27 Nov

Could the lending rules be changing yet again?


Posted by: Michael Hallett

March 2014 OSFI will presented to the public for comment, here is the enitre article.

One casualty of new restrictions could be 30-year mortgages


Special to The Globe and Mail

Published Monday, Nov. 25 2013, 7:00 PM EST

Since 2008, regulators have been trying to contain housing risk by piling on new mortgage rules, and bringing back some old ones. So far, the housing market has yet to crack under the weight of those policies.

In fact, home prices just keep reaching record highs. And each month they do, policy makers get more and more nervous about overextended borrowers.

“We have noticed that there has been a shift in the marketplace to offer more 30-year amortizations,” chief banking regulator Julie Dickson said Monday at the mortgage industry’s annual conference in Toronto. “About half” of new borrowers with down payments of 20 per cent or more are choosing 30-year amortizations, she added.

That concerns Ms. Dickson, who cautions, “Borrowers need to understand what they’re getting themselves into.” She said people need to “think about the leverage [they’re] taking on,” especially if a 30-year amortization is the only way they can afford their home.

A 30-year amortization potentially means extra years of making mortgage payments and up to 23 per cent more interest over the life of the mortgage. (I say “potentially” because borrowers have traditionally paid off their mortgages in 30 per cent less time than their original amortization, according to the Canadian Association of Accredited Mortgage Professionals.)

If regulators do decide to restrict 30-year amortizations, they could either:

• eliminate them altogether

• allow payments at a 30-year amortization, but make borrowers prove they can afford a 25-year amortization, or

• Put restrictions on those getting a 30-year amortization (like higher credit scores, higher down payments or lower debt ratio limits.)

Those latter two options would at least give strong borrowers flexibility to divert mortgage payments to better sources – like paying down high-interest debt, making investments, financing education, building a small business and so on.

But even if banks are banned from selling 30-year amortizations, there may still be a place to get them: credit unions.

Most provincial regulators have seen no need to impose OSFI’s full slate of mortgage rules on credit unions.

“At this point and time there is no plan to do anything to change any of the [mortgage] regulations…” said Andy Poprawa, CEO of Ontario’s credit union regulator.

“Credit unions have traditionally been very conservative,” he said. “When credit unions lend money on a 30-year mortgage, they’re also taking into account other debts” and other prudent underwriting criteria.

“Because credit unions are smaller than the large banks, they must be very very careful how they utilize their capital. They can’t afford to have large delinquencies.”

Ms. Dickson doesn’t seem overly concerned about credit unions’ impact on market risk, noting that, “the vast majority of mortgage lending is coming from the [federally] regulated sector.”

On top of amortizations, OSFI is also “focusing on total debt servicing and gross debt servicing.” The regulator is paying special attention to borrowers with high debt ratios and low equity or low credit score.

In addition, OSFI is recommending new restrictions for mortgage default insurers like CMHC. Those proposals, contained in “Guideline B-21,” should be released for public comment by March, 2014, Dickson says. She assures that “any future changes to [mortgage] guidelines” will be put up for public comment before implementation.

4 Nov

Variable vs Fixed Payment


Posted by: Michael Hallett

It looks like fixed rates on are on the move again. But does that mean you should absolutely 100% opt for a fixed mortgage. Nope, I don’t think so! Weigh the pros and cons! Previous suggestions was that the prime lending rate of 3.0% would go up in late 2014 or early 2015 and now we’re seeing 2016 become a more popular opinion. This is great news for those borrowers that are able to chose the variable rate. I did a quick, easy and loose payment breakdown for to help you see the difference. Which provides more security? Which saves you money? Which pays more principal? Answer…VARIABLE, see below!


5 yr Variable rate mortgage = prime – 0.40% (prime has been 3.0% since September 29, 2010)

5 yr Fixed rate mortgage = 3.45%


FIXED vs VARIABLE — Based on $300,000 mortgage utilizing a  25 yr amortization schedule. The Variable rate mortgage requires you to pay approximately $43,000 in interest over a 5 yr term while the Fixed pay is around $48,000. That’s a $5,000 savings, which could and should be applied directly back to the outstanding principal amount.


2014Variable rate is 2.60% and Fixed is 3.45%

–          Monthly Payment is $1359 or $1490

2015 Variable rate is 2.60% and Fixed is 3.45%

–          Monthly Payment is $1359 or $1490

2016 Variable rate is 2.85% and Fixed is 3.45% (presuming Prime now increases to 3.25% midyear)

–          Monthly Payment is $1397 or $1490

2017 Variable rate is 3.10% and Fixed is 3.45% (presuming Prime now increasing to 3.50%)

–          Monthly Payment is $1435 or $1490

2018 Variable rate is 3.60% and Fixed is 3.45% (presuming Prime now increasing to 4.00%)

–          Monthly Payment is $1514 or $1490


Borrowers that opted for the variable rate over fixed have saved $5,000. By applying it right back to the outstanding balance they have made it easier to renew their next mortgage and protected themselves from rate increase.


Note the Bank of Canada only meets to discuss the Prime lending rate on 8 pre-determined days each year http://www.bankofcanada.ca/monetary-policy-introduction/key-interest-rate/schedule/?page_moved=1 Variable rates can be locked into a fixed term at any time if you foresee your saving being expunged.


In the past 10 years there has been no other 3 year period where the prime lending rate has not changed. Since October 2010 prime has remained at 3.0%. My increase prediction amounts were based on documented increases that happened 3 times in that same year. Prime was adjusted at increments of 0.25% or 25 basis points each time.


Variable rate mortgages also offer a much less and attractive pre-payment penalty is you ever need to alter the terms of your mortgage. Variable rate borrowers will only ever incur a 3 month interest penalty. Fixed mortgages carry a much more complicated pre-payment penalty. The lender will calculate an interest rate differential (IRD) or 3 month interest penalty, whichever is high…generally it’s the IRD that will ruin your day!


Having said all that above, each and every mortgage application is different and needs to be reviewed and qualified using the federal lending guidelines. Circumstances might require applicants to opt for a fixed. For an individual review please contact me to discuss your options.


 (DISCLAIMER – These numbers are merely an example, I am no economist, analyst or master predictor, I just put them together with the resources I have.)