Newsletter November 2017

• November 14, 2017

Welcome to the Guardian Financing November 2017 monthly newsletter. This month’s issue is about how recent changes will impact the mortgage industry throughout 2018.

Tough Rules for Mortgage Lending in 2018

This holiday season is going to be busy for the residential housing market in Canada, as households attempt to get into the housing market before the tighter mortgage restrictions come into play.

The new regulations are from the federal banking regulator, and are set to be effective as of January 1^st, 2018. As per the regulations, every homebuyer with a down payment of 20% or more will have to prove that they are in a position to afford a mortgage at the average five year posted rate, which currently sits at 4.89%. This is about 2% above the actual mortgage rate, and if they can’t prove that, then it becomes a bad credit mortgage.

The banks made it clear that they would pay attention regarding data assessing the effects of higher levels of interest, the impact on the economic capacity, and the changes to wage growth and inflation. The next rate announcement is set for the 6^th of December.

The annual expansion rate of the economy recorded for the first three months of 2017 was 3.7%, and 4.5% for the second quarter. The latest outlook by the banks, predict a GDP annual growth at the rate of 1.8% in the third quarter, and 2.5% in the final quarter of 2017.

It is now expected that growth, as determined by the real gross domestic product, will slow down from the robust annual pace of 3.1% in 2017, to about 2.1% in 2018, and finally 1.5% in 2019.

Why the New Set Rates

It is believed that with set rates, the state of the economy will grow on a more sustainable trajectory as a result of an increase in foreign demand, the continued availability of relatively low borrowing rates, increases in commodity prices, and an increase in government infrastructure spending. Additionally, the proposed rules also project a steady growth in business investment, which picked up recently at the beginning of 2017. It is also believed that the weaker-than-expected roll out of federal infrastructure spending will lead to a smaller boost to the economy in 2017.

Impacts of the new mortgage rules on the Canadian residential market

The final rules targeting borrowers within this uninsured market were released by the Office of the Superintendent of Financial Institutions, and this made it more difficult for buyers with more than 20% down payment to qualify for mortgages. The regulations, termed as B-20 guidelines, will demand that lenders test the ability of the borrowers to see if they are in a position to pay the Bank of Canada’s five year bench mark rate or 2% of the offered mortgage rate, beginning in January.

According to Gregory Klump, the Chief Economist at the Canadian Real Estate Association, the only persons who are not affected by the regulations, are the ones who don’t need mortgage financing, since the regulations have captured the entire market. In simple terms, the only people unaffected by the new regulations are the ones paying with cash.

What is the outlook of the Canadian residential market following rate changes?

Experts believe the final rules will have a “very minor negative impact” on the large Canadian banks, but the changes project a more positive outlook for non-prime lenders, such as private mortgage unions. The recent increase in mortgage rates will be challenging for a good chunk of potential home buyers, who will be tempted to turn to more accessible alternatives such as private mortgage lenders or second mortgages; especially the more affordable options within that category.

The question is, therefore, whether the credit unions, which are under provincial regulations, will still allow people to qualify at lower rates, and therefore make it easier to gain access to mortgages, amidst the new rules.

Bank Mortgages or Private Mortgage Lenders – Your Best Option for 2018

With the new minimum qualifying rate, referred to as “stress test”, the minimum qualifying rate for unsecured mortgages will be greater than the five-year benchmark rate or 200 basis points above the applicant’s contractual mortgage rate. Using Ratehub.ca’s mortgage affordability calculator, if you have an annual income of $100,000 with a down payment of 20% at a fixed mortgage rate of 2.83% for five years and an amortization period of 25 years, you will be able to afford a home worth $726,939. With the new rules in place, the family will have to qualify at a rate of 4.89%, with the ability to afford $570,970.

Ultimately, there could be a lot of pressure on the rental market as many potential buyers may put their purchase decisions on hold. There may also be an increase in the demand for low priced properties such as condos. In addition, there may be an increase in the number of families and individuals pursuing private mortgage institutions in a profitable way, especially if such institutions don’t adapt their regulations to conform to the new guidelines.

Guardian Financing is a direct mortgage private mortgage lender. We serve the greater Montreal area, providing short term residential mortgage loans, typically ranging from $50,000 to $750,000. Contact us today to discuss your file at 514-700-3121 or by email at files@guardianfinancing.ca.