Political promises continue to roll out every day now.
I thought a quick summary of a couple political promises, related to the Real Estate market with my thoughts on the topic, would be valuable for you.
Let’s get started …
1. Removing the Mortgage stress test from renewals:
The stress test asks borrowers to qualify for their Mortgage at the greater of the Mortgage Qualifying Rate or 2% above the contract rate.
Today, the MQR is 5.19%.
To be clear, if the borrower renews their Mortgage with their incumbent lender, they DO NOT have to re-qualify for the Mortgage (regardless of the stress test interest rate).
Should the borrower wish to take their business to a different Mortgage lender, or change the Mortgage amount/amortization, the Mortgage stress test and full underwriting of the client/property would apply.
**Conspiracy Alert**
You want to know something unbeknownst to the public …
If I have my personal banking, credit, auto loan, Mortgage, investments etc ALL under one brand of Bank – they know everything about me.
They can see my income, debt, net worth, and internally check my credit rating.
In these cases, should the Bank notice my income is down, credit is higher, and I have less liquid assets they might consider me a higher risk when renewing my Mortgage.
Because they can see everything, they might offer me a higher interest rate for my renewal because they calculate I can’t qualify to take my Mortgage to another lender.
They got me!
This is called risked based Mortgage renewals. It’s happening and will continue to happen as Banks gain more information.
**End Conspiracy Alert**
I’ve seen this conspiracy unfold with some clients I’ve been referred to. In one case, the incumbent lender made a big miscalculation in their Mortgage renewal offer. I was able to find a Mortgage solution for my clients at a different lender that was significantly less than their renewal offer.
In that particular case, the client was in a position to move within the Mortgage market.
And this is my philosophy on “the market”. If the lender deems me to be a higher risk to lend money to at Mortgage renewal, why should they not price that accordingly? If I was deemed to be a “high risk borrower” coming to the same lender as a new client, they might not extend a Mortgage to me. Why do I assume my incumbent Mortgage lender would offer me a prime Mortgage renewal if I am not a prime customer?
One way to help myself receive a prime Mortgage renewal offer and avoid the all knowing, all seeing Bank, is to spread assets and debt around, or keep my finances in prime condition. Or both.
2. Changing the Mortgage stress test for everyone.
Above I noted the stress test is the greater of the Mortgage Qualifying Rate (MQR) or 2% above the clients Mortgage contract rate.
Do you know where the MQR comes from? How is that interest rate decided anyway?
Well, the big banks in Canada control it.
The MQR is the mode interest rate (most common) of the all the big bank posted 5 year rate. Really, the 5 year posted rate is not used to lend money on. The 5 year posted rate is used as a factor in the banks Mortgage payout penalty formula.
The past year has seen 5-year fixed Mortgage rates drop from about 3.79% down to 2.69%. The Mortgage Qualifying Rate has only decreased from 5.34% to 5.19%, where it is today.
I wrote a blog post here about why this rate is beneficial for banks to retain the MQR at elevated levels.
Alternative stress test theories have been proposed that might make more sense to adopt? Possibly having the stress test be 0.75% higher than the market interest rate is one idea.
Considering how important the MQR is to Canada’s housing market, I would like a more defined understanding of why this interest rate moves up and down.
**Shameless Self Promotion**
Many of my clients reading know about my philosophy of planning for higher interest rates at their future Mortgage renewal. Many of my clients have increased their Mortgage payments in anticipation versus waiting and reacting.
#bossmortgage
At my core, I think having some form of stress test is valuable for Canadians to plan for when borrowing money. Especially considering where we are in today’s interest rate environment, relative to past interest rate highs.
I also acknowledge the interest rate outlook today, is low for quite some time. I think you’ll also agree with me, the world can change rapidly. I think being in anticipation of higher rates, with a plan, is better than responding to higher rates. Capiche.
**End Shameless Self Promotion**
Conclusion:
There are more political promises related to the housing market that are floating around …
[] Adding a 30 year amortization.
[] Adding more foreign buyer speculation tax.
[] Improving money laundering detection.
How important are housing related political promises to your federal election vote?
Talk soon,
Chad Moore
P.S
Also tell me about your Thanks Giving weekend coming up! I’m personally watching my food intake all week so I can unapologetically gorge myself this weekend!
