Blog Post
Fall Survey Highlights Stress Test Fallout
Martin Jensen • Dec 12, 2017
OSFI’s forthcoming stress test for all uninsured mortgages after January 1 will have far-reaching effects across the mortgage industry, potentially removing up to 50,000 buyers from the real estate market each year.
That’s one of many key findings from Mortgage Professionals Canada’s Annual State of the Residential Mortgage Marketsurvey, released this week by the association’s chief economist Will Dunning.
“The market is already slowing under the weight of increased interest rates, and policies aimed at suppressing the market further might be adding to economic risks,” he said.
Like in years past, this report dishes up a healthy serving of relevant and insightful industry statistics. We’ve combed them over and have included some of the most pertinent below. (Data points of special interest appear in blue.)
**********
New OSFI Regulations
- 18%: The percentage of prospective homebuyers who require a mortgage and who otherwise would have had reasonable prospects of completing their desired transactions, that are expected to fail the stress test and therefore not be able to make their anticipated purchase
- 91%: The percentage of new mortgages, across all channels, that will be subject to some form of stress testing
- 6.8% (or $31,000): The amount that potential homebuyers will need to reduce their target price in order to pass the stress test
- 20%: The percentage of buyers who will have to adjust their target price by less than 2.5%
- 40-50%: The percentage of buyers who will fail the stress test, that are expected to be unable to find an alternative for which they can qualify
- 100,000: The number of prospective buyers who previously could have qualified for financing, who will now be disqualified
- 50,000-60,000: The number of buyers who will still be able to make a purchase, though one that is “less attractive to them”
- 40,000-50,000: The number of prospective buyers who will be removed from home ownership entirely
- 50,000-100,000: The potential number of renewers each year who “may find themselves unnecessarily vulnerable” in their mortgage renewals as they will be unable to negotiate with other federally regulated lenders
- “In some cases, these renewing borrowers may be forced to accept uncompetitive rates from their current lenders,” Dunning notes
Mortgage Types and Amortization Periods
- 68%: Percentage of mortgage in Canada that have fixed interest rates (72% for mortgages on homes purchased during 2016 or 2017)
- 28%: Percentage of mortgages that have variable or adjustable rates (24% for mortgages taken out in 2016/2017)
- 4%: Percentage that are a combination of fixed and variable, known as “hybrid” mortgages
- 86%: Percentage of mortgages with and amortization period of 25 years or less (81% for home purchased between 2014 and 2017)
- 14%: Percentage with extended amortizations of more than 25 years (19% for recent purchases between 2014 and 2017)
Actions that Accelerate Repayment
- ~33%: Percentage of overall mortgage holders who voluntarily take action to shorten their amortization periods (vs. 38% of recent buyers)
- For buyers who purchased a home between 2014 and 2017:
- 18% made a lump-sum payment (the average payment was $19,500)
- 16% increased the amount of their payment (the average amount was $440 more a month)
- 10% increased payment frequency
Mortgage Sources
- 46%: Percentage of borrowers who took out a new mortgage during 2016 or 2017 who obtained the mortgage from a Canadian bank (vs. 61% of total mortgages)
- 39%: Percentage of recent mortgages that were arranged by a mortgage broker (vs. 27% of overall mortgages)
- 12%: Percentage of recent borrowers who obtained their mortgage through a credit union (vs. 8% of all mortgages)
Interest Rates
- 2.96%: The average mortgage interest rate in Canada
- A small drop from the 3.02% average recorded last year, though down substantially from the 3.50% average rate in 2013
- 2.90%: The average interest rate for mortgages on homes purchased during 2017
- 2.68%: The average rate for mortgages renewed in 2017
- 51%: Of those who renewed in 2017, percentage who saw their interest rate drop
- Among all borrowers who renewed in 2017, their rates dropped an average of 0.19%
- 2.72%: The average actual rate for a 5-year fixed mortgage in 2017 , about two percentage points lower than the posted rates, which averaged 4.72%
Miscellaneous
- 0.24% (1 in 401 borrowers): The current mortgage arrears rate in Canada (as of August 2017)
- $1,486: The average monthly mortgage payment ($1,568 for recent purchases made from 2014 to 2017)
Equity
- 62%: The average percentage of home equity for homeowners who have a mortgage but no HELOC
- 58%: The average equity ratio for owners with both a mortgage and a HELOC
- 81%: The equity ratio for those without a mortgage but with a HELOC
- 91%: Percentage of homeowners who have 25% or more equity in their homes
- 53%: Among recent buyers who bought their home from 2014 to 2017, the percentage with 25% or more equity in their homes
Equity Takeout
- 9% (860,000): Percentage of homeowners who took equity out of their home in the past year
- $54,500: The average amount of equity taken out
- $47 billion: The total equity takeout over the past year
- $28 billion was via mortgages and $17 billion was via HELOCs
- Most common uses for the funds include:
- 26% (10.7 billion): For purchases (including education)
- 22% ($9 billion): For home renovation and repair
- 21% ($8.7 billion): For debt consolidation and repayment
- 21% ($8.4 billion): For investments
- 10% ($4.2 billion): For “other” purposes
- Equity takeout was most common among homeowners who purchased their home during 2000 to 2009
Sources of Down payments
- 26%: The average down payment made by first-time buyers from 2014 to 2017, as a percentage of home price
- This is a significant increase from previous surveys, where the average down payment was consistently around 20%. Dunning writes that most of these buyers appear to have increased their down payments to avoid the need for mortgage insurance
- The top sources of these down payment funds for homes bought from 2014 to 2017 were:
- 92%: Personal savings
- 43%: Gifts from parents or other family members (vs. 23% from 2010-2013)
- 19%: Loan from parents or other family members (vs. 12% from 2010-2013)
- 27%: Loan from a financial institution
- 29%: Withdrawal from RRSP
- 105 weeks: The amount of working time at the average wage needed to amass a 20% down payment on an average-priced home
- This is up from 93 weeks in 2014 and 53 weeks two decades ago
Homeownership as “Forced Saving”
- 50%: Approximate percentage of the first mortgage payment that goes towards principal repayment (based on current rates)
- 10 years ago this share was about 25%
- Dunning notes that rapid repayment of principal means that, “once the mortgage loan is made, risk diminishes rapidly”
- He added that most affordability analyses use the posted rate, “which gives a distorted impression of the current level of affordability, and of how current affordability compares to the past”
A Falling Homeownership Rate
- 67.8%: The homeownership rate in Canada in 2016
- Down from 69% in 2011
- Ownership rates fell for the three youngest age groups of buyers (first-time buyers) by more than 4%
- Dunning attributes this “disappointing” change to:
- The increased difficulty of saving down payments
- The elevated rate of “forced saving”
- Five sets of mortgage insurance policy changes by the federal government that have made it more difficult to buy
Consumer Sentiment
- 7.15: The average score (on a scale of 1 to 10 where 1 indicated complete disagreement) with the following statement: “Low interest rates have meant that a lot of Canadians became homeowners over the past few years who probably should not be homeowners.” (Up from an average score of 6.98 in previous surveys)
- 7.15: Average score in response to the statement that “real estate in Canada is a good long-term investment” (down from the previous average of 7.28)
- 90%: The percentage of homeowners who are happy with their decision to buy a home
- 7%: Of those who regret their decision to buy, the regret pertains to the particular property purchased
- Just 4% regret their decision to buy in general
Consumers’ Comfort with Technology
- 65%: Percentage of mortgage consumers who are “moderately” or “quite” comfortable with texting or instant messaging their mortgage professional with questions or concerns (77% of those aged 18-24)
- 47%: Percentage who are moderately or quite comfortable with being served by an online digital mortgage advisor (i.e., a chatbot) when applying for a mortgage
(vs. 58% of those aged 18-24)
- 40% are “uncomfortable” while 27% are “moderately uncomfortable”
- 50%: Percentage who are moderately or quite comfortable with applying for a mortgage through an app on their mobile device (vs. 73% for those aged 18-24)
- 36% are uncomfortable while 26% are moderately uncomfortable
- Dunning notes that comfort levels are greatest for the youngest age groups, but surprisingly also among those aged 65 and older
Outlook for the Mortgage Market
- Data on housing starts suggests housing completions in 2018 will increase slightly compared to 2017. “This factor, therefore, will tend to increase the growth rate for mortgage credit,” Dunning writes.
- “Another significant factor is that low interest rates mean that consumers pay less for interest and, therefore, are able to pay off principal more rapidly,” he noted. “Current low interest rates have, therefore, tended to reduce the growth rate for mortgage debt.”
- 5.9%: The current year-over-year rate of mortgage growth (as of August)
- Vs. an average rate of 7.3% per year over the past 12 years
- Dunning expects the growth rate to slow to 5.6% by the end of 2017 and 5.5% for 2018
This article was written by Steve Huebl of Canadian Mortgage Trends. It was originally published hereon December 8 2017.
RECENT POSTS
You’ve most likely heard that there are two certainties in life; death and taxes. Well, as it relates to your mortgage, the single certainty is that you will pay back what you borrow, plus interest. With that said, the frequency of how often you make payments to the lender is somewhat up to you! The following looks at the different types of payment frequencies and how they impact your mortgage. Here are the six payment frequency types Monthly payments – 12 payments per year Semi-Monthly payments – 24 payments per year Bi-weekly payments – 26 payments per year Weekly payments – 52 payments per year Accelerated bi-weekly payments – 26 payments per year Accelerated weekly payments – 52 payments per year Options one through four are straightforward and designed to match your payment frequency with your employer. So if you get paid monthly, it makes sense to arrange your mortgage payments to come out a few days after payday. If you get paid every second Friday, it might make sense to have your mortgage payments match your payday. However, options five and six have that word accelerated before the payment frequency. Accelerated bi-weekly and accelerated weekly payments accelerate how fast you pay down your mortgage. Choosing the accelerated option allows you to lower your overall cost of borrowing on autopilot. Here’s how it works. With the accelerated bi-weekly payment frequency, you make 26 payments in the year. Instead of dividing the total annual payment by 26 payments, you divide the total yearly payment by 24 payments as if you set the payments as semi-monthly. Then you make 26 payments on the bi-weekly frequency at the higher amount. So let’s use a $1000 payment as the example: Monthly payments formula: $1000/1 with 12 payments per year. A payment of $1000 is made once per month for a total of $12,000 paid per year. Semi-monthly formula: $1000/2 with 24 payments per year. A payment of $500 is paid twice per month for a total of $12,000 paid per year. Bi-weekly formula: $1000 x 12 / 26 with 26 payments per year. A payment of $461.54 is made every second week for a total of $12,000 paid per year. Accelerated bi-weekly formula: $1000/2 with 26 payments per year. A payment of $500 is made every second week for a total of $13,000 paid per year. You see, by making the accelerated bi-weekly payments, it’s like you end up making two extra payments each year. By making a higher payment amount, you reduce your mortgage principal, which saves interest on the entire life of your mortgage. The payments for accelerated weekly payments work the same way. It’s just that you’d be making 52 payments a year instead of 26. By choosing an accelerated option for your payment frequency, you lower the overall cost of borrowing by making small extra payments as part of your regular payment schedule. Now, exactly how much you’ll save over the life of your mortgage is hard to nail down. Calculations are hard to do because of the many variables; mortgages come with different amortization periods and terms with varying interest rates along the way. However, an accelerated bi-weekly payment schedule could reduce your amortization by up to three years if maintained throughout the life of your mortgage. If you’d like to look at some of the numbers as they relate to you and your mortgage, please don’t hesitate to connect anytime; it would be a pleasure to work with you.
One of the benefits of working with an independent mortgage professional is having lots of great financing options! Rather than dealing with a single lender with one set of products, independent mortgage professionals work with multiple lenders who offer a wide selection of mortgage financing options that provide more choice. Increased choice in mortgage products is beneficial when your situation isn’t “normal,” or you don’t quite fit the profile of a standard buyer. Purchasing a new construction home through an assignment contract would be a great example of this. Purchasing a new construction home through an assignment contract can be tricky as not every lender wants the added perceived risk of dealing with this type of transaction. Most of these lenders won’t come out and say it; instead, they add a significant list of qualifying conditions to make the process harder. The good news is, there are lenders available exclusively through the broker channel that have favourable policies for assignment purchases. Here are some of the highlights: All standard purchase qualifications apply, including applicable income verification, established credit, and required downpayment Assignments can be at the original purchase price or current market value Minimum 620 beacon score with no previous bankruptcies or consumer proposals The full downpayment must come from the purchaser and not include any incentives from the seller. As far as documentation goes, the lender will want to see the original purchase agreement signed by all parties, the MLS listing, the assignment agreement signed by the builder, the original purchaser, and the new buyer. The lender will also want to see the side agreement between the original purchaser and the new buyer, including the amended purchase price. The lender will want to substantiate the value through a full appraisal. Now, as every situation is different, this list of conditions is in no way exhaustive but meant to show that assigning a new construction purchase contract is doable while highlighting some of the terms necessary to secure financing. If you’re looking to purchase new construction through an assignment contract, or if you’d like to discuss purchasing a home through traditional means, please connect anytime! It would be a pleasure to outline the mortgage products on the market that won’t limit your financing options!
If you’re going through or considering a divorce or separation, you might not be aware that there are mortgage products designed to allow you to refinance your property and buy out your ex-spouse. If you’re like most people, your property is your most significant asset and is where most of your equity is tied up. If this is the case, it’s possible to structure a new mortgage that allows you to purchase the property from your ex-spouse for up to 95% of the property’s value. Alternatively, if your ex-spouse wants to keep the property, they can buy you out using the same program. It’s called the spousal buyout program. Here are some of the common questions people have about the program. Is a finalized separation agreement required? Yes. To qualify, you’ll need to provide the lender with a copy of the signed separation agreement, which clearly outlines asset allocation. Can the net proceeds be used for home renovations or pay off loans? No. The net proceeds can only buy out the other owner’s share of equity and/or pay off joint debt as explicitly agreed upon in the finalized separation agreement. What is the maximum amount that you can access through the program? The maximum equity you can withdraw is the amount agreed upon in the separation agreement to buy out the other owner’s share of the property and/or retire joint debts (if any), not exceeding 95% loan to value. What is the maximum permitted loan to value? The maximum loan to value is the lesser of 95% or the remaining mortgage + the equity required to buy out other owner and/or pay off joint debt (which, in some cases, can total < 95% LTV. The property must be the primary owner-occupied residence. Do all parties have to be on title? Yes. All parties to the transaction have to be current registered owners on title. Your solicitor will be required to confirm this with a title search. Do the parties have to be a married or common-law couple? No. Not only will the spousal buyout program support married and common-law couples who are divorcing or separating, but it’s also designed for friends or siblings who need an exit from a mortgage. The lender can consider this on an exception basis with insurer approval. In this case, as there won’t be a separation agreement, a standard clause will need to be included in the purchase contract to outline the buyout. Is a full appraisal required? Yes. When considering this type of mortgage, a physical appraisal of the property is required as part of the necessary documents to finalize the transaction. While this is a good start to answering some of the questions you might have about getting a mortgage to help you through a marital breakdown, it’s certainly not comprehensive. When you work with an independent mortgage professional, not only do you get a choice between lenders and considerably more mortgage options, but you get the unbiased mortgage advice to ensure you understand all your options and get the right mortgage for you. Please connect anytime; it would be a pleasure to discuss your needs directly and provide you with options to help you secure the best mortgage financing available. Also, please be assured that all communication will be held in the strictest of confidence.
Copyright © 2023 Martin Jensen. All Rights Reserved. Quantus Mortgage Solutions. Privacy and Content Notice