Impact On You – Mortgage Rule Changes Oct 2016

Buying or Closing On A Purchase:

The new rules announced and then ammended in early Oct 2016 have caused a lot of confusion with their different implementation dates for different situations. If you are waiting to close on a purchase or are actively looking to buy, talk to a mortgage professional to clarify what the impact is to you specifically.

Average Home Owner:

  • If you have a mortgage already, the rules have no impact on you when it comes time to renewing.
  • If you have been thinking of refinancing to pay off debt or do a major reno then in most cases there will be no change. But give me a call anyways to determine how much you can qualify for.

Mortgage Insurance Rule Change Impact On Values:

The impact of this is a bit harder to predict but I like to make educated guesses to see if I am right or not in the future. From my experience under 10% of buyers take on a mortgage that is greater than 80% of what they qualify for. For example, if I qualify a buyer for a mortgage of $500,000 they likely will end up buying something with only a mortgage of $400,000. The reason being is that although the rules allow a relatively high amount, in most cases people don’t want that much of a payment. Even those that are in the 10% it is because they have income sources that we can’t use to qualify but do contribute to their household income so they can afford the higher payments.

The net result is that a small group of buyers won’t be able to take on a mortgage as large as they would like. From past experience all this means is that they will adjust their criteria and purchase something at a lower price. The important thing to recognize is that it won’t change overall demand. As long as we continue to have strong demand for housing in the region prices have a bottom and will likely continue to rise. The real impact will be on First Time Home Buyers. They qualify for less now so they have to move further out or accepting a lesser property in order to own. I suspect more will choose to continue to rent and put off buying because the gap between the property they can get in terms of rent vs what they get with buying will widen even greater than it already is. So we will see a decrease in FTHB activity but the demand and desire won’t go away. For each FTHB that doesn’t buy, that is one less rental unit available and causes other’s in the rental market to consider buying as Rents continue to jack up in response to ultra low vacancy rates.

The Impact On Rates:

I believe the real impact is going to be on the rates we all face in the future due to an effective reduction in competition in the mortgage market. The changes specifically around the low-ratio mortgage insurance options hit the Monoline Lenders (ie non Big Bank/Tier 1 lenders) the hardest. It was the security provided under low-ratio mortgage insurance (in which the lender pays the premium) that allowed the huge growth in competition.

While the lenders are adjusting to the new rules, I believe it is just a mater of time that we see a reduction in lender options. The conspiracy theorists in the industry see it as the Liberals paying off the Big Banks since it is them that ultimately have the most to gain from this change. I don’t see it that way, I believe that the government wasn’t clearly aware of the unintended consequences and is desperate to make sure that tax payers aren’t on the hook if prices keep escalating and there is a big correction. The good news is that in the last 5 years the government has made it easier for the creation of Charter Bank institutions and many Monoline lenders have already gone this route or are about to. This means that they can take deposits of sorts and thus provide balance sheet lending products. How they all hold out, especially if there is a correction of any size is yet to be determined.

Risk Sharing

The next big change on the menu is risk sharing. As it is, default insured mortgages are 100% at cost to the insurer. The new rule changes being discussed will have the insurers responsible for most but not all the costs of a default. I believe this will result in two major changes:

  1. Lenders will tighten up their lending criteria and be less ‘lose’ with what they will accept. This will make it harder for marginal borrows such as Business For Self, recently bankrupt, poor credit borrowers and riskly properties to gea approved.
  2. With high risks will come higher costs both in terms of risk and default costs. This will result in higher rates.

Historical Rates Coming To An End

5 year fixed rates being in the 2.5-2.75% range  for the better part of the last year or two. I think we are going to see the end of these all-time historical low rates even if bond yields remain as low as they are. There are too many costs building in the system for lenders and they will need to raise rates to absorb them. If I was to put a wager on it I would guess that after perhaps this Spring 2017 market (at the latest) we will never see rates this low again. But then again I have been wrong before and if we get into negative overnight lending rates, anything is possible!

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