Mortgage rules changing

The Superintendent of Financial Institutions (OSFI) announced changes to mortgage qualification rules, on Thursday.

The proposed change is set to come into effect June 1. Clients applying for mortgage financing who have 20% (or more) down or who are looking to refinance their mortgage, will now have to qualify at a stress test rate of 5.25%.

Clients who are purchasing a home with less than 20% down will still be subject to the stress test, but still at the current rate of 4.79%.

What does this mean in dollars and cents?

This means a decrease in borrowing power (or ability to refinance) of approximately 4-4.5%.

Assuming the following:

  • Combined family income of $120,000
  • Property taxes of $4,000 annually
  • No significant debts besides the proposed mortgage
  • 20% down
  • 25-year amortization

Running the numbers as I would for a pre-qualification discussion, at the current stress test of 4.79%, this family would qualify to buy a new home at a purchase price of $750,000.

Under the proposed new stress test of 5.25%, this same family would only qualify for a purchase price
of $715,000.

It may seem like a $35,000 difference in purchase price is not such a big deal. However, in many communities across the country that $35,000 means a significant difference in either the quality or location
of the home people will be looking at.

Who will this affect?

I think this change will most affect middle-class Canadian families looking to upgrade from their starter home to a larger family home. In turn, this may trickle down and also affect new buyers trying to get into the housing market.

If people don’t qualify to upsize or upgrade their homes and are forced to stay put, this means that the inventory of starter homes will be reduced.

With a reduced inventory of starter homes there will be more competition for people trying to buy the homes that do become available.

This might mean people who otherwise qualify to buy a home are forced to continue to rent.

When the stress test was introduced in October 2016 for insured mortgages and subsequently in January 2018 for uninsured mortgages, there was a great deal of conjecture about the long-term impacts of these qualification changes.

We saw lenders adapt some of their policies that helped to ease the impact of the stress test.

As an example, multiple lenders who did not previously include government benefits like Child Tax Credit are now including this income to help more clients qualify.

We saw more and more clients leaning on the bank of mom and dad to increase their down payment or sign as co-borrowers for their mortgages.

Despite the initial pushback and outcry, we have adjusted to the new qualification guidelines. We will again to the proposed changes coming in June.

Ostensibly, this most recent change is geared to cool our crazy housing market. I don’t think this will have the desired effect.

If you are currently shopping for a home and have been pre-qualified based on a down payment of 20% or more, I urge you to reach out to your mortgage professional to double-check how the proposed changes may affect your application.

As the proposed change is still so new so I’m sure we will learn more over the next few weeks. An article posted on the Canadian Mortgage Trends site provided an avenue for public feedback:

The public is invited to provide feedback to OSFI via [email protected], which will be accepted up to May 7.

OSFI will then communicate some of that feedback and any final amendments to the qualifying rate by May 24, prior to the new stress test taking effect on June 1.

Again, for people currently shopping (with 20% or more down) or considering refinancing their home I think it is important to connect with your mortgage person to double-check if and how the proposed change will affect your mortgage application before you write an offer on a home.


Mortgage frenzy

Back in January, I shared my thoughts about the challenges that potential buyers are having trying to buy homes right now.

I likened it to an episode of The Amazing Race.

I’m starting to feel like its more a season of the series as opposed to an episode. It is not just our market. I’ve spoken with mortgage colleagues, and it sounds like clients are facing the same challenges across the country.

I finished my last column with my desire to see a more balanced, less frenetic market.

During the last month, I’ve seen a few sellers scrambling to buy a property once their home sells. Purchasers are coming in with highly desirable offers – writing offers with figures well over the asking price and tight closing dates.

Due to overwhelming volumes, lenders are starting to bog down. Turnaround times are creeping up. And due to the prices offered, I’m seeing fewer homes pass lenders’ AVM systems so more appraisals are being required by lenders.

If you haven’t heard the term before, google explains that AVM stands for Automated Valuation Models.

AVMs are statistically based computer programs that use real estate information such as comparable sales, property characteristics, and price trends to provide a current estimate of market value for a specific property.

An AVM report provides a written summary of the results.

Part of what we do as mortgage brokers is find the right fit for our clients. Each lender has different niches, policies, and procedures. At the beginning of March, I submitted to one of my favourite lenders that normally has approvals back within 48 hours.

I waited 12 days for an approval on a straight forward purchase with amazing clients. The approval came with one of the conditions being an appraisal to confirm the value.

Appraisers are being inundated and in some centres are booking a week to 10 days out.

This is a serious challenge right now because I’m seeing offers with five or seven days for subject removal. With the market as hot as it is, sellers are not keen on signing extensions.

Home inspectors are swamped and also booking over a week out in some cases.

To add another level of complexity, lawyers and notaries are swamped. One of my clients went to four different lawyers before she could get someone to act on her behalf for an April 30 closing date.

Apart from the stress of trying to make sure all of these moving pieces line up for our clients, my major concern is potential buyer’s remorse down the line.

One of my clients received a brilliant offer on his home, with a closing date of (you guessed it) April 30. He was fortunate to nail down an accepted offer on a home that seemed to check all the boxes. I had an approval in place for him. Then he panicked.

He collapsed the offer he had in place, thinking he would find something else that he would be happier with. He wrote an offer on another property and we finally have an approval in place on the second home.

Chatting with him last week, he said that this was certainly not his dream home but there was nothing else available.

This felt frustrating to me. Clients are panicking and writing offers on properties they don’t love to make sure they have a roof over their heads. This can be an expensive game if you decide you truly hate the home and need to move again.

If you are trying to buy a home, please try to allow for at least two weeks for subject removal for your financing. Touch base up front with whomever you want to work with for your legal documents to make sure they can act on your behalf.

Most important, be patient with the team that is working so hard to help you buy your dream home. There is a lot of work that happens behind the scenes, and in the whirlwind of activity and emotion it’s important to maintain perspective.

Quick reminder – if you are a homeowner, don’t forget to complete your declaration for the Speculation Tax. This needs to be completed by March 31.

Writing unconditional offers

Don’t. Just don’t.

Have you heard stories about what happened when the Cabbage Patch dolls came out in 1976?

People were fighting in stores trying to get the last doll off the shelf? Our housing market is starting to feel a bit like that.

Our housing market is crazy. Off-the-charts crazy. I was looking for a more professional description, but that word really seems to fit the best.

I am seeing an increasing number of clients wanting to write subject-free offers on homes, generally at a figure well over asking price.

Each and every time we have a similar conversation, clients ask “Are you OK with us writing a firm offer?”

Each and every time, my answer is the same. No.

  • No, I am not comfortable with you (my client) writing a subject-free offer.
  • No, I am not comfortable with you putting your financial future in jeopardy in case something goes sideways.

I think that using the term pre-approved can be misleading for clients. Being pre-approved means that you, as a borrower, have been vetted and are pre-qualified to purchase a suitable property at a certain price-point, based on your current financial situation.

And here’s the rub. It is decidedly a seller’s market. Inventory is low. So many offers are coming in on each listing that clients are looking for any kind of edge or advantage that puts them in a more favourable position.

What are some of those possible advantages?

  • Writing at a higher price
  • Suggesting a quick closing date
  • Presenting a subject-free firm offer
  • Being flexible on the completion date to suit the seller’s situation

What could possibly go wrong?

  • Your lender requires an appraisal, and the appraisal comes in low
  • The sale of your current home collapses unexpectedly
  • The strata hasn’t been well-managed, so lenders won’t touch the complex you bought in
  • Something has changed with your financial situation that changes the amount you are approved for
  • There are issues with the home — i.e.: knob and tube wiring, asbestos, outdated plumbing, etc.
  • Lenders don’t like the location of the property
  • The property was a former grow-op

What if something does go sideways? What if you write a subject-free offer, then your lender does not approve the purchase?

Depending on why a lender declines a file, there may be other options. Maybe there are other lenders who are fine with your application.

Lenders have their own policies and procedures, so it may be a matter of finding a lender where your file is a better fit.

However, if the issue is a low appraisal and you only have funds for the minimum down payment, you may find yourself in a bit of a pickle.

Lenders will finance to a percentage of the lower of the purchase price or the appraised value. If the appraisal comes in low, you may need to increase your down payment by the difference.

I am seeing a trend of more sellers listing their homes and specifying that they will be reviewing offers on a certain day. While this is advantageous to the sellers, it is challenging for potential purchasers.

I have been working with a young couple that are desperate to find a home. They have been trying for more than a year to find an appropriate home in their price range.

About two weeks ago, they found a home that ticked all the boxes. The sellers were reviewing offers the following Sunday. We had a long conversation, reviewed their application line by line to make sure nothing had changed with their situation.

They wanted to write an offer for $40,000 over the list price of the home. They ordered an appraisal up front to determine whether this was an appropriate value.

Ordering an appraisal for every home you are thinking of writing an offer on is obviously not an affordable option.

I’m seeing clients writing on three or four (or more) homes before they are finally chosen as the successful purchasers, so spending several hundred dollars for each potential home would get expensive quickly.

In this case, my clients were comfortable writing at a higher price and closing very quickly. They wrote their offer with one subject, which was a home inspection.

They were overjoyed to learn they were finally getting a home. I had a sleepless night waiting for their approval to come back.

There are checks and balances built into the home-buying process for a reason. Writing subjects such as financing and inspection into your offer are designed to protect you, the buyer, in the event that the value of the home comes in low or if the Property Disclosure Statement shows that the home has issues of concern for lenders.

If you write a subject-free offer and then are unable to find suitable financing, you could find yourself in a very uncomfortable spot. You might:

  • End up in a mortgage with a private or alternative lender at a higher rate
  • Have to scramble and find a co-signor
  • Lose your deposit
  • Risk being sued
  • Lose a lot of sleep until you know you have financing in place

If you ask me about writing a subject-free offer, my advice is not to do it. Maybe I’m too conservative, but the last thing I ever want to see is my clients on the hook for not having an emergency out if there is something wrong with the property.

I made one realtor choke yesterday when he told me his clients were writing an offer. I’m not sure that “May the odds be ever in your favour” was the most appropriate way to sign off the call, but that’s how many are feeling these days.

If you are a seller in today’s market, these dynamics are fantastic for you. However, the trick is that most sellers are buying a new property themselves.

This is a vicious circle, and I have to say I for one will be much happier when the market shifts to a more balanced situation.

COVID's emotional cost

COVID is catching up.

I remember conversations from last March and April as we were trying to anticipate the implications and fallout from a world-wide pandemic.

I remember the great toilet paper hunt of 2020. I remember wondering about how homeowners would be affected if they had to go months without income.

In conversations with other brokers, I recall speculating about when our world would be back to normal.

Lenders were quick to support their mortgage clients by offering payment deferrals. The government came out with programs to help support those who weren’t working.

As we moved through last year and many people found ways to go back to work, it seemed like (for most people) we were adapting to our new normal.

So here we are, a year into the pandemic.

There are friends and neighbours among us who have been unable to return to their chosen careers due to the nature of their work.

I have had a few heartbreaking conversations with clients over the last few weeks. And the number of these calls seems to be increasing.

Clients who have exhausted their savings, maxed out all their credit cards trying to make ends meet, found work in different fields, revamped their lifestyles, and then received a bill from the government saying they didn’t actually qualify for CERB so they now have to repay almost $10,000.

For this family, this bill was the proverbial last straw.

My client is an event planner, specializing in international music festivals. Last spring, she had a full slate lined up for the year. Her partner works in advertising. He was able to adapt his work and has been operating at about 75% capacity as compared to before COVID hit.

She estimated that she lost more than $150,000 in revenue last year.

This is the heartbreaking part of the story. Both self-employed, and both were heading into what they thought was going to be a banner year for their businesses.

They had been working hard for years to get to where they were. Relief was in site.

Here we are a year later. We are working to refinance their home to pull equity to pay off their credit cards and reduce their monthly bills.

I got a little choked up during one of our calls. My client said she was mortified about having to go down this road. She said it took them more than a month to work up to calling about a refinance once they realized they had reached their breaking point.

They had a plan. They had been working diligently on this plan with their finances, and this past year has set them back to where they were five years ago.

This call in particular was a sobering one for me. I am sure there are many families out there who are struggling but doing their best to maintain the lifestyle they led prior to COVID.

If you have significant equity in your home, refinancing may be an option to help reset your finances and reduce your monthly bills. Although this may not be an ideal solution, if you are losing sleep because creditors are looking for payments you don’t have it may be the solution that works for now.

For families that are still struggling with reduced income, if you are a homeowner it may be worthwhile to reach out to your mortgage person.

Even with changes to income, there are lenders offering refinances at reasonable rates that may provide the solution that allows some breathing room for you.

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 www.okanaganmortgages.com

Visit their blog at 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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