Most people don’t like change is a saying we hear quite often. But there’s also a more optimistic view on change and that it is good. As a mortgage broker, I walk the line between these two trains of thought most days. However, here’s a thought almost every Mortgage Broker agrees on:
The federal government forcing change through a broad stroke policy is not necessarily a good change for everyone in Canada.
We make this statement in reference to yet another series of mortgage regulations that the federal government is “proposing” for our industry. We have lost count of how many new tightening policies Ottawa has made over the past 5 years, but we remember the last change well because it was a game changer. In a nutshell, home buyers with less than a 20% down-payment now have to qualify at a mortgage rate approximately 2% higher than they will actually be paying for the next 5 years.
Essentially, what this change did was take away considerable buying power from an average family buying their first home. Many times, this change amounts to a six-figure difference regarding the price point of their purchase.
Now, despite this overly harsh regulation forced on all major financial institutions in Canada, the world went on. Some even argued it was a prudent step to protect first time buyers as rates inevitably will go up, and it protects government programs like CMHC insurance.
The latest proposed round of changes will also have a similar impact on purchasing power, but this time it will affect the homebuyers that actually put 20%-30% down on a mortgage. These borrowers are generally more sophisticated, have owned a home already, and obviously will have more equity in their purchase. Again, purchasing power will be affected, but this time it will influence the higher end of the market.
Another proposed change is banning, of what we call, a bundled mortgage. In essence, a bundled mortgage is the combination of a 1st mortgage, offered by one of our preferred financial institutions, “bundled” with a 2nd mortgage, which is generally by a private lender. Why do we offer bundled mortgages? To allow the loan-to-value to go higher than what the 1st lender is either comfortable or regulated to lend. It won’t affect a huge percentage of the population, but what’s funny is that this strategy has been occurring well before financial institutions formalized this process and will continue after these changes are in effect, just in a more unofficial capacity. Essentially, the 2nd mortgage market will become less regulated, and the consumer will be less protected as there will continue to be private unregulated options available to Mortgage Brokers and borrowers.
We are often asked what the logic is behind this string of changes. At best, we throw our hands up in the air and quote articles we’ve read about the housing bubble in Toronto /Vancouver and(or) the amount of consumer debt the average Canadian has. But honestly, a good reason is hard to come by. All we really do know is change is constant, and good businesses always find a way. We’ve seen some of our lender partners start to create new products that address the true needs of our clients that still work within the ongoing layers of regulation.
The consultation period for these changes has expired. Despite large protests from our industry, as well as the real estate community, we fully expect them to take place later this fall or, at the latest, the beginning of the New Year.