Today’s StatsCanada Labour Force Survey for March is much weaker than expected. Employment fell by 2,200, and the employment rate declined for the sixth consecutive month to 61.4%.  Total hours worked in March were virtually unchanged but up 0.7% compared with 12 months earlier.

The details were similar to the headline: as full-time jobs dipped, total hours worked fell 0.3%, and only two provinces managed job growth. Among the type of worker, a 29k drop in self-employment was the primary source of weakness, while private sector jobs managed a decent 15k gain. The issue for the Bank of Canada is that wage gains are not softening even with a rising jobless rate. Average hourly wages actually nudged up to a 5.1% y/y pace, now more than two percentage points above headline inflation. With productivity barely moving, these 5% gains will feed into costs and threaten to keep inflation sticky.

The unemployment rate in Canada jumped to 6.1% in March of 2024 from 5.8% in the earlier month, the highest since October of 2021, and sharply above market expectations of 5.9%. The result aligned with the Bank of Canada’s rhetoric that higher interest rates have a more significant impact on the Canadian labour market, strengthening the argument for doves in the BoC’s Governing Council that a rate cut may be due by the second quarter. The unemployed population jumped by 60,000 to 1.260 million, with 65% searching for jobs for over one month. Unemployment rose to an over-seven-year high for the youth (12.6% vs 11.6% in February) and grew at a softer pace for the core-aged population (5.2% vs 5%).In March, fewer people were employed in accommodation and food services (-27,000; -2.4%), wholesale and retail trade (-23,000; -0.8%), and professional, scientific, and technical services (-20,000; -1.0%). Employment increased in four industries, led by health care and social assistance (+40,000; +1.5%).

Average hourly wages among employees rose 5.1% (+$1.69 to $34.81) year over year in March, following growth of 5.0% in February (not seasonally adjusted). This is still too high for the Bank of Canada’s comfort.

Bottom Line

The central bank meets again next Wednesday, and a rate cut is unlikely. I still expect rate cuts to begin at the following meeting in June. The Canadian economy, though resilient, will suffer from rising mortgage costs as many mortgages come under renewal over the next two years. Delinquency rates have already risen. Moreover, the planned reduction in temporary residents will also slow economic activity.

With the US jobs market still booming, it is likely the BoC will begin cutting rates before the Fed.

What do you think about reverse mortgages, now more commonly referred to as Home Equity Conversion Mortgages (HECMs)?  Do you believe you understand how they work?  I’m willing to bet if you read this article you will find you very much misunderstood this product.

Reverse mortgages are the single fastest growing home finance product on the market right now.  Reverse mortgages have a $2b share in the home finance market and we anticipate strong growth to $10m quickly over the next few years as a result of our challenging financial environment.  Why?

• The need for a product that allows aging folks to access their hard-earned cash from the equity in their homes without having to qualify based on income.
• British Columbia, particularly areas like Vancouver and the surrounding regions, has experienced significant increases in home prices over the years. This has contributed to the attractiveness of reverse mortgages for homeowners looking to tap into their home equity.
• Government Regulations: The reverse mortgage market in Canada is regulated by the federal government, with specific guidelines in place to protect consumers. Borrowers are required to undergo mandatory counseling to ensure they understand the terms and implications of a reverse mortgage.
• Consumer Awareness: Efforts to educate consumers about reverse mortgages have increased, including information about the risks and benefits associated with these products. Many financial institutions and mortgage lenders offer reverse mortgages in British Columbia, contributing to consumer awareness and accessibility.

Here’s some food for thought based on the FACTS….  (using HomeEquity Bank and it’s products for the purposes of this article)

A reverse mortgage is just a first charge on your property.  You still own your home and have title to the home.  However, it is different from all other types of loans in a couple ways.

• Any other type of loan requires that you qualify for the loan based on income and credit.
• All other loans require that you make a monthly payment until the debt is paid off.

Because of the stress test, qualifying for financing is difficult for many, and making a payment is counterintuitive if improving cash flow is the goal.

So, instead of having to qualify for a loan based on income and credit, it’s mainly age and equity that determines the approval for a reverse mortgage.  The older the client, the higher the approved limit you receive…the younger the client, the lower the limit.  Essentially, you are given a credit limit on the home, the money can be used for whatever you like, but you never have to make a single payment against it for as long as one applicant lives in the home.  Instead of a regular loan where you make a payment every month, with a reverse mortgage the interest that they charge is simply added to your balance and grows over time.  Whenever you eventually sell the home, that is when they are paid back the money you borrowed plus the interest that accrued over the years; the rest of the equity is all yours.

History has shown that while the balance owing increases over time because of the accruing interest, the home tends to appreciate over time as well.  Typically, clients find that they have just as much equity left in the home when they sell as when they started, because the appreciation on the home made up for the accruing interest.  To provide clients further confidence, HomeEquity Bank has a “fair market value guarantee”….this means that if you ever sell the home at fair market value, and you owe more than it sells for, HomeEquity Bank takes the loss; not you.  Here is an example of what a reverse mortgage could look like on a $3m home for a 68 year old applicant that intends to stay in his home for 10 years (of course you can get out of the reverse mortgage prior to the 10 years if you wanted to – see below about possible applicable penalties).

Comparing Home Equity to RRSP’s

When you really think about it, your house is an investment you made; not too different from RRSP’s.  You paid a mortgage payment every month for 25 years into an investment, and now it represents $1m of your life savings.  Had you put money into an RRSP for 25 years and you had $1m in that account, you would likely be drawing down on that investment to help fund your retirement.  In the end, there would be less money in the RRSP because you chose to use some of the money along the way.  There is a cost to spending RRSP’s, though….first, when you take money from an RRSP, you are no longer earning interest on that money, so it’s costing you 5%-6% in lost returns when you take it out.  Plus, the money is taxable income.  When you take money out of the savings account in your home, they will charge you interest, but that’s no different than the interest you lose when taking from investments.  The money from your home is tax free, and the value of the asset doesn’t deplete just because you used some of the money. As well, proceeds from a reverse mortgage are typically not considered taxable income and do not affect eligibility for government benefits such as Old Age Security (OAS) or Guaranteed Income Supplement (GIS).

Penalties

A common misunderstanding is that if clients take a short term, they can pay it out at the end of the term with no penalty.  A reverse mortgage becomes that way after 5 years, but in the first 5 years, regardless of the term chosen, the prepayment penalties to pay it off are as follows:

0-12 months – penalty is 5% of the balance owing
13-24 months – penalty is 4% of the balance owing
25-36 months – penalty is 3% of the balance owing
After 3 years – penalty is 3 months interest
Penalty always waived upon death of the last applicant
Penalty reduced by 50% if moving into a care facility
At the 5 year mark, now clients can start paying off at the end of each term with no penalty; otherwise it just stays at 3 months interest

There are a number of products available within HomeEquity Bank for you to choose from.  I am attaching a comparison sheet for you to look over.  There is a fully open product where the above penalties DON’T apply.  That product costs a little more to set up (upfront fee is the greater of $2995 or 1.25% of the loan amount), and the rate is Prime+3.54%, but that is less expensive than paying the penalties to get out of the regular CHIP in the first couple years.

Who is a reverse mortgage useful for?  Here’s a profile of the ideal Canadian reverse mortgage client:

• Age 55 or older: In Canada, individuals as young as 55 can qualify for a reverse mortgage. However, the older the borrower, the higher the percentage of home equity they can access.
• Homeowner: The client must own their primary residence, which should be their principal residence throughout the term of the reverse mortgage.
• Sufficient Home Equity: The ideal client has significant equity built up in their home, typically with minimal to no existing mortgage debt. The amount of equity will determine the maximum loan amount available through the reverse mortgage.
• Limited Income and Financial Flexibility: Canadian reverse mortgages are often sought by retirees or seniors with limited/fixed income who want to access the equity in their homes to supplement their retirement income, cover unexpected expenses (or live out their wildest dreams with their hard earned money!!!).
• Wants to maintain homeownership: Clients who wish to remain in their homes and maintain ownership while accessing their home equity are ideal candidates. They should have a strong desire to age in place.
• Understands the risks and benefits: The ideal client is well-informed about the terms, conditions, and implications of a reverse mortgage. They have received counseling from an accredited third-party counselor, as required by Canadian regulations.
• Needs flexibility in payment options: Canadian reverse mortgages offer flexibility in how funds are accessed, including lump-sum payments, periodic payments, or a combination of both. The ideal client chooses a payment plan that best suits their financial needs.
• No plans to move in the near future: Reverse mortgages are designed for individuals who plan to stay in their homes for at least 5 years or longer.
• Considers the impact on heirs: While the client may not have immediate plans to leave the home to heirs, they have considered and discussed with their family the potential impact of a reverse mortgage on inheritance and estate planning.
• Comfortable with interest accrual: Clients understand that interest accrues on the reverse mortgage balance over time, which can lead to a reduction in home equity over the loan term.

You can see now how a reverse mortgage unquestionably has a place in our market!  There is no other way for retired homeowners to access the large amounts of equity in their homes to live out their retirements however they want. After working for 40+ years, we all deserve to live our best lives, don’t you agree?

What is the First Home Savings Account (FHSA)?

The First Home Savings Account is a type of registered savings plan for Canadians saving to buy their first home. Canadian residents aged 18 years or older can open an FHSA to save towards the purchase of a home in Canada.

You can contribute $8,000 annually up to $40,000 maximum cumulatively.

Contribution room carries forward to the next year if you don’t put in the full amount. Carry-forward amounts only start accumulating after you open an FHSA for the first time. The carry-forward room does not automatically start when you turn 18.

The FHSA is designed for first-time home buyers. This means that at the time the you withdraw money for a home purchase, you have not resided in a home you owned, in the previous four calendar years.

Where can you get an FHSA?

You can get an FHSA starting in 2023, from banks, credit unions, or any financial institution that issues Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).

What can go into an FHSA?

An FHSA can hold savings or investments. The same qualified investments that are allowed to be held in a TFSA can also be held in an FHSA. This could include mutual funds, bonds and GICs.

A TFSA can be used for any kind of savings goal, and also has an annual contribution limit that carries forward each year.

Are FHSA contributions tax deductible?

Contributions made to your First Home Savings Account (FHSA) are tax deductible. Claim your annual contributions on your tax return, and either reduce your tax owing or add to your refund at tax time.

If you transfer your FHSA into your RRSP, you cannot claim the transfer as a tax deduction.

What happens if you don’t buy a home?

If you decide not to use your FHSA contributions to purchase a home, you can transfer the savings into an RRSP or Registered Retirement Income Fund (RRIF) tax free. Otherwise, any withdrawals from your FHSA will be considered taxable income.

There are limits to how long you can keep your FHSA account. You must close your FHSA after you’ve had it for 15 years or by the end of the year you turn 71 — whichever comes first.

Can you have an FHSA at the same time as a TFSA and RRSP?

Yes, you may hold an FHSA as well as a TFSA or RRSP (or all three) at the same time.

The RRSP Home Buyers’ Plan allows you to withdraw up to $35,000 from your RRSP to help buy your first home. However, the amount you withdraw must be repaid to your RRSP within 15 years. And any withdrawals from your RRSP, that are not for your Home Buyers’ Plan, will be considered taxable income.

Your TFSA can be used for anything you want….retirement, renovations, a pool, a lamborghini— and withdrawals are not taxed as income.

An RRSP is primarily designed specifically for retirement savings. It offers other tax advantages, depending on your income level.

How does the FHSA compare to the RRSP Home Buyers’ Plan and a TFSA?

When you first purchased your home, you most likely used a lawyer to complete the transaction. When you do your renewal or if you are considering refinancing, you may be able to complete the transaction without a lawyer, using First Canadian Title (FCT).

Renewals

If you decide to renew your mortgage with your current lender, you will not require a Lawyer or FCT to complete the transaction. This is because your current lender and mortgage are already registered to the property title.  If you decide to renew your mortgage with a different lender, your renewal then becomes what is known as a ‘switch’ in the mortgage industry, and FCT is often an option offered.

Refinancing

When refinancing your mortgage (which involves dissolving your mortgage and replacing it with a new one, even if you are not changing lenders), you are given the choice to use FCT or a Lawyer depending on your preferences.

Pros and Cons?

FCT

• significantly less costly
• costs sometimes covered by lender for a new mortgage
• able to offer additional flexibility in meeting dates/times
• provides insurance to protect lenders against various risks, such as title defects, liens, and fraud
• one fee for all payouts (mortgages/loans/cards)

Lawyer

• faster than FCT if in a time crunch
• more costly
• able to offer legal advice in addition to facilitating the transaction
• charge per payout

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

Here’s the reality folks….we are in unusual times and NO ONE definitively knows what to do! We can share what we learn from analysts and economists, factor in what projections the Bank of Canada has made and analyze your circumstances to assess what options might accommodate you best. But at the end of the day, you, as the consumer need to understand where you are at to determine where you want to go when you come to a crossroads. It’s way easier (and less stressful) to be proactive than reactive!

Static variable mortgage vs non static variable mortgage (or adjustable rate mortgage)?

A static variable mortgage means your monthly payment stays the same despite interest rate increases, but the bank puts more of your money towards interest and less towards the principal. As a result the amortization of the mortgage increases. A non static variable mortgage means that the bank adjusts your payment to reflect the increased interest required by increased interest rates. As a result, amortization remains stable.

Trigger rate and trigger point?

If you hold a static variable rate mortgage, you need to know what these terms mean. You’ve reached the ‘Trigger Rate’ when the interest rate rises to the point that the entire fixed payment is 100% interest. You’ve hit the “Trigger Point” when your principal debt has crept back up to its original level, or higher as a result of making interest only payments for a long period.

OMG I have a variable rate mortgage, what do I do?

The good news is you have options. Everyone’s options will look different depending on what their circumstances are and what their capacity for payments is and what their risk tolerance is. A good mortgage broker will look closely at your entire financial landscape and see options outside the traditional boxed ones every broker is writing about.

I am in a fixed rate mortgage, none of this applies to me right?

(Cue buzzer sound) WRONG. If you’re a homeowner you will have to renew at some point. You should have a mortgage review done, re-visit your current budget (as everyone’s has changed post pandemic), and explore all the options available to you so you can be proactive and prepared so you can make education decisions with confidence (or at least some sense of faith).

Geez, what should I do?

Easy! 1. Check what mortgage product you are in. 2. If you are in a static variable mortgage ask how your lender manages trigger rate and trigger point. 3. Talk to a mortgage broker to assess your options. Your lender can only offer their own products and rates. I have access to 90+ lenders. It costs you ZERO to do a mortgage review and might save your family $000’s!