Fall Survey Highlights Stress Test Fallout
Marci • December 11, 2017
OSFI’s forthcoming stress test for all uninsured mortgages after January 1 will have far-reaching effects across the mortgage industry, potentially removing up to 50,000 buyers from the real estate market each year.
That’s one of many key findings from Mortgage Professionals Canada’s Annual State of the Residential Mortgage Market survey, released this week by the association’s chief economist Will Dunning.
“The market is already slowing under the weight of increased interest rates, and policies aimed at suppressing the market further might be adding to economic risks,” he said.
Like in years past, this report dishes up a healthy serving of relevant and insightful industry statistics. We’ve combed them over and have included some of the most pertinent below. (Data points of special interest appear in blue.)
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New OSFI Regulations
- 18%: The percentage of prospective homebuyers who require a mortgage and who otherwise would have had reasonable prospects of completing their desired transactions, that are expected to fail the stress test and therefore not be able to make their anticipated purchase
- 91%: The percentage of new mortgages, across all channels, that will be subject to some form of stress testing
- 6.8% (or $31,000): The amount that potential homebuyers will need to reduce their target price in order to pass the stress test
- 20%: The percentage of buyers who will have to adjust their target price by less than 2.5%
- 40-50%: The percentage of buyers who will fail the stress test, that are expected to be unable to find an alternative for which they can qualify
- 100,000: The number of prospective buyers who previously could have qualified for financing, who will now be disqualified
- 50,000-60,000: The number of buyers who will still be able to make a purchase, though one that is “less attractive to them”
- 40,000-50,000: The number of prospective buyers who will be removed from home ownership entirely
- 50,000-100,000: The potential number of renewers each year who “may find themselves unnecessarily vulnerable” in their mortgage renewals as they will be unable to negotiate with other federally regulated lenders
- “In some cases, these renewing borrowers may be forced to accept uncompetitive rates from their current lenders,” Dunning notes
Mortgage Types and Amortization Periods
- 68%: Percentage of mortgage in Canada that have fixed interest rates (72% for mortgages on homes purchased during 2016 or 2017)
- 28%: Percentage of mortgages that have variable or adjustable rates (24% for mortgages taken out in 2016/2017)
- 4%: Percentage that are a combination of fixed and variable, known as “hybrid” mortgages
- 86%: Percentage of mortgages with and amortization period of 25 years or less (81% for home purchased between 2014 and 2017)
- 14%: Percentage with extended amortizations of more than 25 years (19% for recent purchases between 2014 and 2017)
Actions that Accelerate Repayment
- ~33%: Percentage of overall mortgage holders who voluntarily take action to shorten their amortization periods (vs. 38% of recent buyers)
- For buyers who purchased a home between 2014 and 2017:
- 18% made a lump-sum payment (the average payment was $19,500)
- 16% increased the amount of their payment (the average amount was $440 more a month)
- 10% increased payment frequency
Mortgage Sources
- 46%: Percentage of borrowers who took out a new mortgage during 2016 or 2017 who obtained the mortgage from a Canadian bank (vs. 61% of total mortgages)
- 39%: Percentage of recent mortgages that were arranged by a mortgage broker (vs. 27% of overall mortgages)
- 12%: Percentage of recent borrowers who obtained their mortgage through a credit union (vs. 8% of all mortgages)
Interest Rates
- 2.96%: The average mortgage interest rate in Canada
- A small drop from the 3.02% average recorded last year, though down substantially from the 3.50% average rate in 2013
- 2.90%: The average interest rate for mortgages on homes purchased during 2017
- 2.68%: The average rate for mortgages renewed in 2017
- 51%: Of those who renewed in 2017, percentage who saw their interest rate drop
- Among all borrowers who renewed in 2017, their rates dropped an average of 0.19%
- 2.72%: The average actual rate for a 5-year fixed mortgage in 2017 , about two percentage points lower than the posted rates, which averaged 4.72%
Miscellaneous
- 0.24% (1 in 401 borrowers): The current mortgage arrears rate in Canada (as of August 2017)
- $1,486: The average monthly mortgage payment ($1,568 for recent purchases made from 2014 to 2017)
Equity
- 62%: The average percentage of home equity for homeowners who have a mortgage but no HELOC
- 58%: The average equity ratio for owners with both a mortgage and a HELOC
- 81%: The equity ratio for those without a mortgage but with a HELOC
- 91%: Percentage of homeowners who have 25% or more equity in their homes
- 53%: Among recent buyers who bought their home from 2014 to 2017, the percentage with 25% or more equity in their homes
Equity Takeout
- 9% (860,000): Percentage of homeowners who took equity out of their home in the past year
- $54,500: The average amount of equity taken out
- $47 billion: The total equity takeout over the past year
- $28 billion was via mortgages and $17 billion was via HELOCs
- Most common uses for the funds include:
- 26% (10.7 billion): For purchases (including education)
- 22% ($9 billion): For home renovation and repair
- 21% ($8.7 billion): For debt consolidation and repayment
- 21% ($8.4 billion): For investments
- 10% ($4.2 billion): For “other” purposes
- Equity takeout was most common among homeowners who purchased their home during 2000 to 2009
Sources of Down payments
- 26%: The average down payment made by first-time buyers from 2014 to 2017, as a percentage of home price
- This is a significant increase from previous surveys, where the average down payment was consistently around 20%. Dunning writes that most of these buyers appear to have increased their down payments to avoid the need for mortgage insurance
- The top sources of these down payment funds for homes bought from 2014 to 2017 were:
- 92%: Personal savings
- 43%: Gifts from parents or other family members (vs. 23% from 2010-2013)
- 19%: Loan from parents or other family members (vs. 12% from 2010-2013)
- 27%: Loan from a financial institution
- 29%: Withdrawal from RRSP
- 105 weeks: The amount of working time at the average wage needed to amass a 20% down payment on an average-priced home
- This is up from 93 weeks in 2014 and 53 weeks two decades ago
Homeownership as “Forced Saving”
- 50%: Approximate percentage of the first mortgage payment that goes towards principal repayment (based on current rates)
- 10 years ago this share was about 25%
- Dunning notes that rapid repayment of principal means that, “once the mortgage loan is made, risk diminishes rapidly”
- He added that most affordability analyses use the posted rate, “which gives a distorted impression of the current level of affordability, and of how current affordability compares to the past”
A Falling Homeownership Rate
- 67.8%: The homeownership rate in Canada in 2016
- Down from 69% in 2011
- Ownership rates fell for the three youngest age groups of buyers (first-time buyers) by more than 4%
- Dunning attributes this “disappointing” change to:
- The increased difficulty of saving down payments
- The elevated rate of “forced saving”
- Five sets of mortgage insurance policy changes by the federal government that have made it more difficult to buy
Consumer Sentiment
- 7.15: The average score (on a scale of 1 to 10 where 1 indicated complete disagreement) with the following statement: “Low interest rates have meant that a lot of Canadians became homeowners over the past few years who probably should not be homeowners.” (Up from an average score of 6.98 in previous surveys)
- 7.15: Average score in response to the statement that “real estate in Canada is a good long-term investment” (down from the previous average of 7.28)
- 90%: The percentage of homeowners who are happy with their decision to buy a home
- 7%: Of those who regret their decision to buy, the regret pertains to the particular property purchased
- Just 4% regret their decision to buy in general
Consumers’ Comfort with Technology
- 65%: Percentage of mortgage consumers who are “moderately” or “quite” comfortable with texting or instant messaging their mortgage professional with questions or concerns (77% of those aged 18-24)
- 47%: Percentage who are moderately or quite comfortable with being served by an online digital mortgage advisor (i.e., a chatbot) when applying for a mortgage
(vs. 58% of those aged 18-24)
- 40% are “uncomfortable” while 27% are “moderately uncomfortable”
- 50%: Percentage who are moderately or quite comfortable with applying for a mortgage through an app on their mobile device (vs. 73% for those aged 18-24)
- 36% are uncomfortable while 26% are moderately uncomfortable
- Dunning notes that comfort levels are greatest for the youngest age groups, but surprisingly also among those aged 65 and older
Outlook for the Mortgage Market
- Data on housing starts suggests housing completions in 2018 will increase slightly compared to 2017. “This factor, therefore, will tend to increase the growth rate for mortgage credit,” Dunning writes.
- “Another significant factor is that low interest rates mean that consumers pay less for interest and, therefore, are able to pay off principal more rapidly,” he noted. “Current low interest rates have, therefore, tended to reduce the growth rate for mortgage debt.”
- 5.9%: The current year-over-year rate of mortgage growth (as of August)
- Vs. an average rate of 7.3% per year over the past 12 years
- Dunning expects the growth rate to slow to 5.6% by the end of 2017 and 5.5% for 2018
This article was written by Steve Huebl of Canadian Mortgage Trends. It was originally published here on December 8 2017.
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Your Lender Is Not Obligated to Renew Your Mortgage Many homeowners assume that if they’ve made every mortgage payment on time, their lender is automatically required to renew their mortgage at the end of the term. That’s a common belief—but it isn’t true. When you sign a mortgage, you’re agreeing to a contract for a specific term . Once that term ends, the lender has the legal right to either renew the mortgage or call the loan . There is no obligation to offer a renewal. In practice, most lenders do renew mortgages—but certain situations can prevent that from happening. Reasons a Lender May Decline to Renew A lender may choose not to renew if: Mortgage payments were missed during the term A bankruptcy or consumer proposal has occurred There is a separation or divorce Employment or income has changed A borrower on the mortgage has passed away The lender no longer prefers the property’s location or market The lender is no longer licensed to lend in Canada Even one of these factors can change how a lender views the risk. Why This Matters Because renewal is not guaranteed, waiting until the last minute can put you in a difficult position. Understanding this reality early gives you time and control. How to Protect Yourself at Renewal The best approach is to be proactive. Ideally, you should begin reviewing your options 120 days before your mortgage term ends . This gives you enough time to explore alternatives and make informed decisions—rather than reacting under pressure. Even if your current lender offers a renewal, that’s just one option , not automatically the best one. The lender that was right for you years ago may no longer offer the most competitive rate, terms, or flexibility today. The goal at renewal isn’t convenience—it’s reducing your total cost of borrowing and choosing terms that align with your current situation. Why Work With an Independent Mortgage Professional Working with an independent mortgage professional ensures someone is advocating for you , not the lender. Instead of being limited to one set of products, you can compare options across multiple lenders and choose the solution that best protects your interests. Final Thoughts Whether your lender is offering a renewal or not, the smartest move is to review all your options before signing anything. If your mortgage is coming up for renewal—or if you want to plan ahead—feel free to connect anytime. I’d be happy to help you protect your options and make a confident decision.
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If the title of this article caught your attention, chances are your family is growing. Congratulations. If you’re thinking now is the right time to move into a home that better fits your growing family—but you’re unsure how parental leave affects your ability to qualify for a mortgage—you’re in the right place. Here’s the good news. Qualifying for a mortgage while on parental leave is possible when it’s done correctly. When you work with an independent mortgage professional, lenders can often qualify you based on your return-to-work income , as long as you can provide documentation confirming you have guaranteed employment waiting for you. A word of caution If you walk into a bank branch and disclose that you’re currently on parental leave, there’s a chance the bank will only allow you to qualify using your parental leave income. That can significantly reduce your borrowing power. Parental leave income is typically limited to 55% of your previous earnings, up to a weekly maximum. Qualifying on that amount alone can restrict your options and impact the type of home you can purchase. Why lender choice matters One of the biggest advantages of working with an independent mortgage professional is choice . You’re not limited to one lender’s rules or products. Some lenders will allow you to qualify using 100% of your confirmed return-to-work income , which can make a meaningful difference in your approval amount and overall options. What you’ll need to qualify Most lenders will require an employment letter that includes: Employer name (preferably on company letterhead) Your job title Original start date (to confirm probation has been completed) Confirmed return-to-work date Guaranteed salary upon return Lenders want reassurance that your income will resume once parental leave ends. You may also be asked to provide income history from the past couple of years, which is standard for most mortgage applications. One important note Whether or not you actually return to work after parental leave is entirely your decision. From a mortgage perspective, qualification is based on having a confirmed position available to you at the time of approval. If you have questions about qualifying for a mortgage while on parental leave—or anything mortgage-related—please connect anytime. I’d be happy to walk you through your options and help you plan with confidence.
