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Rate Update: Bank of Canada Increases Overnight Rate to 1.50%
The Bank of Canada today increased its target for the overnight rate to 1 ½ per cent. The Bank Rate is correspondingly 1 ¾ per cent and the deposit rate is 1 ¼ per cent. The Bank expects the global economy to grow by about 3 ¾ per cent in 2018 and 3 ½ per […]
2018 CMHC Prospective Home Buyers Survey
In preparation for its 2018 Home Buyers Survey, CMHC surveyed 2,507 prospective home buyers on-line. Respondents were all prime household decision-makers who intend to purchase a new home within the next two years, including approximately 1,500 First-Time Buyers, 500 current owners, and 500 previous owners.
The survey results highlight that:
• First-Time Buyers and Previous Owners share the same top motivator to purchase a home: they want to stop renting. Improved accessibility (physical obstacles and barriers) and investment opportunity were also noted as top motivators across all groups. Changes to mortgage regulations and concerns about possible future interest rate increases were not among the top motivators.
• Over four-in-ten First-Time Buyers and Previous Owners say they would delay their home purchase if they were not able to find their ideal home, with a fairly similar proportion saying they would be willing to compromise on the size of the home and location.
• The majority of future home buyers intend to obtain a mortgage to finance their home purchase, with First-Time Buyers showing higher incidence compared to Previous Owners and Current Owners.
• Across all future home buyers groups, more than six-in-ten say they are likely to have a financial buffer in case their expenses change in the future. Furthermore, the majority of future home buyers, especially Current Owners, agree that they feel confident they have the necessary tools and information to manage their mortgage and debt load.
• Among all groups, the two most common actions completed one to two years prior to the purchase of a home were saving for a down payment and determining what type of home to buy. On the other hand, in the last three months before purchasing, about two-in ten of prospective buyers pre-qualify for a mortgage.
• About one-in-four prospective home buyers stated that they would be very likely to consider delaying their purchase in the event of an increase in interest rates.
https://www.cmhc-schl.gc.ca/en/hoficlincl/moloin/sure/upload/2018-prospective-home-buyers-survey.pdf
Bank of Canada Increases Overnight Rate to 1.25%
Jan 17, 2018 – The Bank of Canada today increased its target for the overnight rate to 1 1/4 per cent. The Bank Rate is correspondingly 1 1/2 per cent and the deposit rate is 1 per cent. Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook.
The global economy continues to strengthen, with growth expected to average 3 1/2 per cent over the projection horizon. Growth in advanced economies is projected to be stronger than in the Bank’s October Monetary Policy Report(MPR). In particular, there are signs of increasing momentum in the US economy, which will be boosted further by recent tax changes. Global commodity prices are higher, although the benefits to Canada are being diluted by wider spreads between benchmark world and Canadian oil prices.
In Canada, real GDP growth is expected to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019, following an estimated 3.0 per cent in 2017. Growth is expected to remain above potential through the first quarter of 2018 and then slow to a rate close to potential for the rest of the projection horizon.
Source: Bank of Canada
Picture Source: Financial Post
Major Policy Change – another day, another mortgage change…and this one’s BIG!
While the details are still trickling in, the Office of the Superintendent of Financial Institutions (OSFI) has once again used its powers to tighten mortgage qualification rules. These changes could be effective as early as today for some lenders, but no later than January 1, 2018 and will impact anyone looking to purchase or refinance a home with 20% or more down payment or equity – i.e., a lot of people.
We will continue to monitor this closely as the various banks and lenders issue their responses/implementation dates and guidelines. We hope you find the below helpful, and we are available at any time to discuss any specific or general questions or scenarios you may have.
What’s Changing?
While a number of changes were announced today, the most significant is with respect to setting a new minimum qualifying rate, or “stress test” for uninsured mortgages (i.e., mortgages with 20% or more down payment).
As a recap, currently if you have 20% or more for a down payment and you select a 5-year fixed mortgage term, you can qualify for a maximum mortgage using your actual monthly payment in the calculations. A typical 5-yr fixed bank rate is around 3.24% right now, which is called the “contract rate” or “actual rate”. Going forward, while your actual mortgage payment would still be based on your contract rate, you would need to qualify using a much higher monthly mortgage payment based on the new “stress test” rate requirement which is the HIGHER of:
- The 5-yr benchmark rate published by the Bank of Canada (currently 4.89%), or
- The contract rate plus 2.0% (i.e., if the contract rate is 3.24% the qualifying rate would be 5.24%)
In the above example, this change would significantly reduce the maximum purchase price or refinance amount that a person could qualify for as it would require them to qualify based on a stress test rate of 5.24% vs. the contract/actual rate of 3.24% – please refer to the impact section below for examples.
When is This Changing?
The banks/lenders have yet to comment, but it is anticipated some may start implementing the new rules as early as today, but no later than January 1, 2018. As this is a federally regulated change it will directly impact the banks, but is also expected to roll out through the mono-line lenders. As our credit union lenders are provincially regulated, it will be interesting to see if they will have a competitive advantage vs. the other lenders in the coming months and into the new year.
What is the Potential Impact?
While every case is different, we have included a sample max purchase price impact calculation for a 20% down buyer*. Please contact us if you would like us to run the numbers for any specific scenario or would like the detailed calculations for the below:
Impact Example #1 (Max Affordability):
Total household salaried income = $200,000
Down payment available = 20%*
Mortgage Product Chosen = 5-year Fixed
Purchase Style / Location = Freehold / Toronto
Debts = limited debts (i.e., credit card, car, etc.)
Current Max Purchase Price = Approx. $1,550,000*
Max Purchase Price After New Stress Test Rules = Approx. $1,320,000*
(Note: the above is for illustration only. Please contact a member of Outline Financial to discuss, or for specific scenarios.)
**********
Impact Example #2 (Max Affordability):
Total household salaried income = $100,000
Down payment available = 20%*
Mortgage Product Chosen = 5-year Fixed
Purchase Style / Location = Condo / Toronto
Debts = limited debts (i.e., credit card, car, etc.)
Current Max Purchase Price = Approx. $720,000*
Max Purchase Price After New Stress Test Rules = Approx. $620,000*
(Note: the above is for illustration only. Please contact a member of The Lang Team to discuss, or for specific scenarios.)
*Note: for the above examples we converted the 20% down payment to a $ amount and used that same $ amount for both the contract rate and new stress test rate qualifying scenarios. Many media reports on the subject appear to be using a straight 20% down payment for both scenarios which would make the decrease in affordability appear larger.
What is the Media Saying?
While additional details are expected to be published throughout the week, we have included a link to the OSFI announcement as well as a few relevant articles that have come out in the media today:
- OSFI Announcement Posted on Government of Canada Website – Oct 17, 2017
- The Globe and Mail Article – Canada’s banking regulator raises bar for uninsured mortgages
- CBC.ca Article – OSFI finalizes new mortgage rules, including stress test for even uninsured borrowers
- Financial Post Article – Canada’s banking watchdog sets tougher rules for mortgage lending
- BNN Article – OSFI set new rules for mortgage lending
Additional Comments
While it is clear this change will have a significant impact on affordability, the argument for this change is that it will help stabilize the Canadian housing market over the long term. In a worst case scenario, if the housing market overshoots on the downside, given the numerous tightening measures implemented by the government in recent years, they now have many tools at their disposal to help stimulate the housing market if/when needed (i.e., by increasing amortization, lowering the stress test rate, increasing the availability of CMHC insurance, etc.)
Should you have any questions regarding the above, please contact us at any time.
Sincerely,
The Outline Financial Team
t: 416 834 1590
e: hello@outline.ca
Bank of Canada Increases Overnight Rate to 1%
Oct 11, 2017 – The Bank of Canada is raising its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.
Recent economic data have been stronger than expected, supporting the Bank’s view that growth in Canada is becoming more broadly-based and self-sustaining. Consumer spending remains robust, underpinned by continued solid employment and income growth. There has also been more widespread strength in business investment and in exports. Meanwhile, the housing sector appears to be cooling in some markets in response to recent changes in tax and housing finance policies. The Bank continues to expect a moderation in the pace of economic growth in the second half of 2017, for the reasons described in the July Monetary Policy Report (MPR), but the level of GDP is now higher than the Bank had expected.
The global economic expansion is becoming more synchronous, as anticipated in July, with stronger-than-expected indicators of growth, including higher industrial commodity prices. However, significant geopolitical risks and uncertainties around international trade and fiscal policies remain, leading to a weaker US dollar against many major currencies. In this context, the Canadian dollar has appreciated, also reflecting the relative strength of Canada’s economy.
While inflation remains below the 2 per cent target, it has evolved largely as expected in July. There has been a slight increase in both total CPI and the Bank’s core measures of inflation, consistent with the dissipating negative impact of temporary price shocks and the absorption of economic slack. Nonetheless, there remains some excess capacity in Canada’s labour market, and wage and price pressures are still more subdued than historical relationships would suggest, as observed in some other advanced economies.
Source: Bank of Canada
Picture Source: Financial Post
CMHC Policy Revision: Get Ready for a Busy Weekend
As you enter the weekend, we wanted to provide you with an important update to the stress test implementation guidelines that were initially announced by the Minister of Finance on October 3rd. These changes to the initial announcement will likely result in a flood of buyers trying to beat the end of weekend deadline.
Our understanding of the revisions are as follows:
Updated guidance from CMHC and lenders state that the new stress test rules (i.e., having to qualify at the benchmark rate of 4.64% vs. the lower actual interest rate if you have less than a 20% down payment) will not apply to borrowers that enter into a legally binding agreement of purchase and sale before October 17th, 2016 regardless of the date the borrower applies for financing and/or the closing date of the purchase.
This is in contrast to the initial announcement that stated the submission for financing had to occur prior to October 17th and fund by March 1, 2017.
- Key Impact #1 – if someone purchases a property before or including this weekend, the old lending rules will still apply — even if the borrower submits a financing application after the Oct 17th cut-off date.
- Key Impact #2 – There was some uncertainty around new build purchases and if they have to register before March 1, 2017 to qualify under old lending guidelines. This latest update clarifies the issue as old lending rules should apply if a legally binding purchase and sale agreement is in place prior to Oct 17th (regardless of the occupancy or registration date).
We hope the above is timely and helpful, and we are on stand by should you have clarification questions or would like to discuss.
Please find below a link to our previously issued updates on this topic:
Sincerely,
Outline Financial
How Could the Recent Mortgage Policy Changes Impact You?
What a week — As noted in a previous post, the Minister of Finance caught everyone off guard earlier this week with what could be the most significant changes to the real estate and financing market we’ve seen yet.
While we will continue to post updates on our website, should you have any questions please call or email at any time as our team is on standby to discuss how these changes may impact you and/or any opportunities that may still be available given we are at the lowest interest rate point in history.
What has changed?
We have included a list of key articles at the bottom of this email that describe the changes in detail, but in summary:
- October 17th – the maximum affordability for those with less than a 20% down payment will be reduced dramatically. As an example, someone that could have qualified for an $800,000 purchase on October 16th could see that shrink to $650,000 on October 17th.
- Impact for those with more than 20% down payment (or refinances) – While this area is still in flux, what we do know at this point is that the cost and restrictions for lenders to securitize their mortgages will be increasing – which will ultimately be reflected in higher rates and/or tighter mortgage restrictions for the consumer.
How Could This Impact You?
Depending on your current circumstances and/or goals, you may want to consider the following potential risks or opportunities:
- Qualification Impact – The potential for higher rates (actual and/or qualifying), shorter amortizations, and tougher qualifying guidelines could make it increasingly difficult to purchase at desired price levels or access existing equity in your home. If you have any plans to renovate, consolidate debts for a lower overall interest cost, purchase an investment property, or borrow to invest, it may be an opportune time to look at your options under existing lending rules.
- Rate Impact – to put it bluntly, rates have never been lower. Given the recently announced changes, combined with regulatory statements published earlier this year, we anticipate a steady upward pressure on mortgage rates over the coming weeks, months, and year. If you were/are planning on accessing any additional equity from your home, or would like us to review any opportunity to restructure your current mortgage/rate, we are happy to assist.
- Home Value Impact – consistently high demand and low supply has driven GTA average price increases into the double digits (on pace for 14%+ year over year growth in 2016). The recent changes should slow the demand side of the equation (move some buyers down in price, or out of the market completely) resulting in potential buying opportunities for qualified borrowers. On the flip side, if you are looking to sell or refinance, as the changes will take some time to work through the market this could signal a good opportunity to review your options.
Media Summary:
October 2016
- Link -> [CBC News: Ottawa tightens mortgage requirements and targets foreign money]
- Link -> [Financial Post: Federal government closes tax loophole used by foreign home buyers, hikes mortgage scrutiny]
- Link -> [Bloomberg: Canada Tightens Mortgage Eligibility, Closes Loophole]
- Link -> [The Globe and Mail: Four Major Changes to Canada’s Housing Rules]
September 2016
July 2016
- Link -> [The Globe and Mail: Banking regulator cracking down on mortgage lending as home prices surge]
December 2015
Please contact our team if you have any questions, or would like any additional information.
Sincerely,
Outline Financial
Major Policy Change – Mortgage Qualification Guidelines
While the details are still trickling in, The Minister of Finance potentially dropped a bombshell on the Toronto real estate market as of this morning. While their press release was vague [click here], we understand the changes to be as follows:
Mortgage Qualification Policy Change: Currently, if you select a 5-year fixed mortgage term, you would qualify based on your actual monthly mortgage payment (i.e., calculated on 5-year fixed rates in the low to mid 2% range). Going forward, while your actual mortgage payment would still be based on your contract rate, you would need to qualify using a much higher monthly mortgage payment based on the Bank of Canada “stress-test” Benchmark Rate (currently 4.64%) — resulting in a significantly reduced maximum purchase price (refer to impact section below).
Implementation Dates: It is expected this change will be effective on October 17th for all those with less than 20% down. We are awaiting additional details, but the change may also impact those with greater than 20% down given the banks/lenders use of portfolio insurance. If that is indeed the case, it is expected that change may be implemented on November 30th.
Impact: While every case is different, we have included a sample max purchase price impact calculation for a 10% down buyer. Please contact us if you would like us to run the numbers for any specific scenario:
Impact Example (Max Affordability):
Total household salaried income = $120,000
Down payment available = 10%
Mortgage Product Chosen = 5-year Fixed
Purchase Style / Location = Freehold / Toronto
Debts = limited debts (i.e., credit card, car, etc.)
Current Max Purchase Price = Approx. $800,000*
Max Purchase Price After Oct 17th = Approx. $640,000*
(Note: the above is for illustration only. Please contact a member of The Lang Team to discuss)
Media Coverage: While additional details are expected to be published throughout the week, we have included a few relevant articles that have come out in the media today. We have also reached out the Department of Finance, lenders, and mortgage insurers directly and will pass along any relevant information as/when received.
- CTV News – Plans to Tighten Mortgage Insurance Rules
- The Globe and Mail – New Housing Measures
- CBC – Ottawa Tightens Mortgage Requirements
Should you have any questions regarding the above, please contact any member of our team.
Housing demand set to grow for Millennials and Baby Boomers
It’s estimated that 9.6 million baby boomers are in Canada today and they have long been the segment which garners the most attention. There is, however, another demographic just as big than the Boomers: the “Millennials” ( or “Gen Y’s”).
This group has not been clearly defined yet, with no standard criteria for categorizing them. They are born anywhere from the early 1980’s to the early 2000’s. This age bracket has as many as 7 million to 9.1 million people living in Canada – a huge demographic with a huge influence on trends.
Millennial housing demand is growing as they look to buy their first homes, especially in Toronto and Vancouver. They have the potential to be the biggest home buying group in history — even bigger than their baby boomer parents.
According to CREA, the Baby Boomers (the majority of whom are in their 50s) are out of their move-up years, but still a long way from downsizing the family home. A large chunk of the housing stock remains occupied by Boomers who will likely be keeping their home off the market for some time to come. For now, it’s members of the Greatest and Silent generations (people over 70) who are most likely downsizing.
With Millennials coming into their homeownership years well before their Boomer parents are likely to downsize, the demand for homes will continue to grow while inventory remains flat.
Outline Financial
Toronto’s team of industry experts includes former entrepreneurs and some of Canada’s most respected mortgage and insurance executives and professionals.
