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Poloz Weighs In On Mortgages
Jackson Middleton • May 9, 2019
Governor Poloz's proposed innovations for Canada's mortgage market are less than meets the eye.
Poloz Says Mortgage Market Should Offer More Options
In a speech early this week, Bank of Canada Governor Stephen Poloz said that it is time for some fresh ideas for Canada's mortgage market. He suggested that changes could include encouraging longer than 5-year duration fixed-rate mortgage loans, the creation of a market for private mortgage-backed securities and the launch of shared-equity mortgages for first-time homebuyers proposed in the March federal budget.
Taking these in turn, only two percent of all fixed-rate loans issued in 2018 had durations longer than five years. For borrowers, this would mean less interest-rate risk if they dealt with fewer renewals; however, this is not the full story.
Taking these in turn, only two percent of all fixed-rate loans issued in 2018 had durations longer than five years. For borrowers, this would mean less interest-rate risk if they dealt with fewer renewals; however, this is not the full story.
Firstly, 65% of all 5-year mortgage holders break their mortgage by around month 33. Also, some banks and many mortgage brokers offer fixed-rate loans with durations of 7, 8, or even 10 years. However, the borrower pays dearly for this insurance against rising rates. Since the introduction of mortgage stress tests, many borrowers have trouble qualifying for loans as it is. Most want lower, rather than higher, monthly payments and demand for longer-duration mortgages is so low because they cost a full 100 basis points or more above existing 5-year mortgage loans. Besides, interest rates have been low and even falling over most of the period since 1982. Fear of significant rate spikes has diminished dramatically.
Poloz agrees there is some momentum in Canada towards the creation of a private market for mortgage-backed securities. He said it would provide a more flexible source of long-term funds for mortgages not insured by CMHC. To the extent that enhanced sources of capital would reduce the cost of funding for lenders, it might reduce the rate spread between 5-year and longer-duration mortgages, making them more attractive. But, again, perceived rate risk and the actual less than 5-year duration of most mortgages begs the question of why Poloz is providing an answer to a question no one is asking.
Poloz agrees there is some momentum in Canada towards the creation of a private market for mortgage-backed securities. He said it would provide a more flexible source of long-term funds for mortgages not insured by CMHC. To the extent that enhanced sources of capital would reduce the cost of funding for lenders, it might reduce the rate spread between 5-year and longer-duration mortgages, making them more attractive. But, again, perceived rate risk and the actual less than 5-year duration of most mortgages begs the question of why Poloz is providing an answer to a question no one is asking.
Indeed, data show that Millennials in Canada are buying homes in Canada's most expensive cities. Royal Bank economists found that "apart from a short-lived slowdown in 2015 resulting from changes in the temporary foreign worker program, the population aged 20-to-34 in Vancouver, Toronto and Montreal has grown solidly over the last dozen years. ...The inflow of millennial immigrants is poised to grow in the coming years. Canada will increase its annual immigration target from 330,000 in 2019 to 350,000 in 2021, and our largest cities will likely get the lion’s share of newcomers. In recent years, Vancouver, Toronto and Montreal together welcomed approximately half of all new immigrants aged 20-34."
Finally, the shared-equity mortgage for first-time homebuyers may well prove to be unpopular. A similar program was offered in British Columbia a few years ago, and there were very few takers.
The BC Home Owner Mortgage and Equity Partnership program, introduced in late 2016, was cancelled effective March 31, 2018, due to lack of interest. The province anticipated that the program would provide 42,000 loans over three years. However, as of January 31, 2018, there were fewer than 3,000 loans approved.
The new federal program will provide a larger downpayment for first-time buyers, but it only applies to homes priced just over $500,000 or less, which might help in some parts of the country, but in higher-cost regions homes that cheap are slim pickings.
Canadians don't want to share the equity gains in their homes, as most first-time buyers don't imagine that their home equity could decline. Governor Poloz, himself, forecast in the same speech that he's confident Canada's housing market will return to growth later this year. Population and job growth has been rapid pointing to the resumption of growth in depressed housing markets later this year.
Canadians don't want to share the equity gains in their homes, as most first-time buyers don't imagine that their home equity could decline. Governor Poloz, himself, forecast in the same speech that he's confident Canada's housing market will return to growth later this year. Population and job growth has been rapid pointing to the resumption of growth in depressed housing markets later this year.
Poloz is a champion of the B-20 guidelines, saying they have done what they were intended to do
--remove the froth from bubbly housing markets. During the press conference following his speech, reporters asked if the governor would support a reduction in the roughly 200 basis point spread between the qualifying rate and the contract rate to which he responded in essence-- a resounding, No.
This article was written by Dr. Sherry Cooper; DLC's chief economist, and was originally published as part of her regular client newsletter on May 8th 2019.
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Did you know there’s a program that allows you to use your RRSP to help come up with your downpayment to buy a home? It’s called the Home Buyer’s Plan (or HBP for short), and it’s made possible by the government of Canada. While the program is pretty straightforward, there are a few things you need to know. Your first home (with some exceptions) To qualify, you need to be buying your first home. However, when you look into the fine print, you find that technically, you must not have owned a home in the last four years or have lived in a house that your spouse owned in the previous four years. Another exception is for those with a disability or those helping someone with a disability. In this case, you can withdraw from an RRSP for a home purchase at any time. You have to pay back the RRSP You have 15 years to pay back the RRSP, and you start the second year after the withdrawal. While you won’t pay any tax on this particular withdrawal, it does come with some conditions. You’ll have to pay back the total amount you withdrew over 15 years. The CRA will send you an HBP Statement of Account every year to advise how much you owe the RRSP that year. Your repayments will not count as contributions as you’ve already received the tax break from those funds. Access to funds The funds you withdraw from the RRSP must have been there for at least 90 days. You can still technically withdraw the money from your RRSP and use it for your down-payment, but it won’t be tax-deductible and won’t be part of the HBP. You can access up to $35,000 individually or $70,00 per couple through the HBP. Please connect anytime if you’d like to know more about the HBP and how it could work for you as you plan your downpayment. It would be a pleasure to work with you.
If you’re new to the home buying process, it’s easy to get confused by some of the terms used. The purpose of this article is to clear up any confusion between the deposit and downpayment. What is a deposit? The deposit is the money included with a purchase contract as a sign of good faith when you offer to purchase a property. It’s the “consideration” that helps make up the contract and binds you to the agreement. Typically, you include a certified cheque or a bank draft that your real estate brokerage holds while negotiations are finalized when you offer to purchase a property. If your offer is accepted, your deposit is held in your Realtor’s trust account. If your offer is accepted and you commit to buying the property, your deposit is transferred to the lawyer’s trust account and included in your downpayment. If you aren’t able to reach an agreement, the deposit is refunded to you. However, if you commit to buying the property and don’t complete the transaction, your deposit could be forfeit to the seller. Your deposit goes ahead of the downpayment but makes up part of the downpayment. The amount you put forward as a deposit when negotiating the terms of a purchase contract is arbitrary, meaning there is no predefined or standard amount. Instead, it’s best to discuss this with your real estate professional as your deposit can be a negotiating factor in and of itself. A larger deposit may give you a better chance of having your offer accepted in a competitive situation. It also puts you on the hook for more if something changes down the line and you cannot complete the purchase. What is a downpayment? Your downpayment refers to the initial payment you make when buying a property through mortgage financing. In Canada, the minimum downpayment amount is 5%, as lenders can only lend up to 95% of the property’s value. Securing mortgage financing with anything less than 20% down is only made possible through mortgage default insurance. You can source your downpayment from your resources, the sale of a property, an RRSP, a gift from a family member, or borrowed funds. Example scenario Let’s say that you are looking to purchase a property worth $400k. You’re planning on making a downpayment of 10% or $40k. When you make the initial offer to buy the property, you put forward $10k as a deposit your real estate brokerage holds in their trust account. If everything checks out with the home inspection and you’re satisfied with financing, you can remove all conditions. Your $10k deposit is transferred to the lawyer’s trust account, where will add the remaining $30k for the downpayment. With your $40k downpayment made, once you sign the mortgage documents and cover the legal and closing costs, the lender will forward the remaining 90% in the form of a mortgage registered to your title, and you have officially purchased the property! If you have any questions about the difference between the deposit and the downpayment or any other mortgage terms, please connect anytime. It would be a pleasure to work with you.
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