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Canada’s Bank Regulator Wants Tighter Real Estate Risk Rules

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Canada’s Bank Regulator Wants Tighter Real Estate Risk Rules More stringent rules on mortgage borrowing could be on the horizon for Canadian homebuyers. The Canadian banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), has issued a call for comments on proposed new regulations. This intended to limit banks’ use of leverage and lessen their exposure to risk. Risk instruments like the stress test have proven their worth. Now they’re looking to fill any holes that have opened up because of this.  Possible Income-Based Loan Limits for Canadian Mortgage Borrowers There may soon be limits placed on how much money an individual or family can borrow in relation to their income, known as loan-to-income (LTI) or debt-to-income (DTI) ratios. The level of household debt as a percentage of disposable income is expressed as the LTI ratio. A loan-to-income (LTI) ratio of 200% indicates that the borrower has taken on debt equal to twice their annual salary. Borrowers are termed overleveraged or heavily indebted when their LTI ratio for their mortgage is 450% (4.5x income). If a borrower’s balance drops below this critical point, they are at risk of a financial crisis. There are currently no limits placed on the total amount of loans at this tier. OSFI research indicates that the Q3 2022 will witness over one-third of all new mortgages issued to borrowers who are already in financial distress. However, since the beginning of the epidemic, highly leveraged borrowers have become a larger portion of the market, despite the fact that their share has dropped from 40% to 20%. OSFI is considering a change in this by implementing a “high LTI threshold” of 4.5x for mortgages. This wouldn’t get rid of them because there are buyers out there. These buyers have high incomes and good credit histories for whom lenders consider them lower risk. The proportion of these mortgages that the lenders can be capped at 25%. It’s better than the pre-crisis average of 23.8 percent. However, it still implies 8.7 percent of recent loans wouldn’t have been as large as they were in the most recent reported quarter. The predicted result is a lessening of leverage, which should make the system more resilient to shocks. In addition, it would reduce leverage, so limiting the market’s overall capacity. Given the rise of highly leveraged speculators who are outbidding end consumers, this is likely a positive development. New Zealand just instituted a similar policy, and it’s having a major effect. While not quite as significant as increased interest rates. Debt Service Coverage Regulations Aim to Curb the Plight of Overleveraged Mortgage Borrowers The OSFI is also thinking about imposing debt service coverage requirements, which would cap financial commitments at a specific percentage of income. In the case of insured mortgages, federally supervised lenders already deal with these. Gross debt service ratios are used to make sure that mortgage payments for insured borrowers do not exceed 39% of monthly gross income (GDS). Using a debt service ratio, total monthly debt obligations (including mortgage payments, car payments, and student loan payments) cannot exceed 44% of income (DSR). “Beyond those requirements, B-20 does not articulate limits on GDS and TDS for uninsured mortgages and generally permits FRFIs to establish debt serviceability metrics under their RMUPs that facilitate an accurate assessment of a borrower’s capacity to service the loan,” according to the industry consultation documents. To put it another way, neither GDS nor TDS impose any restrictions on federally chartered lenders in regard to uninsured mortgages. Risk management strategies should include a prohibition on irrational lending practices. There is, however, no universally applicable rule or policy that applies to all federal loan providers. OSFI is mulling over a policy shift that would see comparable regulations applied to lenders. It could be targeted at the borrower specifically or implemented across the board for all of the lenders. To that end, they advocate for capping amortisation periods at reasonable levels. The end goal is ostensibly another limit on leverage in case a borrower circumvents the others, albeit this one might not have as much of an effect. Consumer loans in Canada, such as auto loans, could be subject to a revised stress test The traditional “mortgage stress test” has been updated to include interest rate affordability testing. The amount of leverage a mortgage borrower can use is currently limited by a minimum qualifying rate (MQR). People tried to fit themselves into the one-size-fits-all approach, but ended up switching to variable-rate mortgages in search of a better interest rate. Many borrowers with variable rates are now paying interest rates higher than the stress test rate, so that strategy didn’t work out so well. To mitigate this threat, OSFI is considering implementing multiple MQRs depending on the specifics of each product’s risk profile. Consider the fact that a mortgage with an adjustable interest rate has proven to be riskier than a mortgage with a fixed rate. The qualifying rate would be lower for longer fixed terms since there is less potential for payment shocks. It would be fascinating if the regulator also considered testing for consumer debt payments. They imply that it may be necessary to explicitly emphasise the necessity of comparing the stress test rate to the TDS ratio, which is not currently done. Conclusion Soon, a stress test could be implemented for retail loans. Non-mortgage retail financing could be subjected to a stress test, according to the obliquely phrased consideration. Retail lending that is not secured by a mortgage, such as car loans, has been on the rise as record highs are approached. This isn’t such a bad plan. Despite common misconceptions, OSFI’s input time isn’t for mere consideration. They are answers to problems that they may not have fully explained to the general audience. There is more of a “why shouldn’t we do this?” tone to the discussions. There seems to be no reasonable explanation for the sudden rise in the prevalence of excessive leverage in the property market. Further underwriting policy is

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Reasons a robust labour market could affect your mortgage interest rate

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Reasons a robust labour market could affect your mortgage interest rate Over the past year, Canada’s job market has been red hot thanks to the country’s booming economy and the easing of pandemic lockdowns. Statistics Canada’s most recent data confirms this trend. In December, the national employment rate rose by 0.5% from November (representing an increase of 104,000 positions). Thus,+ totaling 3.7% growth over the course of 2022. ( a total of 701,000 new hires). So, the jobless rate fell 0.1% to 5%, surpassing the 4.9% recorded in June and July of last year for the first time ever. This metric reached its highest point since 1976 in May 2020. Thus reflecting how much employment has improved since the earliest days of the pandemic. While it’s great that there are so many job opportunities, rising inflation and interest rates might make life difficult for Canadians. This is especially for people who are already stretching their budgets to the limit. That’s because the Bank of Canada, the country’s central bank, wants to see economic activity cool before it can stop raising interest rates. A hot month for hiring isn’t helping the cause of keeping inflation in check. Economists expect an increase in interest rates Economists are predicting that the Bank of Canada will raise interest rates by 0.25 percentage points on January 25. This is in response to this recent data and last month’s stronger-than-expected inflation report. The Overnight Lending Rate, the benchmark against which other interest rates are measured, would rise to 4.5 percent. If this happened, marking its highest point since July 2007. Desjardins Economics Principal Economist Marc Desormeaux writes in a research note that the December jobs report does “tilt the odds in favour of one final 25 [basis point] rate hike from the Bank of Canada later this month.” Further highlighting the fact that it was the seventh consecutive month in which gains in hourly earnings for permanent employees exceeded 5%. Despite other economic indicators showing signals of slowing growth, the apparent strength in hiring likely means the central bank’s job isn’t done yet, he says. The governor has been stressing the importance of rebalancing the labour market for inflation normalisation in recent months. In a speech given in November, Bank of Canada Governor Tiff Macklem attributed the country’s high inflation rate to the historically low unemployment rate. Desormeaux is alluding to this speech. Macklem said at the time to a crowd at Toronto Metropolitan University. He said that the inability of business owners to find and keep enough workers was a symptom of the general imbalance. This imbalance is between demand and supply that was fueling inflation and hurting all Canadians. Why does Canada’s central bank have to cut inflation rates? Similarly to the labour market, inflation picked up speed when the economy was opened back up. Geopolitical issues, such as the crisis in Ukraine, have put increased pressure on the oil and gas sector. Moreover, snarls in global supply chain operations have contributed to shortages of many of the items Canadians use. As a result, shoppers have felt the pinch at the supermarket and the gas station. However, “shelter prices,” which do include mortgage interest payments, are included in the “basket of goods.” Based on this the CPI is calculated. Mortgage interest rates increased by 14.5% in November. Thus contributing to a 7.2% annual increase in this metric. The 11.4% gain in October was the highest monthly increase since February 1983. As a result of these factors, the Bank of Canada reported inflation of 6.8% in November, which is much higher than the target range of 2%. The Overnight Lending Rate is raised by the central bank if inflation rises over the target level. Variable mortgage rates and other variable-based lending products, such as home equity lines of credit, are directly affected by this. Bank of canada increases the rate A rise in interest rates has the effect of discouraging expenditure by both households and businesses. This in turn reduces overall inflation. Since March of last year, the Bank of Canada has increased its rate seven times, from 0.25% to its current level of 4.25%. It’s the quickest rate of increase recorded since the mid-1990s and the highest level at which this trend-setting rate has been since December 2007. The best five-year variable mortgage rate today is 5.35%, up from a record low of 0.85% in January of last year. The direction of the Bank of Canada’s monetary policy has an indirect effect on fixed mortgage rates. This is because of how the bond market reacts to it. For example, bond yields have been steadily rising throughout 2022. This has pushed the best five-year fixed mortgage rates up into the 4.5% range from the 2.34% range in January. After reaching a 40-year high of 8.1% in June, inflation has dropped thanks to the Bank’s proactive approach to rates. However, the progress has been sluggish. The prospect of a rate cut remains further off as long as economic data keeps surprising to the upside. Conclusion If the Bank of Canada were to raise interest rates by another 0.25 percentage points by the month’s conclusion, the national borrowing rate would reach 4.5 percent. Borrowers should prepare their finances for the highest rates in 16 years. As this will be the most expensive time to borrow since July 2007. Five-year insured variable rates are now at 4%, but should rates rise again. The borrowers may expect to see those rates rise to the 5.6-6.7% area. Connecting with a mortgage broker who can clarify your alternatives and provide individualised guidance is essential. Related posts 21 January 2023 Denied mortgage renewal: What happens next? Denied Mortgage Renewal:What happens next? If you want to keep paying down your mortgage after the current… 19 January 2023 Canada’s Bank Regulator Wants Tighter Real Estate Risk Rules Canada’s Bank Regulator Wants Tighter Real Estate Risk Rules More stringent rules on mortgage borrowing… 16 January 2023 Reasons a robust labour market could affect your mortgage interest rate Reasons a robust labour

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Essential facts about mortgage

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Essential facts about mortgage A mortgage, at its most basic, is a debt taken out to finance the purchase of real estate. A mortgage, like any other loan, has parameters such as an interest rate and an amortisation (payment) schedule. Mortgages are secured by the collateral of the home itself. This means that the mortgage lender has the right to take back the home if the mortgage holder defaults on payments. It is important to understand the following ideas before applying for a mortgage. That will help you receive the best mortgage possible: Term- During the term of your mortgage agreement, you are obligated to make monthly mortgage payments. Rental periods might be as short as six months or as long as five years. Rate of interest- the cost of carrying a mortgage. A portion of each monthly mortgage payment goes toward reducing the loan’s principle balance, while the rest covers interest accrued. Open or closed mortgage- How much leeway you have in determining when and how much of your mortgage payment you make each month determines whether your mortgage is open or closed. You’ll need an open mortgage if you ever want to modify the loan in any way, including renegotiation, refinancing, or repayment. A closed mortgage will limit your options. But the interest rate is usually lower on these types of loans. Mortgage amortization- It is the time it will take to pay off your loan in full. For mortgages, the standard amortisation time offered by the country’s major lenders in Canada is from five to twenty-five years, with a maximum of thirty years available with a twenty percent down payment. In most cases, borrowers will need to wait until the end of many mortgage periods before making the final payment. Fixed or variable mortgage- Mortgage interest can be either fixed (staying the same for the duration of the loan) or variable (changing periodically). Rates of interest on variable-rate loans can rise and fall in response to fluctuations in the market.is How long will it take to pay off your mortgage The length of your mortgage is different from the time it takes to pay it off. The length of time during which you make payments on your mortgage is known as its amortisation period. With a 20% down payment, the standard amortisation length offered by most Canadian lenders is 25 years; with a larger down payment, this number can rise to 30 years. In general, the lower the amortisation term, the lower your interest payments will be over the life of your loan, but the larger your regular mortgage payments will be. should I go for the highest possible amount? For first-time buyers, it’s also vital to consider how much of a mortgage they can comfortably make each month. There are practical matters to think about in your house search regardless of the size of the loan you can afford. First and foremost is the reality that variable interest rates will almost certainly increase in 2022 due to a likely rate hike by the Bank of Canada sometime in the first quarter, maybe in April. The uptrend in fixed rates is expected to continue. Not only should you be aware of the growing rates, but you should also be aware of the fact that many experts advocate setting aside at least 10% of your gross pay for retirement (and some even propose as much as 30%). When borrowing money, it’s best not to borrow more than you can comfortably repay in a single payment. Mortgage affordability calculators can be helpful if you’re not sure how much house you can afford. You should always double-check the results of these tools with a broker who is familiar with the nuances of your financial situation, as they are only meant to provide estimates. How can I determine whether I need adaptability or stability? The choice between a fixed or variable interest rate, a longer or shorter term, a shorter or longer amortisation period, and a larger or smaller mortgage balance all comes down to personal preference and tolerance for risk. If you want to stay within your financial means and at the same time feel at ease, you need to be practical. And fortunately, you can rely on others to help you get the best mortgage for first-time buyers. A mortgage broker can help a first-time buyer get the best mortgage rate and lender for their situation by comparing products from numerous sources.

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After Variable Shock, Canadian Homebuyers Choose Fixed Terms

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After Variable Shock, Canadian Homebuyers Choose Fixed Terms Overstimulated Homebuyers in Canada are avoiding adjustable-rate mortgages. Mortgage borrowers in Canada favoured fixed interest rates over variable ones in October, according to data from the Bank of Canada (BoC). At the beginning of the year, a majority of new borrowers selected adjustable-rate mortgages. As rates return to normal and fixed rates become more affordable, this pattern is quickly changing. Mortgage borrowers in Canada are becoming more comfortable with adjustable-rate loans As interest rates climb, fewer Canadian families are selecting variable rate mortgages. Of all the new uninsured mortgage loans extended in October, only 29.7 percent of it came with adjustable rates. That’s a big drop from the 40.1% recorded a month ago, and even bigger drop from the 60.1% recorded in January 2022, when rates peaked. Uninsured debt was more likely to use variable rates, while insured debt also saw growth during this period. Percentage of Canada’s Mortgage Credit Extended at Variable Rates The market share of variable rates for insured mortgage finance had a similar boom and bust. A little over a quarter, or 24.1%, of October’s new insured mortgage debt was for variable expenses. This is down from the previous month’s 34.1% and the all-time high of 39.3% in January 2022. That’s a dramatic change in terms of time spent and money spent. In Canada, interest rates on adjustable-rate mortgages have been creeping higher The rising cost of borrowing has caused a shift in priorities among Canadian mortgage borrowers. In October, the average interest rate for an unsecured loan with variable terms was 5.53%. The interest rate was significantly higher than the national average of 5.18% seen across all loan types. That is to say, fixed-rate mortgages were mostly responsible for the overall decline in the national average. No Longer A Discount For Canadian Mortgages With A Variable Rate When the market share peaked in January, this wasn’t the case. When compared to the overall average of 1.89% in the same month, the average rate for uninsured variable rate mortgages was only 1.45%. If your mortgage’s variable interest rate doesn’t unexpectedly increase, you could save quite a bit of money. Changes were also seen with loans that had to be insured. In October, the average interest rate on all mortgages was 5.18%, while the average interest rate on variable loans was 5.53%. In January, variable-rate loans averaged 1.51 percent, roughly 50 basis points (bps) below the overall average. It would appear that borrowers are just choosing the lowest interest rate loan available. When you consider that a sizable portion of the market consisted of short-term investors, you can see the logic behind this. Traditional repayment plans with set terms are preferred by the majority of Canadian households. They may be more expensive, but they offer security and piece of mind. It’s surprisingly mature, but it hasn’t happened in the past two years. The Bank of Canada’s low rate stimulus resulted in a significant discount for variable rate loans As central banks lagged behind the market, the chasm widened. Inflation, rising bond yields, and low unemployment were all completely disregarded. Too good to pass up, this steep bargain turned out to be a trap. Especially considering the exceptional action taken by the central bank in offering low rates to households till next year.

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