Blog : Homeownership

Is Now a Good Time to Buy?

Is Now a Good Time to Buy?

If you’re getting tired of all the media headlines claiming impending housing market and economic doom and gloom, you’re not alone. It seems every time you browse the news another US economist is predicting terrible things for Canada. Articles like this one, claiming an ‘extreme bubble’ is just around the corner… note, not just a bubble… but an extreme bubble. 

The truth is, mortgage rates have never been lower and while low interest rates are somewhat blamed for increased house prices, low interest rates are good for borrowers who are looking to get into the market. So despite what the media would have us believe, now (historically speaking) is actually a pretty good time to buy a property.

Understanding that you can’t control the future, and of course past performance doesn’t indicate future direction, if you isolate the actual cost of borrowing money, you might be surprised at how cheap money is right now. Obviously buying a property is a personal decision, the time has to be right for you, and your finances have to be in order, but if the sensational media headlines are causing you to second guess yourself or the market, let’s have a look at the cost of borrowing today compared to previous years.

Fixed Interest Rates

Fixed interest rates are at an all time low. Seriously, it has never been cheaper to borrow fixed money in Canada. Here is a handy chart that provides a visual to that effect, showcasing the historical posted 5 year mortgage rates from 1973 to today.

5 yr posted Graph

Reference: Bank of Canada Interest Rates

Here are a couple points to note:

  • In July of 1981, fixed rates were at 21.75%.
  • 21.75% is a higher rate of interest than a lot of credit cards. Yikes!
  • In July of 2016, rates were at 4.74%.
  • 4.74% is a posted rate, a lot of broker channel lenders have discounted rates in the low 2% range.

Prime Rate

So, fixed rates are a little too permanent for you? No problems, the prime rate (the rate that sets the baseline for a variable rate mortgage) can be found hovering below half of the Canadian historical average. So here is another handy chart that provides a visual going back to 1935 up until today.

Prime Rate Graph

Reference: Bank of Canada Interest Rates

A couple points to note:

  • The 80s were not only bad for music and fashion, but a bad time to borrow money as well.
  • Although prime is 2.7%, lenders offer a variable component discount as well tied to the prime.
  • Discounts in today’s lending landscape are around half a percentage point.
  • The 40s, 50s, and 60s, were pretty steady, who knows, we might just be in for some more of that!

Let’s Talk

So regardless if you prefer the fixed or variable, as you can see, it’s never been cheaper to borrow money. Period. Please don’t let the media scare you into thinking the market is about to implode, their job is to sell advertising not bring a balanced perspective to your newsfeed. Affordability is a personal thing and shouldn’t be dictated by a market you can’t control.

If you would like to figure out what you can afford, and go over your financial situation to prepare for getting a mortgage, I’d love to help. Please contact me anytime at 416.945.9123 or by email at mat@fugeremortgage.ca, I would love to work with you.

 

More Oversight for Mortgages in Canada?

More Oversight for Mortgages in Canada?

Although no firm changes have been announced regarding mortgage regulations, it looks like this might be the beginning of something. The following is correspondence shared by Mortgage Professionals Canada by email to the mortgage industry, it has been shared here for your benefit. 

The Office of the Superintendent of Financial Institutions (OSFI) issued a letter this morning to all federally regulated financial institutions (FRFI). The letter expresses concern about the rising levels of household debt in Canada and serves to remind FRFIs of their obligations under Guidelines B-20 and B-21 to assess and underwrite mortgage loans and mortgage insurance in a prudent manner. 

The letter states: 

Given the current economic environment in Canada, with record levels of household indebtedness and growing risks and vulnerabilities in some housing markets, OSFI’s supervisory scrutiny in the area of mortgage underwriting will continue. Moving forward, OSFI will place an even greater emphasis on confirming that financial institutions conduct prudent mortgage underwriting, and that their internal controls and risk management practices are sound and take into account market developments.

You can read the full letter here.

Highlights

OSFI has identified the following five specific areas that it expects lenders to consider diligently during their underwriting process:

Income Verification
Due diligence processes for lenders must be in place.  Inadequate income verification can adversely affect the assessment of credit risk, anti-money laundering and counter terrorist financing (AML/CTF) compliance, capital requirements and mortgage insurability. More stringent due diligence for incomes outside of Canada should be applied, and there should not be any reliance on collateral values as a replacement for income validation.

Non-Conforming Loans
OSFI warns that the 65% loan-to-value threshold should not be considered a demarcation point below which, sound underwriting practices and borrower due diligence do not apply; a borrower’s character and capacity to service the loan should always take precedence over the value of collateral when underwriting mortgage loans or insurance.

Debt Service Ratios
Incomes should be conservatively calculated and appropriately questioned. In particular, rental incomes from the underlying property should be critically examined. OSFI also suggests that relying on current posted five-year interest rates to test a borrower’s ability to service its obligations does not represent an adequate stress test in a rising interest rate environment.

Appraisals and LTV Calculation
OSFI suggests that rapid house price increases create more uncertainty about the reliability of property appraisals. Institutions should use appraisal values and approaches that provide for a conservative LTV calculation, and not assume that housing prices will remain stable or continue to rise.

Risk Appetite and Portfolio Management
OSFI’s supervisory work indicates that the risk profile of newer mortgage loans is generally on the rise. OSFI reminds mortgage lenders and mortgage insurers to revisit their Residential Mortgage Underwriting Policy and Residential Mortgage Insurance Underwriting Plan regularly to ensure a stringent alignment between their stated risk appetite and their actual mortgage/mortgage insurance underwriting and risk management practices.

OSFI’s letter further states that they are working on various capital policy initiatives to strengthen the measurement of capital held by the major banks and mortgage insurers to ensure their ability to weather losses from residential mortgage defaults. New measures are targeted for implementation in November 2016 and January 2017 respectively.  Risk Sensitive Floors, Capital Requirements for Mortgage Insurers, and BCBS Revisions to the Standardized Approach for Credit Risk are each included in these reviews. 

We are pleased that OSFI is committed to consultations with our industry prior to the implementation of these new rules. Mortgage Professionals Canada will be involved in these discussions and we will keep you informed of any developments.

 

This article was originally published by Mortgage Professionals Canada and was included in an email correspondence.