19 Feb

BREAKING NEWS: Morneau Eases Stress Test On Insured Mortgages

Latest News

Posted by: John Panagakos

Minister Morneau announces new benchmark rate for qualifying for insured mortgages.  The new qualifying rate will be the mortgage contract rate or a newly created benchmark very close to it plus 200 basis points, in either case. The News Release from the Department of Finance Canada states, “the Government of Canada has introduced measures to help more Canadians achieve their housing needs while also taking measured actions to contain risks in the housing market. A stable and healthy housing market is part of a strong economy, which is vital to building and supporting a strong middle class.”

These changes will come into effect on April 6, 2020. The new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.

This follows a recent review by federal financial agencies, which concluded that the minimum qualifying rate should be more dynamic to reflect the evolution of market conditions better. Overall, the review concluded that the mortgage stress test is working to ensure that home buyers are able to afford their homes even if interest rates rise, incomes change, or families are faced with unforeseen expenses.

This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions.

The Office of the Superintendent of Financial Institutions (OSFI) also announced today that it is considering the same new benchmark rate to determine the minimum qualifying rate for uninsured mortgages.

The existing qualification rule, which was introduced in 2016 for insured mortgages and in 2018 for uninsured mortgages, wasn’t responsive enough to the recent drop in lending interest rates — effectively making the stress test too tight. The earlier rule established the big-six bank posted rate plus 2 percentage points as the qualifying rate. Banks have increasingly held back from adjusting their posted rates when 5-year market yields moved downward. With rates falling sharply in recent weeks, especially since the coronavirus scare, the gap between posted and contract mortgage rates has widened even more than what was already evident in the past two years.

This move, effective April 6, should reduce the qualifying rate by about 30 basis points if contract rates remain at roughly today’s levels. According to a Department of Finance official, “As of February 18, 2020, based on the weekly median 5-year fixed insured mortgage rate from insured mortgage applications received by the Canada Mortgage and Housing Corporation, the new benchmark rate would be roughly 4.89%.”  That’s 30 basis points less than today’s benchmark rate of 5.19%.

The Bank of Canada will calculate this new benchmark weekly, based on actual rates from mortgage insurance applications, as underwritten by Canada’s three default insurers.

OSFI confirmed today that it, too, is considering the new benchmark rate for its minimum stress test rate on uninsured mortgages (mortgages with at least 20% equity).

“The proposed new benchmark for uninsured mortgages is based on rates from mortgage applications submitted by a wide variety of lenders, which makes it more representative of both the broader market and fluctuations in actual contract rates,” OSFI said in its release.

“In addition to introducing a more accurate floor, OSFI’s proposal maintains cohesion between the benchmarks used to qualify both uninsured and insured mortgages.” (Thank goodness, as the last thing the mortgage market needs is more complexity.)

The new rules will certainly add to what was already likely to be a buoyant spring housing market. While it might boost buying power by just 3% (depending on what the new benchmark turns out to be on April 6), the psychological boost will be positive. Homebuyers—particularly first-time buyers—are already worried about affordability, given the double-digit gains of the last 12 months.

Reported by Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

2 May

Should I lock in, or stay variable?

Mortgage Interest Rates

Posted by: John Panagakos

You’re in a variable rate and asking yourself should I lock in or stay variable?

If you follow the news closely, there would appear to be a lot of turmoil and uncertainty around interest rates. This past April, the Bank of Canada held the overnight rate at 1.25 per cent.  Suggesting the bank was closely watching both inflation and wage growth.

“The Bank will also continue to monitor the economy’s sensitivity to interest rate movements and the evolution of economic capacity. In this context, Governing Council will remain cautious with respect to future policy adjustments, guided by incoming data,” the BOC said at the time.

The Bank of Canada raised the rates a quarter point twice last year.  Many economists are betting the bank will raise rates before the end of this year.

If you’re a conservative homeowner and have locked into a fixed rate, the speculation of an increase isn’t likely keeping you up at night. You can rest easy for the next few years.  However, if you’re like many Canadians who chose to go variable, this is probably getting you a little nervous. While mortgage brokers don’t have a crystal ball to tell you where rates are going, you can probably assume they are going to increase maybe 50 basis points. There’s all kinds of tea leaves economists trying to read and get a handle on where the rates will go. While that’s what they get paid to do, increases have real world consequences on your bottom line.

So again the question is, should I lock in or stay variable?

And like many financial questions, there’s no easy answer. First, you’ll tend to find first time homebuyers are sceptical with variable anyway.  Someone in their second or third mortgage may have an appetite for a little more risk.

If you’re kept  awake at night in fear of a rate increase, you may want to lock in.  Locking in your rate can give you peace of mind. But it’s also important to look at the big picture. If the rate increases a couple more quarter points, you still need to look at what that variable rate saved you over the term. The rates have been historically so low, there’s a pretty good chance if you’ve been in a variable for a few years, the math will prove you still saved money over the five years, even with an increase.

Depending on your risk appetite and your financial situation, staying in the variable could still payoff in the long run even with a few more increases. Don’t make these decisions alone, come speak to me and I will answer any questions about locking in or not.