Mortgage

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Rate Hikes Are Not The Answer

According to the Polls

In a recent joint Nanos and Bloomberg poll, that took place in May, it was revealed that Canadian’s would welcome rate hikes if it means that it could help cool the housing market. According to the poll, 49% of respondents would support or somewhat support the Bank of Canada to increase the interest rate. This is because they believe that a rate hike would help relieve the very hot housing market. However, in order to soften the activity in the housing market, but this could also torpedo the economy. 

The President of Mortgage Architects, Dustan Woodhouse was interviewed about this potential rate hikes and stated, “who in their right mind would want interest rates to rise? Anyone who’s thinking they want interest rates to rise to slow home prices doesn’t understand how mortgage approval rules work because all mortgage approvals were written to 4.79%, now 5.25%, so what the actual interest rates are don’t actually mean anything as far as home prices have gone, because nobody is qualifying for any extra money over and above what they would if the actual interest rates were 4.79%, and 5.25% (as of June 1),”

Material Slowdown 

When you slow down the amount of money people have to purchase homes, you then need to rise the interest rates to 7.5-8.5%, says Woodhouse. This would cause housing prices to more than just slow down, the entire economy would in fact, grind to a halt. As Woodhouse puts it, “that would be like trying to kill a mosquito with a nuclear bomb.”

Woodhouse also believes that there’s a fundamental misunderstanding of how interest rate policy works. According to Dr. Sherry Cooper, “the problem is that interest rate policy is a blunt instrument and it leads to all sorts of unintended consequences. If you were to raise rates too much, you’d dampen the whole economy, which makes no sense given all the problems we still have in terms of jobs and getting the economy restarted. The Bank of Canada will never do it for that reason. It will raise rates when it thinks the economy is growing rapidly and is close to full employment.”

Rate Hikes to Rise in 2022

It’s been reported that interest rates are expected to rise by 2022, one year earlier than perviously warned by the Bank of Canada. This is because the economy seems to be healthier than everyone had thought it would be during the COVID-19 pandemic. 

The Bank of Canada also recently sated that it’s anticipating a return to full capacity a month sooner than expected. However, while other things are remaining constant, Dr. Cooper says, “it would reduce buying power. The question is would it lead to a decline in home prices? It would take quite a tightening in monetary policy for that to happen, and tightening is unlikely. Even the housing market isn’t one market nationwide; it’s many, many different markets, so we could see home prices reverse in one area or one sector without seeing it happen in another. To see the overall average home price decline, which means it would have to be a widespread phenomenon outside of both Toronto and Vancouver, it’s not that it can’t happen but it’s unlikely.”

Contacting Lori VanDinther and Team 

Please contact Lori VanDinther and her team today if you’re interested in buying or selling your home. If you’re interested in learning what your home is worth, try our free home evaluation.

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Mortgage Stress Test Calculator with wooden house and coins stack and pen on wood table. Property investment and house mortgage financial concept

The Mortgage Stress Test

Looking to Invest in the Housing Market?

If you’ve been looking to start investing in the housing market, there are somethings you’ll need to know first. If you’re just starting out, there’s a chance you’ve probably heard of the Mortgage Stress Test. This test determines how your mortgage and finances might be affected by any sudden change when it comes to your financial situation, such as unemployment. 

Canada’s banking regulators have suggested some new rules for the Mortgage Stress Test, this was due to the ongoing COVID-19 pandemic. Which has resulted in many people finding themselves unemployed, causing the housing market to soar to record highs. However, the new rules will now make it harder for these potential new homebuyers to qualify. 

What is the Mortgage Stress Test? 

According to the Office of the Superintendent of Financial Institutions (OSFI), the Mortgage Stress Test is designed to prepare buyers for the financial stress of becoming a homeowner. The test also determines how the homeowner would be able to handle any sudden change to their financial situation that could affect their mortgage payments. It’s giving them a glimpse at what the high expense of buying a home. 

All buyers in Canada are required to take the Mortgage Stress Test in order to determine if their mortgage loan is even viable for them. It’s also based on their income, property tax and any other debt they might have at the time. Then borrowers can help to complete the evaluations of the potential homebuyers finances, determining what mortgage payment would be right for them. 

How I Pass the Mortgage Stress Test?

The Mortgage Stress Test was revised in April 2021, in order to pass the test now, you’ll need to prove that you qualify at either your contracted mortgage rate plus 2 per cent, or at the Bank of Canada’s five-year benchmark rate of 5.25 per cent – which ever is higher. 

For example, “if you buy a house at the purchase price of $500,000, make a 20 per cent downpayment, and receive a rate of 3.8 per cent, you are required to pay a monthly interest rate of $1,401.63.” In order to complete the Stress Test, you have to be able to prove that you can pay 5.25 per cent or $2,492.15 per month in mortgage rates. The issue is that for some homebuyers, they might default if they aren’t prepared for this sort of payment. 

Homebuyers Are Reconsidering What They Can Afford

This new Stress Test is now causing some potential first-time homebuyers to reconsider what they can afford. It’s been recommended that borrowers should take time to evaluate their finances with their banks, and with the help of a realtor. 

Due to the current housing market, which is is hot, the government regulators have upped the Stress Test. While the interest rates have remained historically low, this has caused the housing market to be flooded with buyers. In order to cool the hot market, the government has decided to institute this new benchmark qualifying rate for uninsured mortgages. 

The Office of the Superintendent of Financial Institutions

The OSFI is now concerned about homebuyers ability to pay their mortgage loans. While banks lenders are now worried that the homebuyers are over reaching in this very highly competitive market. 

“Given elevated levels of household debt and the risks that households may overstretch in the face of rising housing prices, we welcome the recent proposal by the Superintendent of Financial Institutions to introduce a fixed floor to the minimum qualifying rate for uninsured mortgages.” – Tiff Macklem, governor of the Bank of Canada

The test is most likely to have an impact on the housing market. The new Mortgage Stress Test rules will help to ensure that when someone is buying a home at a low-rate, that they can handle a potential increase in their mortgage payments. The 5.25 per cent point Stress Test is going to take effect in June 2021. 

Contact Lori VanDinther 

If you have any questions about the new Mortgage Stress Test, please contact Lori and her team today. They will be happy to help you make the move to becoming a homeowner. 

Please contact Lori VanDinther and her team today if you’re interested in buying or selling your home. If you’re interested in learning what your home is worth, try our free home evaluation.

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Canadian Real Estate Market Home Sweet Home Welcome

First-Time Home Buyers Month

First-Time Home Buyers

This month is First-Time Home Buyers Month, the Incentive helps people across Canada to purchase their first home. This program offers 5 per cent and 10 per cent off of the home’s purchase price, to put toward a down payment. The program will lower your mortgage carrying costs and makes homeownership more affordable.

What Is The Incentive?

The Incentive makes it easier for a first-time home buyer to purchase their home, allowing their monthly mortgage payments to be lower. It’s a shared equity mortgage, meaning that the government shares in the upside and downside of the property value. Allowing you to borrow the 5 or 10 per cent of the home price. You then have the same percentage of the value of your home when you sell or within a 25-year window.

How It Works

As a first-time home buyer, you receive you 5 per cent of the home’s purchase of $200,000, or $10,000. If your home value increases to $300,000, then your payback would be 5 per cent of the current value, or $15,000.

If you’re receiving a 10 per cent incentive of the home’s purchase price of $200,000, or $120,000 and your home value decreases to $150,000, then your repayment value would be 10 per cent of the current value or $15,000.

Are You Eligible?

There are a few criteria that is used to determine if you’re eligible for the Incentive:

  1. Your total annual qualifying income does’t exceed $120,000
  2. Your total borrowing is no more than 4 times your qualifying income
  3. You or your partner area a first-time homebuyer
  4. You are a Canadian citizen, permanent resident or non-permanent resident authorized to work in Canada
  5. You meet the minimum down payment requirements with traditional funds.

The Incentive act like a second mortgage on your home, and you first mortgage must be greater than 80 per cent of the value of the property. It’s also subject to a mortgage loan insurance program, and it also must be eligible through Canada Guaranty, CMCH, or Genworth.

What Are The Repayment Details?

It’s important to note that the the Incentive must be paid in full after 25 years or when the home is sold. There are also a few ways that the repayment can be triggered; you have separated from your partner and you want to buy them out of their half, porting your mortgage, a partial release of security, or a change in the intended use of the property.

How To Apply To The Incentive

Once you’ve been pre-approved for a mortgage, found the home you want to purchase and that you have determined that you are eligible, you can apply. All you need to do now is apply by filling out the forms, you can find these forms on the first-time homebuyers government website.

After you’ve completed forms, you now need to give them to your lender and they will submit the application. Next you’ll need to give the final signed copy to your lawyer.

Contact Lori VanDinther and Team Today

Make sure you contact Lori VanDinther and her team today if you’re looking to purchase your dream home. Lori will also be happy to answer any questions you might have about the current real estate market.

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