27 Feb

Rates are up, prices down. How tough is the mortgage stress test across Canada today?

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Posted by: Frederic Pichette

Original Article Here

A lot has happened since Ottawa rolled out the mortgage stress test.

The idea was to help ensure that Canadians could keep up with their mortgage payments even with rising interest rates. And those borrowing costs are now quite a bit higher than when the rules came into effect.

In October 2016, when the government introduced the stress test for insured mortgages, those with a down payment of less than 20 per cent of home value, were being tested against a benchmark interest rate of 4.64 per cent. Today, that rate stands at 5.34 per cent.

READ MORE: Could you pass the mortgage stress test? Here’s how to find out

That has the real-estate industry reportedly pressing the government to take steps to loosen up requirements for first-time homebuyers, for example, by stretching out the maximum amortization period for insured mortgages from 25 to 30 years.

At the same time, though, those very rules have helped take the sizzle out of most real-estate markets in Canada. Home prices in most major cities are lower today than they were early last year, when Ottawa cast a wider net with a stress test for mortgage applicants putting down 20 per cent or more of the home value up front.

The benchmark prices of a home in Metro Vancouver, for example, is 4.5 per cent lower than it was in January 2018. In Toronto, average prices eked out a gain of a mere 1.3 per cent. Nationally, the average price of a home at the start of this year was 5.5 per cent below what it was at the beginning of 2018.

While lower price tags are bad news for sellers, they lower the stress-test bar for buyers, tempering or offsetting the impact of higher interest rates.

So what does it take to get your mortgage application approved in Canada’s major cities?

READ MORE: New mortgage rules 2018: A practical guide

The mortgage stress test: then and now

We first raised that question nearly a year ago, when we asked financial products comparisons site Ratehub.ca to calculate the minimum income necessary to pass the stress test for homebuyers looking to purchase an average-priced home with a 20 per cent down payment, a 2.99 per cent five-year fixed rate mortgage and a 25-year amortization. We used March 2018 home prices.

READ MORE: Here’s the income you need to pass the mortgage stress test across Canada

This time, we repeated that exercise using January 2019 home prices and a 3.29 per cent interest rate, one of the lowest available on Ratehub.

Here’s how January 2019 compared to March 2018:


In most cities, mortgage applicants would have a better shot today than 10 months ago. In Vancouver, for example, the average home price in January was nearly $65,000 lower than it was in March of last year. That translates to almost $13,000 less to put down a 20 per cent down payment and around $10,000 less in minimum income necessary to pass the stress test. Buyers in Toronto, Calgary and Edmonton would enjoy similar gains.

Of course, the comparison isn’t perfect. In much of Canada, January is one of the most frigid months in terms of both temperatures and real-estate activity. Things, on the other hand, tend to thaw out in March, when prices bounce back as the spring real-estate markets begin.

Still, comparing the national average home price between January 2019 and January 2018 yields a similar result. Thanks to lower home prices, the minimum household income required to qualify for the average Canadian home for a buyer with no other debt, a 25-year amortization and 20 per cent down is $83,639 today, compared to $86,880, according to numbers provided by Toronto mortgage broker Robert McLister.

Overall, “the stress test has been an unequivocal success in stabilizing home prices,” said McLister, founder of rate-comparisons site RateSpy.com and mortgage planner at intelliMortgage.com.

But tougher mortgage rules have also steered more buyers toward cheaper homes, pushing up the prices of lower-end properties, as well as rent, he added.

“People trying to get into the market are really struggling,” said James Laird, co-founder of Ratehub Inc. and president of CanWise Financial mortgage brokerage.

So what about a 30-year mortgage?

The plight of first-time homebuyers is fuelling a revival of the 30-year mortgage. The option is already popular among buyers who can afford a down payment of 20 per cent or more. And politicians are reportedly thinking about re-introducing the longer amortization for insured mortgages as well.

Finance Minister Bill Morneau is said to be mulling the option — something that could be addressed in its pre-election budget, set to be tabled on March 19.

NDP Leader Jagmeet Singh has also recently adopted the idea, part a broader suite of home-affordability measures he supports.

READ MORE: NDP Leader Jagmeet Singh proposes new housing measures

The basic idea is simple: Spreading out a mortgage over a longer period of time lowers monthly mortgage payments, all else equal. This can not only free up some much-needed cash for households on a tight budget but can also push some prospective buyers just over the stress-test bar.

READ MORE: Rent or buy? How stagnating home prices and high rents affect that equation

In our example, a $410,000 home in Calgary would come with monthly mortgage payments of around $1,600 with a 25-year mortgage. But that goes down to about $1,430 a month with a 30-year amortization. Those lower mortgage installments mean a homebuyer with no other debt would need to be making around $65,000 a year to qualify for the loan instead of $72,000.

In general, a 30-year mortgage allows buyers to get 10 per cent more mortgage for the same monthly payment, Laird told Global News.


But longer mortgages come with two notorious downsides. One is that homeowners who stick to the regular payment schedule will end up forking out considerably more in interest over the life of the loan.

To use numbers from our data set, buyers with 20 per cent down on a $777,000 Toronto home would pay around $316,000 in interest with a 25-year amortization, but $387,000 with a 30-year mortgage — a difference of almost $70,000.

READ MORE: From broom closet to detached home: What millennials can afford across Canada

The other catch is the risk that an extra-long mortgage will interfere with homeowners’ ability to save for retirement.

Experts are divided on the merits of the 30-year mortgage.

Laird said that buyers can and tend to accelerate their mortgage payments as they get older. In general, people earn more as they advance in their careers and many will use the extra cash to hack away at their mortgage debt.

“Just because you start with a 30-year mortgage, doesn’t mean you end with a 30-year mortgage,” he said.

A 30-year mortgage is “a Band-Aid on expensive home prices, but that doesn’t mean it’s a good option financially in the long run,” said Jason Heath, a fee-for-service financial planner and managing director at Objective Financial Planners.

“It’s not uncommon for someone to take out a mortgage and add to it or extend the amortization over their lifetime. So, a 30-year mortgage can easily become longer just on that basis,” Heath said.

Rising interest rates could also force homeowners to further stretch out their amortization at renewal if they can’t afford higher monthly payments, Heath noted.

READ MORE: Here are provinces, cities in Canada with the highest and lowest rent

For homebuyers with small down payments, though, there would be less of a temptation to add to the mortgage through refinancing, said Arpad Komjathy, a certified financial planner and mortgage broker.

Refinancing without having at least 20 per cent equity in the home is “very difficult,” Komjathy said.

So a couple with 5 per cent down payment of $25,000 on a $500,000 condo would have to wait until they’ve built up at least $100,000 of equity before refinancing, he added.

“That doesn’t allow them to take on more debt for a long time,” he added.

Overall, he said, especially those living in expensive cities like Toronto, where “downtown rent is crazy expensive,” a 30-year mortgage makes sense for millennial buyers.

Canada has seen longer mortgages than that. The maximum amortization for an insured mortgage was 40 years in 2008, but Ottawa had gradually reduced it to 25 years by 2012.

A return of the 30-year amortization even for buyers with smaller down payments would be a return to the past.

One question about the future, though, is whether the extra demand for housing generated by newly qualified buyers will push home prices and by how much.

© 2019 Global News, a division of Corus Entertainment Inc.

21 Feb

Montreal poised to overtake Vancouver as Canada’s second largest housing market

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Posted by: Frederic Pichette

January saw home sales in Montreal climb the fastest in a decade as lower prices and a booming economy lured buyers

Vancouver is on pace to lose its status as Canada’s second largest housing market to Montreal.

While still Canada’s most expensive city for housing, a recent collapse in sales has led the value of real estate transactions substantially lower. That leaves Montreal’s soaring market poised to overtake the Pacific coast city’s.

In January, the total dollar value of real estate transactions in Vancouver fell to $1.7 billion on a seasonally adjusted basis, the weakest level since 2013 and down 42 per cent from a year earlier, according to data released Friday by the Canadian Real Estate Association. Meanwhile, the value of transactions in Montreal reached $1.63 billion to start the year, an increase of 18 per cent from last January. Montreal — which has much cheaper homes, but more transactions — hasn’t been this close to Vancouver since 2008.

Montreal is the business capital of the largely French-speaking province of Quebec and Canada’s second largest city by population. But it was left out of the boom that saw home prices in Toronto and Vancouver surge to levels that made those cities unaffordable and prompted a rush of regulations to slow down them down.

These measures have included new regional taxes on foreign buyers in Toronto and Vancouver that aren’t in place in Montreal. Higher interest rates and tougher rules for mortgage lending also seem to be having the biggest effect on the country’s priciest markets.

January saw home sales in Montreal climb the fastest in a decade as lower prices and a booming economy lured buyers. Sales in the city advanced 7.1 per cent from December, the fastest pace since May 2009, and the number of units sold reached a record. Montreal’s gains are well ahead of identical moves in Vancouver and Toronto where sales rose 1.2 per cent, and double the national increase of 3.6 per cent.

There’s far less concern Montreal will show the signs of overheating seen in Canada’s two other major cities, given price differentials.

“Much of the recent price appreciation and sales increases, that really reflects the strength of the economy,” Marc Desormeaux, an economist at Bank of Nova Scotia, said by phone from Toronto. “Montreal remains relatively affordable.”

Montreal’s benchmark home price was $349,300 in January, up 6.3 per cent from a year earlier. That’s still far less than the Vancouver price of $1.02 million, which is down 4.5 per cent.

Canada’s largest city Toronto still has by far the most real estate transactions, reaching $5.4 billion to start the year, albeit greatly reduced from the $8.5 billion in activity seen at the beginning of 2017.


15 Feb

Montreal real estate: Due diligence important when making a deal

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Posted by: Frederic Pichette

What’s best for a agent’s business is not always what’s best for you.

Don’t trust your realtor. At least, not blindly.

Yes I know he or she is probably very nice. Most realtors are nice, even disarmingly charming. Which is why you, the client, need to be on your guard. Your realtor is supposed to represent you and your interests, but every broker is also a salesperson out to make a buck.

The real estate industry is home to a bevy of smooth-talkers and schmoozers, but the savviest deal-makers are also shrewd businesspeople. You have to be, to make it in this competitive industry. But what’s best for a realtor’s business is not always what’s best for you.

The good ones do a marvellous job checking their (understandable) desire for fatter commission cheques and actually do put their clients first, even if it means they make less on a sale. But you should never assume this is so. You have to look past the charm and do your own research to be certain that your realtor is truly acting in your best interests.

(A note for the realtors reading this: yes, I know, it’s #notallrealtors. If you’re one of the good ones, relax. I’m not talking about you.)

Realtors must abide by a professional code of conduct, and most are careful to follow the rules. Those who don’t are sanctioned by their peers, and even risk losing their licences. (You can check your broker’s record on the OACIQ website at oaciq.com/en#find-broker). But it’s up to you to protect yourself from costly mistakes, whether caused by human error or moral grey zones.

One of the reasons buyers and sellers choose to work with an agent is that they value their expertise. But some agents pretend to have more in-depth knowledge of an area than they really do, or may not differentiate opinions based on personal experience from verified facts. Your realtor may be convinced that the greenbelt behind your dream house will “never be developed,” for example, but if it really matters to you, be sure to take the time to check that claim at city hall.

Sometimes the error is one of omission. A friend of mine who sold her house on Du Proprio had a realtor approach her who said he had a potential buyer, but would only agree to show the house if she offered to pay him the usual commission. She had listed on Du Proprio to avoid agent fees, but offered a smaller percentage as a token. He never did bring the buyer to see the place (and she did end up selling the house to another buyer, commission-free).

It’s logical from the broker’s point of view. They don’t work for free. But the buyers they’re representing may not realize there could be suitable homes for sale that their realtor doesn’t want them to see. Buyers need to be actively involved in the search to be sure they really have seen everything that meets their criteria.

Dual agency deals can be another tricky situation. When realtors “double-end” a deal, representing both buyer and seller, they are entitled to the commission owed to the buyer’s agent as well as the usual fee. And to be clear: they are allowed to do this in Quebec. Yet many realtors say they feel a prick of conscience when they act as a dual agent. Brokers are supposed to remain neutral as they present all offers, but the temptation is strong to drop hints that could sway the buyer to offer more, or influence the seller’s decision whether to accept a deal. (The practice was banned in B.C. last year to remove this potential for conflict of interest.

I’m not saying don’t use a real estate agent. I certainly have and will again. Do listen to your broker’s advice — many truly are experts in their field. But never forget: It’s your dollars and your happiness at stake. Always do your own due diligence.