Buying a home is one of the largest investments you will ever make! In order to make your home hunting experience the best it can be, there are a few key mistakes to avoid and be aware of before you start your journey:

Not Getting Pre-Approved: One of the most important aspects of buying a home is the mortgage application and approval process. No matter what type of home you are looking for, you will need a mortgage. One of the biggest mistakes when it comes to the home-buying process is NOT getting pre-approved prior to starting your search. Getting pre-approved determines the actual home price you can afford as it requires submission and verification of your financial history to ensure the most accurate budget to fit your needs.

Not Setting or Following a Pre-Determined Budget: Another mistake that people make when home-hunting is not setting, or following, a pre-determined budget. It can be tempting to start looking at the top of your budget, or even slightly over, but when you consider closing costs and the long-term financial responsibility of home ownership, it is best to avoid maxing yourself out. Getting pre-approved will help determine what you can afford, as well as making an appointment with your mortgage broker to determine your financial situation and the best options for you now, and in the future.

Not Hiring a Real Estate Agent: Your mortgage broker and your real estate agent are two of the most important members of your homebuying A-Team! In today’s competitive real estate market, it can be very difficult to acquire property without the help of a realtor. One reason is that realtors can provide access to properties that never even make it to the MLS website! They can also gain access to information about homes that may come onto the market, before a listing is even signed. Most importantly though, a realtor understands the ins-and-outs of the home buying process and can tell you how to be successful in your endeavors to purchase a home by guiding you through the process from the first viewing to having your bid accepted.
 

Focusing Too Much on Aesthetics: While we understand that bad interior design can really affect the perception of the home, you don’t want to be blindsided by it. At the end of the day, aesthetics can always be updated! Giving up the perfect price or location or size for a few aesthetic details (such as paint color, flooring, or even outdated appliances or light fixtures) is one of the biggest mistakes people make! Most homes have incredible bones that only need some minor tweaks to become your perfect space.

Not Thinking Ahead: What you want and need in a house today, could be very different from what you want and need in a house in the future. It is important to be able to look ahead – are you planning on having children? Are your parents getting older and in need of a retirement space? These are things that are good to take into consideration when buying a new home. Buying a home isn’t a permanent decision as you can always sell your home later on if it doesn’t work for you in the future, but it is almost always easier to plan ahead so you can grow with—and not out of—your home whenever possible.

If you are looking to purchase a home, whether your a first time buyer or contemplating a downsize, upsize or just change of scenery, I would be happy to help!  Please don’t hesitate to reach out to set up a quick call or appointment and discuss your mortgage options, pre-approvals and everything you need to know BEFORE you get started.  You will be thankful you did, I promise!

Credit: DLC Marketing Team

Reverse Mortgages have been highly overlooked and underrated for years.  In our current financial environment, all consumers are looking for ways to live within their budgets and live more comfortably.  A reverse mortgage could be a genuinely appealing option for consumers age or older and can be used in many ways.  You would be doing yourself a disservice if you didn’t at least understand them so you know how they compare amongst other financial products. It’s actually a very simple and sensible way to unlock the value in a home and turn it into cash to help homeowners enjoy life on their terms.

BENEFITS OF A HOMEEQUITY BANK CHIP REVERSE MORTGAGE 

You receive the money tax-free. It is not added to your taxable income so it doesn’t affect Old Age Security (OAS) or Guaranteed Income Supplement (GIS) government benefits you may receive.

You can use the money any way you wish. Maybe you want to enjoy your retirement or cover unexpected expenses. Perhaps you want to update your home or help your family without depleting your current savings. The only condition is that any outstanding loans (e.g. existing mortgage or home equity line of credit) secured by your home must be paid out with the proceeds from your CHIP Reverse Mortgage.

No regular mortgage payments are required while you or your spouse live in your home. The full amount only becomes due when you and your spouse no longer live in the home

You maintain ownership and control of your home. You will never be asked to move or sell to repay your CHIP Reverse Mortgage. All that’s required is that you maintain your property and stay up-to-date with property taxes, fire insurance and condominium or maintenance fees while you live there.

You keep all the equity remaining in your home. In many years of experience, 99 out of 100 homeowners have money left over when their CHIP Reverse Mortgage is repaid. And on average, the amount left over is 50% of the value of the home when it is sold.

FREQUENTLY ASKED QUESTIONS

How does a CHIP Reverse Mortgage work?

A CHIP Reverse Mortgage is secured by the equity in your home. Unlike a traditional mortgage in which you make regular payments to someone else, a reverse mortgage pays you.

The big advantage with the CHIP Reverse Mortgage is that you do not have to make any regular mortgage payments for as long as you or your spouse lives in your home. That’s what has made reverse mortgages such a popular solution in Canada, the U.K., the U.S., Australia and other countries.

Who is it for?

The CHIP Reverse Mortgage is designed exclusively for homeowners age 55 and older. This age qualification applies to both you and your spouse.

How much can I get and how is it calculated?

You can receive up to 55% of the value of your home. The specific amount is based on your age and that of your spouse, the location and type of home you have, and your home’s current appraised value. You can contact me and I can quickly give you an estimate of how much you may be approved for.

How do I receive the money?

You can choose how you want to receive the money. The CHIP Reverse Mortgage gives you the option of receiving all the money you’re eligible for in one lump sum advance, or you can take some now and more later, or you can receive planned advances over a set period of time. Planned advances are available on the Income Advantage product. 

Will the homeowner owe more than the house is worth?

The homeowner keeps all the equity remaining in the home. In our many years of experience, over 99% of homeowners have money left over when their loan is repaid. The equity remaining depends on the amount borrowed, the value of the home, and the amount of time that’s passed since the reverse mortgage was taken out.

Will the bank own the home?

No. The homeowner retains title and maintains ownership of the home. It’s required for the homeowner to live in the home, pay taxes on time, have property insurance, and maintain the property in good condition.

What if the homeowner has an existing mortgage?

Many of our clients use a reverse mortgage to pay off their existing mortgage and debts.

Should reverse mortgages only be considered as a loan of last resort?

No. Many financial professionals recommend a reverse mortgage to supplement monthly income instead of selling and downsizing, or taking out a conventional mortgage or a line of credit.

What fees are associated with a reverse mortgage?

There are one time fees to arrange a reverse mortgage such as an appraisal fee, fee for independent legal advice as well as our fee for administration, title insurance, and registration. With the exception of the appraisal fee, these fees are paid for with the funding dollars.

What if the homeowner can’t afford payments?

There are no monthly payments required as long as the homeowner is living in the home.

Can a reverse mortgage be used to purchase a home?

YES!  There are a few ways that a reverse mortgage could be used to purchase a home.

We see the news, we turn the page and read the next article, and nothing is thought of these concerns until renewal time….cue the scary music.  The sad reality of our current financial environment is that few will escape the impact of the changes in effect and the changes to come.  So if you didn’t read closely the first time, take note now….THIS APPLIES TO YOU!  OSFI Superintendent Peter Routledge states that the changes OSFI seeks to incorporate into home financing policy could very well mean:

1. Fewer borrowers will qualify for a mortgage with a federally regulated lender, like a bank.

As proposed, banks would potentially have to reduce how many mortgages they grant to borrowers with high ratios of debt to income (those with mortgages over 450 per cent of their income, for example).

OSFI could also put a hard limit on traditional debt ratios, which banks use to underwrite borrowers. Today, banks make exceptions for creditworthy high-debt-to-income borrowers – so long as they have significant assets or other risk mitigants. That may end or be curtailed.

On top of that, OSFI may somehow raise the minimum interest rate borrowers must prove they can afford.

2. More borrowers will pay up for non-prime mortgages

When bank credit becomes more restrictive, borrowers increasingly search out less-regulated lenders where it’s easier to get approved. That flexibility comes with higher interest rates and fees, which raise default risk for these borrowers. OSFI suggests this is an immaterial risk for the banks it regulates – but if you’re the borrower assuming this risk, it’s material.

3. It could add slight downward pressure to home prices, other things being equal

Some will argue that OSFI’s timing could exacerbate the housing sell-off. After all, home prices in many regions have fallen off a cliff, affordability is stretched with lofty interest rates and we’re likely headed into recession. We also just got a foreign-buyers ban, there’s a new anti-flipping law, federal and provincial governments have enacted a slew of new real estate-related taxes, and in February Basel III, an international regulatory framework for banks, is going to further tighten mortgage capital requirements. It’s probably fortunate that the implementation date of these changes is several months out, at least six months is my guess.

My coles notes interpretation of this all is…..  It may get harder to borrow money, but housing could be slightly more affordable (it’s hard to say this as an Albertan in BC!).  It’s important now to plan ahead (much ahead).  Seek out assistance from a reputable mortgage broker so you can look at all options available to you – you WILL want them!

osfi is at it again.

Late last week, the Office of the Superintendent for Financial Institutions (OSFI) announced it was concerned about the risks associated with the large and rising number of highly indebted borrowers, especially those with floating-rate mortgages, which stands at a record proportion of outstanding mortgage loans.

With the economy in danger of entering a recession and the Bank of Canada warning of potentially more rate hikes to counter persistent inflation, the housing market may face continued pressure in the coming months.

A record number of buyers used floating-rate debt for purchases during Canada’s pandemic-era real estate boom. Those borrowers may come under increasing strain if mortgage costs remain high. Job losses from an economic slowdown also would make it harder for people to keep up with loan payments and stay in their homes.

Superintendent of Financial Institutions Peter Routledge said a review of the country’s mortgage-underwriting rules that starts later this week would look beyond its current main measure — a stress test requiring borrowers to qualify for higher interest rates than what their banks are offering.

“The question in our minds is, is it sufficient?” Routledge said of the current stress test. “So we will look at a broader range of debt-serviceability tools, including debt-to-income constraints, debt-service constraints, as well as the current interest-rate stress test tool.”

The proposed rules⁠—subject to public consultation⁠—include loan-to-income and debt-to-income restrictions, new interest rate affordability stress tests and debt-service coverage restrictions.

Highly Indebted Borrowers

OSFI is particularly concerned about the rise in mortgage originations to households with a loan-to-income ratio of 450% or more, which the Bank of Canada has long asserted is the sector most at risk of delinquency and default. This risk has repeatedly been highlighted in the Bank’s financial risk analysis–the Governing Council’s Financial System Review. The latest report says, “Those with high debt are more vulnerable to a decline in income and will face more financial strain when they renew their mortgages at higher rates.”

This vulnerability relates to households’ ability to continue servicing their debt if incomes decline or interest rates rise without significantly reducing their consumption. The Bank staff estimate that the most highly indebted households have generally seen the smallest increases in liquid assets. At the same time, alongside higher house prices, many households have taken out sizable mortgages to purchase a house, adding to the already large share of highly indebted households.

The chart below shows that the average share of high loan-to-income borrowers before the pandemic was 23.8%. The average since the pandemic onset has risen to 33.7%.

Proposals for Comment

To date, mortgage delinquency rates at federally regulated financial institutions (FRFIs) are at a record low. The large FRFIs have worked closely with borrowers who have reached their trigger points. TD, CIBC, and BMO have allowed some negative amortizations until renewal. As a result, the proportion of their mortgages having remaining amortizations has risen sharply (see second chart below). Questions remain regarding how they will deal with this at renewal time. Will the new mortgage be amortized at 25 years at renewal, raising the monthly payments dramatically and increasing the risk of delinquency or default, especially among highly indebted households?

Earlier last week, CEOs of the Big 5 banks weighed in on vulnerable mortgage clients. None were quite as forthcoming as Scotiabank’s new President and CEO, Scott Thomson, who said the bank has about 20,000 borrowers that it considers “vulnerable.” These are borrowers with a high loan-to-value (LTV) mortgage, a low credit score, lower deposits in their checking accounts and those with home valuations that are susceptible to market conditions.

“So, as you think about the tail risk, we have about 20,000 vulnerable customers, which would be 2.5% [of the total portfolio],” he said Monday during the RBC Capital Markets Canadian Bank CEO Conference.

However, he added this represents a “manageable-type situation for us on mortgages.” Scotiabank’s floating-rate mortgages are not fixed payment. They adjust monthly payments every time the central bank changes the overnight rate.

According to Steve Huebl at Canadian Mortgage Trends,  RBC President and CEO Dave McKay said that his bank is “keeping a watchful eye on its mortgage clients, turning to AI and various types of modelling to forecast clients’ cash flow.”

“We look at incomes, we look at the stress of inflation on expenses in a household, and we monitor cash flow to interest payments, as you would in any corporation,” McKay said during the conference. “We do that [for] every single consumer in our portfolio because over 80% of our clients have their core checking and core cash management with us.”

Looking at the bank’s variable-rate mortgage portfolio, which totals between $100 and $120 billion, McKay said the bank has been able to segment that group of clients, keeping tabs on when they reach their trigger rates and when they’ll be coming up for rate resets in the next several years.

Through modelling, the bank can then predict which clients with upcoming renewals “will or will not have a cash flow challenge” should the economy enter a moderate or severe recession, he said. “We have a pretty clear view of that.”

For clients who have difficulties making their payments, mortgage lenders have several options to try and assist borrowers before the situation progresses to the point of them needing to sell their homes.

“You have skip-a-payment deferrals, you have maturity extensions, whatever it happens to be, you have a lot of ways to work with that client,” McKay said.

In terms of clients with cash flow challenges in addition to a collateral problem, where the property sale wouldn’t cover their mortgage and could result in default, McKay said it’s a much smaller group but one the bank is actively monitoring.

“That bucket, I can tell you, is in the low single-digit percentages of our portfolio,” he said. “And that’s the bucket we’re managing.”

Bottom Line

To the extent these measures are implemented, further pressure on mortgage growth is likely. Mortgage brokers can access lenders not impacted by OSFI B-20 rule changes. More than ever, brokers could add value to borrowers turned away from the banks. In these uncertain times, existing and new clients need advice from a trained and caring professional.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres