Last week was puzzling if you’re a prospective home buyer with only 5 per cent or 10 per cent down.
You had Canada Mortgage and Housing Corp. (CMHC) telling you it’s so risky out there that they have to make it harder for people to get a default insured mortgage.
Meanwhile, you had a Canadian bank dropping its insured five-year fixed rate below 2 per cent, for the first time in history.
Could it be the best time ever, or worst time, to get a default-insured mortgage? I’ll let you know in a couple of years.
In the meantime, here’s what’s staring insured borrowers in the face today.
1.99% has officially arrived
On Friday, HSBC became the first Canadian bank to widely advertise 1.99 per cent on a five-year fixed mortgage. This deal applies to default-insured purchases and switches (when you moved a standard mortgage to a new lender) only. You’ll pay roughly 2.29 per cent or more if you need an uninsured five-year fixed.
Realtors are hoping sub-2-per-cent rates will get their phones ringing. At the very least, 1.99 per cent will entrench the five-year fixed as Canada’s most popular term. Already, no less than 96.6 per cent of CMHC-insured mortgages in the past quarter had a fixed rate.
From an interest cost standpoint, 1.99 per cent is spectacular. How good? Well just two months ago some banks were advertising 2.99 per cent and higher. Compared with 2.99 per cent, a 1.99 per cent rate saves $149 a month, $14,074 of interest over five years and $44,787 of interest over a 25-year amortization on a $300,000 mortgage.
In days gone by, a rate this smokin’ would have sparked a mini-cattle rush into real estate. Readers may recall that in 2013, then-finance minister Jim Flaherty warned banks not to ignite a mortgage war after Bank of Montreal dropped its price on the five-year fixed to 2.99 per cent.
These days, headline-making rates won’t bring buyers the same adrenaline rush they used to, for three reasons:
1) Housing jeopardy
Home values face unquantifiable risk in the fall if: a) mortgage deferrals end as scheduled; b) government income assistance (for example, the Canada Emergency Response Benefit) terminate as planned; c) immigration takes longer than expected to ramp back up; and d) high unemployment and underemployment persists for hundreds of thousands of Canadians.
Supply is tight and that helped prices hold up last month in places such as Toronto and Ottawa. Nonetheless, you’re going to have people who refuse to risk a capital loss on their home to save interest on a mortgage.
2) Sticky stress test
When five-year rates broke below the last, nice round number (3 per cent) in 2013, Canada didn’t have a mortgage stress test based on arbitrarily high rates. Today we do. If you want that 1.99-per-cent steal of a rate, you must prove you can afford a payment based on the government chosen threshold: 4.94 per cent – a number almost three percentage points higher than your true rate.
On top of that, the government shelved its proposal to let the stress test adjust to market rates. So despite five-year fixed rates dropping 140 basis points since December, the stress test rate is only down a measly 25 basis points. (A basis point is one 100th of a percentage point.)
That means a smaller share of potential buyers can enjoy Canada’s lowest five-year fixed rates than virtually ever before.
3) CMHC draining the punch bowl
CMHC spooked the market last week by tightening credit, something that typically makes recessions worse.
Starting July 1, if you want to get an insured mortgage from Canada’s housing agency, your:
- Gross debt service ratio, or maximum ratio of housing costs to gross income, must now be four percentage points less (35 per cent);
- Total debt service ratio, or maximum ratio of total monthly obligations to gross income, must now be two percentage points less (42 per cent);
- Minimum credit score must be 80 points higher (at least one borrower on the application must now have a 680-plus score);
- Down payment must not be from unsecured borrower sources (such as unsecured lines of credit, unsecured loans or, God forbid, a credit card).
These measures could shave up to 11 per cent off an insured borrower’s maximum possible purchase price.
CMHC’s move is more symbolic than game changing, however. That’s because private insurer Genworth Canada declined to follow CMHC’s stricter rules, suggesting CMHC is overstating the risk of those loans. This means borrowers with smaller down payments, higher debt loads and lower credit scores still have options. For now, only a small, single-digit percentage of insured borrowers will no longer qualify owing to CMHC’s tightening.
Should you take the plunge on 1.99%?
Despite that a temporary scarcity of listings are keeping home prices afloat, housing risk is the highest it’s been in years. But waiting for homes to go on sale hasn’t worked well in the past.
That said, would I dive in with just 5 per cent down right now? Nope.
But everyone’s needs are different. If you’ve got strong, stable work, fallback assets if you lose your job, a reasonable debt load and can handle the risk of lower home prices, home ownership might be right for you, despite the price risk.
For those well-qualified buyers who want a big-bank five-year fixed, 1.99 per cent is closer to free money than we’ve ever been. So, from solely an interest cost perspective, it’s one of the best times ever to get an insured mortgage.
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