Are you receiving a lot of questions from clients who are trying to understand the recent changes to the mortgage rules in Canada? Answer these concerns with ease and confidence after listening to Eden Simari, of Eden Simari Mortgage Solutions and Bill MacDougall of Optimum Realty make sense of it all.
Are you receiving a lot of questions from clients who are trying to understand the recent changes to the mortgage rules in Canada? Answer these concerns with ease and confidence after listening to Eden Simari, of Eden Simari Mortgage Solutions and Bill MacDougall of Optimum Realty make sense of it all.
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Speaker 2:in your area, a podcast designed by area to update, educate and refresh realtors, brokers in the industry, stakeholders on topics that matter most to you. Listen on the go in your car at a coffee shop wherever your day takes you. This is a podcast designed with today's busy realtor in mind and now here's Today's host Bill Mcdougal.
Speaker 3:Welcome to in your area a podcast, Roberto realtors on the move podcasting from the boardroom of the of over Alberta Rita State Association. I'm your host Bill Mcdougal. Welcome to this episode, understanding the Canadian mortgage rule changes. I'm a broker owner of optimum realty group along with my wife Audrey. I had been in the industry for over 17 years and I've served as an instructor with Krebs and area for over five years. Joining me today is Eden Samari broker up eating some ra mortgage solutions. Eden is award winning a mortgage professional with over 15 years in the lending industry. She has extensive experience in mortgage underwriting, risk management, business development and customer service. Eden is passionate about the mortgage industry and sharing her skillset with customers to assist them in making their financial and home ownership dreams come true. Eden was honored to be nominated for the mortgage broker of the year in Canada for 2018. Eden, please tell us more about why you are here today.
Speaker 2:Thank you Ben for the introduction and hello to all the listeners I am here today because I had the honor of being invited to talk about a topic that's very near and dear to our heart professionally and personally. It's something we discuss on a daily basis with our referral partners and our clients. Um, it's something that's had a huge impact on our day to day operations as well as our, I would believe, a immediate marketplace. So I think it's very timely that we put some, um, bite sized pieces out to the, the real estate community and, and have a better understanding of, of how we can work towards being more successful with these changes going forward.
Speaker 3:Okay, great. First thing I want to ask is how bad is it out there?
Speaker 2:How bad is it? It, well, it depends which way you look at this and what market you're in. But I'm ever the optimist, so I don't like to think of things in bad. But I have been in the industry now, this'll be the third economic recession I've worked through in this industry. I started in this industry just over, yeah, 15, 16 years ago. Um, this one has had I think, the, the furthest reaching impact, um, especially in our local economy. I would say measurably, um, it's definitely affected people's purchase power, especially your first time home buyers here locally. Um, I think what's in measurable that I would say would be a little bit bad if you will, is, um, the perception that it's put out there. I think there's a lot of people we can't tell if that aren't transacting because they assume they won't qualify. So there is a large group of people that we assume are out there just in deciding to continue to rent because they haven't done the preapproval process. But in actuality, a high percentage of our borrowers are still qualifying with this change, um, but it has affected their purchase power. So, um, yeah, I would say it's on a scale of one to 10 it's maybe been a six or a seven. Some might argue with me on that, but yeah.
Speaker 3:You had mentioned they're dialing down their expectations or are they really cognizant of how much they have to dial down or is a big dial down? I've seen, I know when the real estate side we have seen, you know, people that were wanting to buy a$500,000 house or looking at something that's three 75 to 400 now because of the restraints. Are you seeing that with your, with your
Speaker 2:we are in some sectors I would say the largest impact has definitely been the first time home buyers and in Calgary, Toronto and Vancouver as well. Anybody that's budget is based in a condo type market where they're having to also budget in heavy fees per month. That has a big impact on their qualifying. When the new stress test that was implemented last January is 2% higher than their contract rate conventionally or the benchmark, which is now 5.34%. So, um, for that sector on average, their budget has shrunk from about 16 to 18% in purchase power. And then in Canada, especially in that sector, we have a very high unsecured debt load, which also factors into that qualification. So it's, it was the stress test, but also the debt that people are carrying that that cut their budget back for sure. Um, that being said though, there is a large sector that, um, has amended their down payments. Uh, I would say in Calgary in particular, we're seeing quite a shift to the Bank of mom and dad or warm inheritances from grandparents, um, or investments coming in the form of larger gifts to help, uh, keep that first time buyer in the market or that move up buyer, um, continue to purchase even with some equity erosion in their existing property. So we're seeing people reapproach their applications differently than before. Um, but it's definitely affected some sectors more than others. And I would say pushed. Um, maybe 40 k on average is not necessarily, I would say that's a very local statistic here in Alberta in particular. And now when you're looking at, you know, the GTA or the Gva that's had a much larger impact because their purchase powers are, you know, uh, drastically affected with their prices, but different pricing all together. Very different. Yeah. Different markets. Who
Speaker 3:are you finding there? Your clients are coming to you away from the banks for approvals? I noticed them, like from my experience in the first year of this, um, change coming through, people were saying, Oh yeah, we're approved. The bank said, yeah, we're approved. They go to the bank and all of a sudden their financing not there. And so we had a lot of deals fall apart in the very first year. I had a number of deals fall apart because they couldn't get financing and they didn't know where to go after that. Is that change? Are they starting to, to, to hunt around a little bit more for, um, a better mortgage or a better or qualify for more?
Speaker 2:I would say they are. I think when consumers are given, um, somewhat of an impasse with these changes, they are, they're becoming more resourceful. And I will say something that I love about Alberta is everyone's very, um, they have a very hardworking spirit and they're very creative in the sense that if, if someone tells him though they want to find a solution, um, and we believe in, even if it's, um, it's not going to be a yes today telling clients it's a not right now situation and coaching them, uh, you know, tie their, pay down some debt or fix things or give them a plan to get them ready to buy. What we have found since last January is more and more people are looking for advice with an experienced licensed mortgage professional who has options with a number of different institutions, um, so that if say they don't fit in the normal a lending space that we can look at other options like at the bank or potentially private. Although privates not meant to be a longterm solution. Um, but we definitely have more choice and our fiduciary duty to the client is to represent the client and be a transaction facilitator in most transactions between them in the institution. So we're always looking to find the best fit for the client. So I feel like they have been seeking broker's advice, um, more and it's, it's given us an opportunity to really educate them on, on the importance of using a licensed professional and finding some really good fits for their financing going forward. Um, and also to be cut because we represent them directly. I find I've become somewhat of a financial life coach because they're stressed and they come in thinking they're credits garbage or that don't qualify or they're really worried about having to rent forever. But when we actually break the numbers down and explained to them how little or some impact this will have to them, it's just adjusting expectations. So maybe it's a while you need to, for a first time buyer, yes, your budget's been cut back. Maybe we move you into, um, uh, move up property rather than your dream house today. And maybe you keep it as a rental and move up in a few years from now. So we, we rather than just cut them out of the market completely, we kind of coach them. There's, there's more than one way to find a solution. And I'm not finding that their experience at the bank per say, it's more transactional where more relationship based.
Speaker 3:So you're saying they shouldn't buy that brand new pickup just before they start shopping for a house? Not unless they're buying it in cash then say Levy, but yeah, no, please. Uh, all the way up until you get the keys, please do not finance anything new. Okay. Speaking of the banks, and I'm glad you brought that up with, you know, the banks don't have to apply the stress test to somebody that's renewing no mortgage. And I personally, I feel that that's a part of the legislation that really helps the big banks. But are you still finding that even with not applying the stress test to these borrowers that the banks are actually turning them down even without that stress test because they're just wanting the very best of the best and with this stress test have most of the best of the best are coming their way anyway?
Speaker 2:Yeah, it's a really good question. And I'll just preface that to say I do do a fair bit of volume with some major six lenders and credit unions. So, um, this is just a, an experience observation, not anything against the banks because we need them in our industry. Um, but yes, this has from, uh, uh, by especially this has done them a favor come renewal in a way because it's given them a pretty powerful position. If that borrower has had any kind of job loss, someone's on a mat leave. Uh, they've acquired, as most Canadians do quite a bit of debt during their home ownership years, um, come renewal. It makes it much harder for us to, uh, shop other options that might be a great fit for them because as soon as we have to look elsewhere, we now have to requalify. Um, and like in the majority of the transactions that we've seen since January come up for renewal and there were 37% of mortgages in Canada last year. We're up for renewal. 2014 was a 2013, 14 were big transactional years in this country. Um, so there we were doing a lot of renewal business, but we like to reach out to our clients six months in advance of that. And we really put some homework steps in place so that we can prepare them to make them movable at renewal. But we also take into consideration that that might not be in their best interest. They might love that product. So what we do do is give their existing institution and opportunity to compete with the whole sale pricing. Um, so that we can make it easier for them to stay in fair for them to stay because there's a high percentage of borrowers, uh, less so nowadays. But there's, you know, we're busy in a lot of people will just get that renewal agreement out 55 days out from renewal from the big six and they'll just sign on the dotted line, not realizing that, you know, there are a lot of times quite a bit a big discount off posted. Um, but the banks do know that, uh, it's a little bit harder to move, so they're not giving them their wholesale rates in most cases come renewal. So having a mortgage professional to even give them a professional second opinion, even if we're not moving them, is important to make sure their pricing is fair. Um, but I would say it's hard to say on the renewal side, the percentage of people that are, are just blindly staying because they're worried about qualifying. But that that could be a real reality, especially in bigger markets where they have bigger mortgages I would say. But, um, so far we've had a lot of flexibility with the existing institutions, mac matching the wholesale rates and then they don't need to requalify they can just sign and get it really good. Right where they are.
Speaker 3:Yeah. The lenders that you're dealing with, you, I know you probably have seven to 10 other lenders you're dealing with, how are they finding the risk, uh, Matt? Uh, the risk in Alberta as they finding it difficult? Or is it something they're worried about or, yeah,
Speaker 2:that's a really good question because as someone who was in the lending community in Alberta with Canada's largest mono-line for many years underwriting here locally, um, we, there are certain lenders that underwrite locally. Um, so your local credit unions, you're at your local monolines, uh, some of the local big six, uh, but a lot of decisions from the big six are still coming from the GTA. Um, and the GVA. So some of their underwriting which helps when you have a, a local professional in your corner because we are really educating the underwriter on especially the self employed sector, which I do a lot of business in the viability of this file and this client and the industry, especially oil and gas. There's been, um, I would say between 2015 and the fall of 2016 there were some lenders that completely pulled out of Alberta. They were much smaller monolines that just didn't want the risk, but they've all come back to the table. We still very much have stated income products for self employed people with all the insurers in Canada and most of the lenders in Canada. Um, so they have a lot more appetite for Alberta. Again, um, I think what they watch for as is, um, you know, people staying up to date on their, on their taxes and debt load here in Alberta. Can be a little bit dicey if they've had a business here that hasn't done well through the recession, but, um, products are back underwritings very fast, so people are interested in Alberta again and the prairies too. Um, but there was a period of time where they really scaled back from us, but they're definitely on the table and we do have a number of, of big monolines like a first national street capital that he, uh, underwrite here locally that are always advocating internally in their world on our behalf here for Alberta
Speaker 3:realtors being most of them if not all of them self employed. Yeah. We're really, this is a product that we're very much interested in. Make sure it doesn't go away. Yes. Okay, great. Um, the only one I have is, is the, the product that um, if they're not qualified, they're going to a B lender or, um, some of the ones that are, have substantial fees as it were. The private side of it. Yeah. How do you have an idea in the stat side, what kind of percentage we're looking at are heading that direction?
Speaker 2:You know, I was trying to do some research statistically on what the bees had said, be banks. I shouldn't say. Um, but it, it's, it, I, I couldn't find some concrete percentages from last year, but what I can tell you in, in dealing on that side as a professional and at our firm, we have a mortgage investment corporation. So we do do our own hen house, private lending. We can also broke her it out. Um, we've seen a, a fare increase in transactions on the B side and, and the private side in Alberta specifically. Um, and that is be, Albert has a very high percentage of self employed individuals, whether that's in real estate, construction, oil and gas, every sector, physicians, everybody. So, um, there, when you don't have that two year, um, minimum filed existence as a corporation or a sole proprietor, that's really outside of the big a lender's boxes. So that's where the be banks and the privates can come in. So for the self employed sector, there's still a lot of options, but sometimes it means taking a, a one or a six month, like a one year term, six month sidestep, um, until such time as you filed that, that second year. And now you're qualifiable on the AE side. So there has been an uptick in that for sure. Um, and they're always there for, you know, a little bit of bruise credit scores or if we're needing to do workouts, solutions with income tax and stuff. So it's a sector we don't ever want to see it go away because it really helps us rebuild clients back to be AAA again. Um, but yes, they have become quite busy. And I will say that a number of the be institutions like your home trust and your optimum, um, for a long time, a scaled back into be lending only and they've started to open their a divisions again, which means that there's some confidence back in this local economy, um, that they're taking and they're trying to compete with the bigger monolines and the credit unions for this business. So, so, and they're opening that division so that if we are putting people in the B, they can easily renew back into the a side. So, you know, I would say yes on the private side there has been an uptick in business, um, which can be very expensive over there, double digit rates sometimes and some big fees. But it's never meant to be a longterm solution. It's meant to be a bit of a bandaid until we can yes. Until they're a quality, which is the goal for everybody. Yeah.
Speaker 3:Um, the one thing I wanted to do, I'm going to ask for a bit of looking into the future. I was listening to be an end today and they're looking at, it looks like the interest rates will probably not be going up until late 2020 is what they're saying now today. How much is that going to help us in stabilizing this mortgage market that we're in an Alberta specifically?
Speaker 2:The perception is that's positive. We have a big year this year, provincially and federally for from an election perspective, um, in most cases, uh, economies locally and federally rally around election time. And the banks to take advantage of that for sure in the sense that historically that's usually around the time that there's um, you know, some excitement, some reinvestment in the economy. And so, um, that's an opportunity for them to economically raise interest rates. However, the economies are not performing at that scale yet in, um, Calgary included in that and we really need some, some bigger factors to play in before they're able to, um, continue the increase. Um, we, yeah, we had a consistent two year run of Bank of Canada quarter point increases and for the first time in a full quarter they have left it as is and now they're speculation. They might even reduce it by a quarter points in the fall.
Speaker 3:That was the other question. It's kind of up, if that does go down a quarter point, that's going to help a bunch. I would think
Speaker 2:a number of things that you, your large, he locks. So you're secured lines of credit, any of your unsecured debt, um, that's based off prime and your variable rate mortgages. And we, um, the bond market, which is separate from the variable rate world and that's what runs your fixed rate pricing. Um, has seen a significant drop like in the last three weeks alone, we've seen 30 point drops on, on fixed rates, mainly the, the, the longer terms, the five, seven, and 10. Um, and we've seen three year money become quite affordable again. So, um, they're hungry for market share. It is spring, uh, so they're all hungry to, to fill the books for sure. But the economies are just not recovered enough to, to justify continued increases, which from a buyer's perspective or a seller, I think could, um, boost confidence in our local markets that anytime we see historically rates drop it, it pulls people off the fence, it starts them transacting, it makes moving to this province, um, more affordable in their minds. So, um, you know, and on larger, the average mortgage in Alberta is around 383,000, which I think is quite low. I think it's quite a bit higher. Yeah.
Speaker 3:That the GTA in Vancouver.
Speaker 2:Right. And I would dare to say that most of my book has quite a bit larger in Calgary, but that's just a standard. And I would say, so let's say it's a$600,000 mortgage, a 30 basis point drop in rate can save people, you know, maybe 7,000 in interest over five years and approximately one 80 to two 50 a month. And in principal payments, like that's, that's a fair drop for people. So, um, I do think it'll, it'll put some confidence back in the market and I don't think we're going to see any substantial increases certainly until later this year that they'll even start looking at it. 2020. I've heard some of those speculations. It's hard. It's hard to throw out that far out. Uh, cause a lot could change after the election. You know, it depends who get in.
Speaker 3:Are you recommending doing back to the, the terms of and looking at the really the market is, we were not sure where we're going. Have a provincial election, federal election coming up. What are you recommending? Like getting into a longer five year term for these mortgages and see what happens in five year. Hopefully the economy will pull itself together a little bit and there'll be a bunch of better position in five years. Do you think that's a better strategy than going after maybe some of the variable lower rates to help them out? Like right now, what, what would you think on that?
Speaker 2:Such a good question. Cause I don't believe in selling on price. I believe in, um, it mortgages are so much more than rates. Um, uh, personally and professionally. I'm a big believer in the variable product. Um, however, every single client we approach with a custom solution, it is very personal, whether they take a fixed or variable shorter, longer term, but all of the products we offer, um, with all of our institutions and we're very conscious of this, have portability options and prepayment options in fair penalty calculations. That's so, so important. Um, then we talk about what their risk tolerance is. Now, historically, variables continue and have for a long period of time outperform fixed. They're cheaper in and they're cheaper out. Um, and if you take advantage of them, um, meaning that you, if you qualified at a, say five year fixed price, but you took the variable discount, continued to pay it, the five year price, you're making a good dent in that principal. So you're really working that product. Um, but you have to sign up for the emotional ups and downs. And for some people that's absolutely out of the question. So for those people alone, even though economically from, you know, from my background, that would be a no brainer to me. For some people that is, they're not on board for that roller coaster. Yeah, no. Yeah. Um, and if we have a discussion with someone about a variable and they even asked me about locking in, we discuss it. If you're even thinking of taking this to lock it in and just have the security of a fixed, but it also comes down to spread to like, uh, you know, if a variable is quite far off a fixed, that's when people start thinking low rate. But, um, fix or the spread is lessening and fix. They're becoming very attractive again. Um, low, low, 3%, some of them even under 3% for five year fixed. So, um, very attractive. Yeah. So while the variables still are less than that, um, they're, the, the, the window is narrowing where if you're even considering a variable to fixed is so close, it, it is something to consider. Um, if people take the longer terms, I'm just making sure that portability is an option. Um, because the average life of a mortgage in Canada's 3.65 years before they're having kids and needing more space, getting transferred for work, going their separate ways. So, um, taking a seven in the 10 years, still very rare because, um, you know that they are somewhat larger penalties and, and if one party leaves, then they're harder to port. So it's very customized to each person. But I would say I'm still a big believer in variable, but fix, they're getting really attractive again. So join us next time for part two of mortgage changes.