Mortgage adjustments

There were more changes with respect to mortgage qualification this past week.

TD announced that they are changing how they calculate Home Equity Line of Credit (HELOC) payments for mortgage applications.

HELOCs are credit lines that are secured by a mortgage against your home.

When we submit a mortgage application, we are required to factor in payments based on the outstanding balance of any credit facilities.

For unsecured credit cards or lines of credit, we calculate three per cent of the current balance, regardless of what your lender requires as a minimum payment.

If you have a visa with a balance of $5,000 we use a payment of $150.

For HELOCs, we calculate a payment as if the outstanding balance is amortized over twenty-five years at the Bank of Canada Benchmark rate. Using the example of $200,000 HELOC with a balance of $50,000,  we would include a payment of $300.56.

TD has changed their guidelines so that we now add in a payment based on the approved limit as opposed to the outstanding balance.

For the same example, we would now use a payment of $1,202.22.

For new mortgages with a HELOC component, we calculate the payment based on the entire amount so it will be business as usual.

This change will affect clients who are looking to purchase or refinance second or subsequent properties (i.e. purchasing a rental).

As a very rough (and simple) calculation, every $500 of payments you have drops your borrowing power by about $100,000. For the example above, TD’s change means that the client will be able to borrow about $200,000 less.

I will qualify this by saying that each lender has different guidelines, policies, and procedures.

TD is the first bank in the broker channel to announce this change. I will not be surprised to see other institutions following suit.

Down the road, it will be interesting to see if a similar rule is applied to unsecured credit facilities. I work with a variety of clients, many of whom have multiple credit cards with zero balances.

If guidelines change such that we need to calculate in payments based on limits as opposed to balances, borrowing power will be greatly reduced for many people.

An irony is having multiple credit cards you use responsibly (maintain no or minimal balances) goes a long way to increasing your credit score – something lenders look for.

While there are people in over their heads financially (for whatever reason), there are just as many who use their credit facilities responsibly.

Changes to mortgage legislation over the last few years to slow the housing market and protect Canadians from becoming over-extended have impacted the ability of many buyers to get into the market.

I’m seeing people renting for longer despite having worked and saved to be able to buy.

If the rules continue to change and now affect those looking to purchase rental housing, it will be interesting to see what happens to the rental housing market over the next few years.

While I was at the Mortgage Professionals Canada conference two weeks ago, I listened to economist Benjamin Tal, who thinks recent changes will lead to an over-correction by 2020.

Lenders and clients will adjust and adapt, just as they have to changes in the past.


Social media, mortgages - 2

Happy Halloween!

A few columns back I wrote about how lenders (and brokers) research potential clients online. Results of these online searches can affect mortgage applications.

I had some interesting feedback about that comment. Like it or not, this is the new way of doing business.

Searching the property you are thinking about buying is also important. For the last few months, I’ve been working with a young couple in Nanaimo who are purchasing their first home.

They have a very specific wish list and are being very methodical about their search. They want to make an informed decision that they are comfortable with for years to come.

After viewing multiple potential properties over the course of several months, they found the perfect home. It met every single item on their wish list, was well within their price range, and in a great neighbourhood. They went home to discuss how much they would offer and what they wanted as a closing date. They were thrilled.

Over a coffee they googled the address of the house.

They were disappointed by what they found. There were multiple posts and media interviews by the owner and neighbours about significant problems with how the subdivision had been built.

These interviews talked about issues that happened a few times a year (winter and spring generally) that made the neighbourhood almost unbearable to live in.

Crisis averted.

Think about what would have happened had they bought this beautiful home, only to find out several months later they couldn’t stand to live there.

The same logic applies to the mortgage process.

Whether you are a first-time or repeat home buyer, it is a great idea to do some research about mortgages. Much has changed over the last few years.

There are fantastic tools available on line to help. Canada Mortgage and Housing has several calculators that will help you determine if you are ready to buy a home.

I also suggest talking to your mortgage broker or bank before you consider moving forward with a purchase. In the not so distant past, it was almost a given that you would qualify for the same size mortgage you are currently carrying.

With the implementation of the stress test and resulting decrease in buying power, it's important to confirm the amount you are qualified to borrow.

Early this spring I helped clients who already had an accepted offer on their home. They were moving to the Lower Mainland and needed a slightly larger mortgage. In their case, they were able to find a home with a rental suite which helped bring their debt servicing in line.

As important, if you are part-way through the mortgage process and have made an offer, talk to your broker or bank before making any big changes to your situation.

Clients I worked with over the summer were thrilled to be approved for the purchase of their first home. Their application was approved and they removed their financing subject. They had written with a slightly longer closing date, so were basically in a holding pattern for two months.

The wife called to ask what would happen if she changed employers. She had been recruited by a competing firm and been offered a substantial increase in salary. The new position, however, had a mandatory three-month probation period.

It would certainly make sense to take a position that paid more money.

Their mortgage had been approved based on the application we sent in, and part of the strength was the fact that she had been with the same employer for 10 years.

I approached the lender to see if this would affect their approval. Based on the amount of their down payment and their impeccable credit score, we were able to get an exception and she took the new position.

However, lenders do not like surprises. And they sometimes do post-audit checks to confirm everything is still the same shortly before the mortgage closes.

I’ve seen this go the other way. Last year, I had a client who posted all over his social media how excited he was to start his new (commissioned sales) job in a completely different industry.

The lender saw this, re-evaluated the file, and cancelled the commitment as this was deemed to be a material change in the client’s financial picture. The client had already removed all his subject, so he was in a bad spot.

The lesson out of this is that the internet is an important tool during the home-buying process.

There is extensive information available at your fingertips to help with both education and calculations.

The process of buying a home can be both exciting and intimidating. Doing your research will help make you more comfortable with the decisions you are making, and hopefully ensure that you make the right decision.

Mortgages for seniors

I received  a call from a gentleman in the Shuswap, last week

He read my last column, which talked about how the mortgage changes are impacting both people who currently have a mortgage and people who are trying to buy a home.

He pointed out that I hadn’t covered how the mortgage changes of the last few years are affecting seniors.

For most Canadians, the message we heard growing up was work hard, pay off your mortgage, then you can retire and do all the things you’ve wanted to: travel, take up a new hobby, relax on the beach or the golf course.

Over the last few years I’ve seen a few heart-breaking situations. I’m not sure about the statistics, but it seems like the number of couples staying married (to their original partner) has dropped dramatically.

As a result, I’m seeing more seniors who are single and whose assets are relatively low due to splitting everything with an ex-partner.

The other situation I’m seeing is seniors who own their home free and clear but have minimal pension income to live on.

Prior to the last round of mortgage changes, we had access to several equity products through A lenders. For clients who had significant equity in their homes, some lenders would provide a mortgage up to 50 per cent (as an example) of the home’s value with more relaxed rules about income qualification.

The lenders that were previously offering these programs have pulled back and no longer offer them.

You might be thinking that someone who has paid off their home should have lots of money tucked away. Sometimes that’s the case, and sometimes it's not.

For instance, I worked with a couple recently who did own their home free and clear. They had operated a small vehicle repair business their entire lives. They were old school and were less concerned about their bottom line and more concerned about helping people, including those who couldn’t afford to pay much.

Because they were self-employed their entire lives, they don’t have substantial pension income. What they do bring in covers basic living expenses but doesn’t leave much room for emergencies that come up, like replacing their furnace or vehicle.

Another retired client bought a condo when she and her husband went their separate ways in their late 60s. She has minimal CPP and OAS, but it covers her small mortgage payment, strata payment, and living expenses.

Her strata raised a special assessment to cover major repairs to the building. She had to come up with $25,000 or pay a monthly payment of $285.00.

I hunted high and low to find a suitable option for her, but under the new rules we could not get an approval anywhere to add the money to her mortgage. Refinancing her mortgage would have made a minimal difference to her monthly budget. Adding a new payment of $285 meant she had to find part time work to help make ends meet.

In her situation, selling her condo didn’t make any sense as she was still paying less than if she were renting a similar unit. She is caught between a rock and a hard place.

Another senior I worked with was left with significant debt when her husband passed away. It was a second marriage and the resulting court battle over her husband’s assets (he died without a will) almost bankrupted her.

In an ideal world, we all retire with significant cash flow and savings and our home free and clear.

Things don’t always go according to plan.

I have done more reverse mortgages for clients this year than I have in the last ten, which I believe is a direct result of the changes to mortgage legislation.

This new mortgage landscape has certainly changed my conversations when working with clients who are getting closer to retirement age.


More changes coming?

In my first column of 2018, I talked about potential impacts of the mortgage changes that were rolled out Jan. 1.

Apart from the significant drop in buying power due to the stress test, one issue I was most concerned about was options for clients at renewal time.

In a nutshell, many clients who purchased their homes prior to the first round of legislation changes (implemented in October 2016) are in the unfortunate position of not qualifying for the size of mortgage they are carrying.

Why is this an issue?

In the past, when your mortgage came up for renewal, you have likely received a renewal notice that offers competitive rates. As long as your mortgage was paid as agreed, odds were solid that renewing your mortgage was a simple matter of signing the renewal offer.

What we have seen over the last year is a marked difference in how many lenders treat renewals.

In March, a client called to ask if 4.89 per cent was a normal rate.

At the time, new mortgages were being offered around 2.99 per cent.

I made a call on her behalf to see if there was an error on the renewal agreement.

The lender basically said that the client was being offered this rate as a result of the lender’s review of her credit report. She had run into financial issues due to a job loss and had slow payments on her credit cards and cell bill.

I asked if they could offer her a better rate. I was politely informed that the lender would not match any other rates; the client could take the rate or find financing somewhere else.

In this case, the client no longer qualified so was forced to stay with her existing lender at the new higher rate.

This week representatives from Mortgage Professionals Canada presented to the finance committee. They recommended nine changes to help address some of the fall out from the legislative changes implemented in October 2016 and January 2018.

The first recommendation was to allow an exemption for people that bought their homes prior to October 2016, so that they are able to switch to other lenders at renewal based on contract rate instead of the stress-test rate (currently 5.34 per cent). 

This is qualified by saying that they must have met the obligations of their original mortgage as agreed.

This recommendation also includes people who want to port the mortgage from their current home to another, provided no additional funds are required.

The second recommendation requests that the government adjust the change to refinances that was implemented in November 2016.

At that time, refinances were excluded from being covered by default insurance (ie: by CMHC).

At the current time refinances present more risk to lenders so they are charging higher interest rates. This change would allow lenders to offer slightly better rates as compared to what is happening in the mortgage market right now.

One segment of the market that was particularly affected by this change was clients who own mobile homes.

The majority of lenders will not finance mobile homes unless they are insured. Under the current rules, if you own a mobile home (even free and clear) you are now unable to refinance to pull any equity out of it as refinances are considered uninsurable. 

Perhaps the recommendation that really jumped out at me (although I was glad to see all of them) was the suggestion that the government consider policies to address the risks associated with household debt like lines of credit, credit cards, and vehicle loans.

I have worked with clients who have gotten in over their heads and are now struggling to meet their monthly payments. They’ve applied for and gotten more cards with higher limits or walked into a furniture store and been approved for a loan right away.

Sometimes this is due to mismanagement of their finances, but many times there are extenuating circumstances. Life happens.

What has been painful to see is that clients who have tons of equity in their home that could consolidate their debts and put themselves back on track don’t qualify to carry the higher mortgage.

This is ironic in that the slightly larger mortgage payment would be quite manageable as compared to all of the payments they are making on high-interest credit cards and loans.

As a broker, I don’t like to see clients get in over their heads. It’s a pretty painful conversation when the only option left is for clients to sell their home. In our market, rents are often higher than the client’s mortgage payment.

Another of the recommendations suggests that the stress test be amended to a percentage over the contract rate as opposed to using the Bank of Canada Benchmark rate.

Particularly in the Okanagan, I agree with having a stress test. It’s all well and good to say that people qualify for their maximum mortgage payment, but reality is that often people live paycheque to paycheque, and may end up in trouble if interest rates increase substantially.

However, the current stress test has decreased buying power for most home buyers by about 20 per cent. I feel there should be a happy medium, which is what this recommendation is hoping to achieve.

The intent of the legislative changes was to cool Canada’s housing market and improve affordability for Canadians. I think the changes rolled out in the fall of 2016 and January 2018 was a knee-jerk reaction implemented without adequate consultation and thought.

We’ve now had two years to adjust to the changes. Impacts have been far reaching. These changes have protected some Canadians, and created barriers to home ownership for many others.

Will anything come of the presentation by Mortgage Professionals Canada to the Finance Committee? I certainly hope so. It will be interesting to see what happens over the next few months.

More The Mortgage Gal articles

About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order to match the needs of their clients with the right mortgage package.

They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit http://www.okanaganmortgages.com

Visit their blog at https://www.okanaganmortgages.com/blog


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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