CONDO MORTGAGE APPLICANTS FACING STRICTER APPROVALS
The Bank of Canada’s announcement last year that they’re holding the overnight rate at 0.5% (where we’ve been for nearly a year now) squashed any chatter about additional, potential rate hikes by Canada’s largest mortgage lenders.
Save for a few increases starting in early January 2016 (largely by the big banks; smaller lenders continue to be more competitive in many cases), mortgage rates have remained low and are likely to stay low through 2016. So, at least for the short term and possibly for the medium term, buyers will continue to enjoy more affordable payments and – with the right contract terms – perhaps even the opportunity to pay down their principal faster.
While borrowers don’t have to fear a major rate hike just yet, getting approval is another matter. One of Canada’s largest banks – Scotiabank – is reigning in on the number of mortgages they approve. Speaking to Bloomberg TV, Brian Porter, CEO of the Bank of Nova Scotia said: “We just took our foot off the gas the last couple quarters in terms of mortgage growth… in terms of Vancouver and Toronto.”
This is an attempt to edge towards a healthier real estate market and acceptable levels of household debt, particularly in Canada’s two hottest markets, Toronto and Vancouver.
As we talked about on Saturday, the federal government is taking measures to contribute to greater housing affordability but we don’t know yet what those measures will be. Regardless of the specifics, it may come too late for many GTA and Vancouver residents already leveraged to the point of high-risk, particularly young families, while making things even more difficult for first-time buyers who, at the start of their careers, don’t always fit a low-risk profile from a lending perspective.
Are the other banks going to follow suit and what might this mean for first time buyers who haven’t yet locked in a mortgage?
Buyers May Want to Get Condo Mortgage Pre-Approval Soon
If Scotiabank is reigning in on mortgage lending, you can bet the other four of the big five banks will follow and that may have a knock-on effect with smaller lenders. In fact, it’s likely happening already and just not talked about openly in the media.
This isn’t a clear cut good or bad thing. On the one hand, we don’t want to see anyone leveraging themselves to a point where they would owe more than they own if the market were to devalue by, say, 20% (as low a possibility as we think this is). On the other hand, this idea that the average first or second-time buyer can stay within the Canada Mortgage and Housing Corporation’s suggested debt to income ratio is absurd.
What’s traditionally considered “safe” by the CMHC is that your monthly household costs (mortgage + utility bills or maintenance fees + property taxes) be no more than 32% of your gross monthly income. I would bet that, of those who’ve purchased a property in the last five years, more Toronto homeowners are over this maximum “risk threshold” than under; certainly the majority of first-time buyers and single buyers without the benefit of dual household income.
On the flip side, renters in hot urban centers like Toronto and Vancouver are leveraged just as high in many, if not most, cases and while they may carry less risk in a debt to income analysis, they’re also not building home equity for their future. In most cases (not all), it’s better to buy versus continuing to rent.
“a greater emphasis by lenders… on household debt to income ratios”
I can certainly attest from my own, recent experience that it’s very tough for anyone considered “non-traditional” to get mortgage pre-approval (for example, freelancers) regardless of the size of your down payment. You could have a 50% down payment and strong monthly income and still be denied a mortgage without a co-signer or guarantor if your income stability is in question or your career considered risky in any way. Add to that a greater emphasis by lenders than ever on debt to income ratios and we’re very likely to see an increase in mortgage denials over the next few years.
Still, even with a shift in the winds when it comes to lending policies, I have seen a heck of a lot of clients get approved for mortgage amounts far beyond what they would advise as being prudent. While some lenders are reigning in, others are still approval-happy at large numbers, putting some borrowers at risk.
“don’t… buy a home only to find yourself living in a house of cards”
Although some realtors can offer advice and take you through the calculations, each prospective buyer needs decide for themselves how much is too much to spend within the mortgage range you’ve been approved for. You may not be comfortable spending the maximum you’re approved for on your mortgage application.
You’ll want to seek a balance that allows you to break into the real estate market and start building equity while not leveraging yourself to the point of insanity. You don’t want to buy a home only to find yourself living in a house of cards.
For some buyers, this will mean paying off existing debt first before they buy. For others who lack stability in their career or don’t want to make sacrifices elsewhere in favor of the rewards of home ownership, continuing to rent may be your best bet in the short term. While buying a condo in Vancouver in or Toronto is almost always a smarter financial move than renting, you have to be truly ready to buy and not everyone is. And that’s okay.
If you are ready to buy a property, our advice is to make the move as soon as possible if you’re buying in the GTA. Things are only going to get tougher in the foreseeable future. Any actions by the big banks are far more likely to present greater barriers to home ownership rather than a leg up. It’s also absolutely critical in this climate that you get mortgage pre-approval before offering on a home, lest you find yourself unable to close and facing steep penalties.
If you get denied, there is hope. I’ll help you find a good mortgage broker for you talk to him or her about your options like having a co-signer or guarantor. Smaller lenders and credit unions may have less strict approval criteria than the big five banks. Just make sure you can really afford to own a home.
Not everyone can in this market and that’s just the real estate reality we’re all living in.
For more information, contact us at your earliest convenience.