadians. While you might pay a little more in interest, oftentimes, that money is saved through corporate structuring and efficient tax planning. Non-traditional income Welcome to the new frontier of earning an income. If you make money through non-traditional employment like Airbnb, tips, commissions, Uber, or Uber eats, alternative lending is more likely to be flexible to your needs. Most traditional lenders want to see a minimum of two years of established income before considering income on a mortgage application. Not always so with alternative lenders, depending on the strength of your overall application. Expanded Debt-Service Ratios With the government stress test significantly lessening Canadians' ability to borrow, the alternative lender channel allows expanded debt-service ratios. This can help finance the more expensive and suitable property for responsible individuals. Traditional lending restricts your GDS and TDS ratios to 35/42 or 39/44, depending on your credit score. However, alternative lenders, depending on the loan-to-value ratio, can be considerably more flexible. The more money you have as a downpayment, the more you’re able to borrow and expand those debt-service guidelines. It’s not the wild west, but it’s certainly more flexible. Connect anytime Alternative lending can be a great solution if your financial situation isn’t all that straightforward. The goal of alternative lending is to provide you with options. You can only access alternative lending through the mortgage broker channel. Please connect anytime if you’d like to discuss mortgage financing and what alternative lending products might suit your needs; it would be a pleasure to work with you.

Benefits of Working with an Independent Mortgage Professional

By Marci Deane • February 12, 2025
If you need a mortgage, working with an independent mortgage professional will save you money and provide you with better options than dealing with a single financial institution. And if that is the only sentence you read in this entire article, you already know all you need to know. However, if you’d like to dig a little deeper, here are some reasons that outline why working with an independent mortgage professional is in your best interest. The best mortgage is the one that costs you the least over the long term. An independent mortgage professional can help you achieve this. Mortgages aren’t created equally. Oftentimes slick marketing leads us to believe the lowest “sticker price” is the best value. So when it comes to mortgage financing, you might assume the mortgage with the lowest rate is the best option. This isn’t always the case. When considering a mortgage, your goal should be to find the mortgage that will cost you the least amount of money over the total length of the mortgage. There are many factors to consider, such as your specific financial situation, the rate, initial term length, fixed or variable rate structure, amortization, and the penalties incurred should you need to break your mortgage early; the fine print matters. An independent mortgage professional can walk through all these factors with you and will help you find the mortgage that best suits your needs. Sometimes taking a mortgage with a slightly higher rate can make sense if it gives you flexibility down the line or helps you avoid huge payout penalties. Working the numbers with an independent mortgage professional will save you money in the long run instead of just going with what a single lender is offering. Save time by letting an independent mortgage professional find the best mortgage product for you. Let's face it, getting a mortgage can be challenging enough on its own. Everyone’s financial situation is a little different and making sense of lender guidelines is a full-time job in itself. So instead of dealing with multiple lending institutions on your own, when you work with an independent mortgage professional, you submit a single mortgage application that is compared to the lending guidelines of various mortgage lenders. This will save you time as you don’t have to go from bank to bank to ensure you’re getting the best mortgage. Simply put, an independent mortgage professional works for you and has your best interest in mind, while a bank specialist works for the bank and has the bank's best interest in mind. It’s no secret that Canadian banks make a lot of money. It seems every quarter they turn billions of dollars in profit (despite the economic environment). They do this at the expense of their customers by charging as much interest as they can and structuring mortgages to their benefit. It’s all about the alignment of interest. Bank employees work for the bank; the bank pays them to make money for the bank. In contrast, independent mortgage professionals are provincially licensed to work for their clients and are paid a standardized placement or finder’s fee for matching borrowers with lenders. When you work with a single bank, you only have access to the products of that bank. When you work with an independent mortgage professional, you have access to all of the lenders that mortgage professionals have relationships with and all their products. Working with an independent mortgage professional will save you money, time, and provide you with better mortgage options. Plus, you have the added benefit of working with a licensed professional looking out for your best interest, providing you with the best possible advice. If you’d like to know more or to discuss mortgage financing, please connect anytime; it would be a pleasure to work with you.

How to Ensure a Smooth Home Purchase

By Marci Deane • February 5, 2025
Chances are, buying a home is one of the most important financial decisions you’ll make in your life. And as mortgage financing can be somewhat confusing at the best of times, to alleviate some of the stress and to ensure your home purchase goes as smoothly as possible, here are six very high-level steps you should follow. While it might seem like the best place to start the home buying process is to browse MLS on your phone and then contact a Realtor to go out and look at properties, it’s not. First, you’re going to want to work with a licensed independent mortgage professional. When you work with an independent mortgage professional, instead of working with a single bank, you’ll be working with someone who has your best interest in mind and can present you with mortgage options from several financial institutions. The second step in the home buying process is to put together a mortgage plan. Unless you have enough money in the bank to buy a home with cash, you’re going to need a mortgage. And as mortgage financing can be challenging and not so straightforward, the best time to start planning for a mortgage is right now. Don’t make another move until you discuss your financial situation with an independent mortgage professional. It’s never too early to start planning. As part of your mortgage plan, you’ll want to figure out what you can afford on paper, assess your credit score, run some financial scenarios, calculate mortgage payments, and have a clear picture of exactly how much money is required for a downpayment and closing costs. You’ll also be able to discuss which mortgage product is best for you, considering different mortgage terms, types, amortizations, and features. Now, what you qualify to borrow on paper doesn’t necessarily mean you can actually afford the payments in real life. You need to consider your lifestyle and what you spend your money on. Understanding your cash flow is the key. Make a budget to verify you can actually afford your proposed mortgage payments and that you have enough funds to close on the mortgage. No one wants to be house-poor or left scrambling to come up with funds to close at the last minute. If everything looks good at this point, the next step will be to get a preapproval in place. Now, a pre-approval is more than just typing some numbers into a form or online calculator; you need to complete a mortgage application and submit all the documents requested by your mortgage professional. Only proceed with looking at properties when you’ve been given the green light from your mortgage professional. When you’ve found a property to purchase, you’ll work very closely with your mortgage professional to arrange mortgage financing in a short period of time. This is where being prepared pays off. As you’ve already collected and submitted many documents upfront during the preapproval process, you should be set up for success. However, remain flexible and provide any additional documentation required by the lender to secure mortgage financing. Once you have firm lender approval and you’ve removed conditions on the purchase agreement, don’t change anything about your financial situation until you have the keys. Don’t quit your job, don’t take out a new loan, or don’t make a large withdrawal from your bank account. Put your life into a holding pattern until you take possession of your new home. So there you have it, six steps to ensuring a smooth home purchase: Work with an independent mortgage professional. Put together a mortgage plan. Figure out what you can actually afford. Get a pre-approval. Provide the necessary documentation. Don’t change anything about your financial situation until you take possession. If you’d like to discuss your personal financial situation and find the best mortgage product for you, let’s work together. We can figure out a plan to buy a home as stress-free as possible. Please connect anytime; it would be a pleasure to work with you.
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