Regulatory loophole in qualification could lead to future market weakness

by Ephraim Vecina04 Jul 2016
A glaring loophole in the existing rules regarding mortgage qualifications in Canada could be the catalyst that would lead to a rise in the number of “over-leveraged” home owners in the next few years—thus increasing the possibility of a market crash.
 
In Romana King’s report for MoneySense, Toronto-based independent mortgage broker Calum Ross stated that in the current regulatory regime, would-be buyers who take five-year fixed mortgages do not need to qualify for the 4.65 per cent rate set by the Bank of Canada.
 
This does not apply to the rest of the borrowing public, who could secure mortgages only if they can successfully make payments based on the aforementioned qualifying rate—and this exemption might prove dangerous to the market when the time comes for the renewal of these fixed terms, Ross warned.
 
“These buyers can qualify at the discounted rate,” the analyst said. The discount rate is hovering at 2.8 per cent as of last year.
 
“Even a 1% increase in mortgage rates will hit homeowners hard, as this translates into an almost 40% increase in interest rates,” he added.
 
The Department of Finance confirmed in an email the provisions for exemption, saying that “…borrowers with five-year fixed-rate mortgages may qualify based on their contract rate.”
 
It’s not all doom and gloom, however, as “regulations governing Canada’s banks and mortgage loans are actually quite different than in the United States, and far more stringent.
 
“[But] that doesn’t mean this current mortgage qualification loophole doesn’t pose a threat to the stability of Canada’s housing market,” Ross wrote.

[Erratum: The previous version of this article quoted Ross as saying: “Even a 1% increase in mortgage rates will hit homeowners hard, as this translates into an almost 40% increase in their monthly mortgage payments.” The correct statement should read: “Even a 1% increase in mortgage rates will hit homeowners hard, as this translates into an almost 40% increase in interest rates.” Apologies for the error.]

Related Stories:
Massive gains in hottest markets mask housing slump everywhere else
Poloz Warns Potential Homebuyers on Toronto, Vancouver Risks
 

COMMENTS

  • by P. Edwards 7/4/2016 10:43:06 AM

    Am I missing something here? Mr. Ross states that a 1% increase in mortgage rates from 2.8% to 3.8% results in a 40% payment increase. Based upon a $100,000 mortgage, a 2.8% rate results in a payment of $463.04 on a 25 year amortization. A 3.8% rate results in a payment of $515.23, an 11.3% increase. The same percentage increase would result with any mortgage amount. What numbers is he using for the 40% increase?

  • by Andrew 7/4/2016 11:13:56 AM

    It's actually even less then 11.3% as you have a 5-year fixed mortgage at 2.8%, at the end of which the rate would go up to, say 3.8%. But now you have a term left over of 20 years, and with the principal remaining of around $85k as per above numbers the payments will be recalculated to $505/mo or around 9% higher payments then original. Nowehere near the 40% the author writes.

Poll

Is a Toronto foreign sales tax a good idea?