Canada’s banking regulator recently confirmed it will move ahead with new capital requirements for lenders and insurers with negatively amortizing mortgage portfolios.

Starting in early 2024, the Office of the Superintendent of Financial Institutions (OSFI) will require lenders to hold more capital for negative amortization mortgage balances with loan-to-values (LTVs) above 65%.

• What’s a negative amortization mortgage? Negative amortization can impact borrowers with fixed payment variable-rate mortgages in an environment when prime rate rises significantly, resulting in the borrower’s monthly payments not covering the full interest amount. This causes the mortgage to grow rather than shrink.

“We have updated several of our capital guidelines to promote prudent allocation of capital against risks that lenders and insurers take,” OSFI superintendent Peter Routledge said in a statement.

The changes were first announced by OSFI in July and were subject to a consultation period over the summer. They will primarily impact four of Canada’s big banks that currently offer fixed-payment variable rate mortgages: BMO, CIBC, RBC and TD.

For these banks, variable-rate mortgages comprise about a third of their overall portfolios (32%-39%), with roughly a quarter of those mortgages with extended amortizations beyond 30 years—or some $277 billion as of July, according to data from Fitch Ratings.

Scotiabank and National Bank of Canada, on the other hand, offer adjustable-rate mortgages where the borrower’s monthly payment fluctuates as prime rate changes. As a result, both banks have less than 1% of their variable-rate portfolios with amortizations above 30 years.

The new requirements will also impact Canada’s three mortgage insurers, which insure between 20% and 30% of all mortgages. Also effective in January, the maximum LTV ratio for individual mortgages in the Mortgage Insurer Capital Adequacy Test (MICAT) capital formula will increase from 100% to 105%. This adjustment aligns the MICAT capital formula with the maximum permitted LTV ratio for insured mortgages.

The new guidelines also set a limit of 40 years on the mortgage’s remaining amortization length for the purpose of calculating regulatory capital.

“Given the relatively low prevalence of negative equity mortgages, the overall impact for mortgage insurers is expected to be minimal, resulting in an immaterial decline in the capital ratio,” DBRS Morningstar noted in a report.

“Our expectation is that underwriting profitability will weaken somewhat but be manageable from a credit quality perspective given mortgage insurers’ strong capital buffers and conservative credit underwriting criteria,” the report added.

Impact on banks to be manageable, Fitch says

In its own report, Fitch said the Capital Adequacy Requirements (CAR) for the banks are likely to be “comfortably absorbed.”

The ratings agency said the changes should impact common equity tier 1 (CET1) ratios by only 7 to 22 basis points, “or less than 2% of the average 3Q23 13.5% CET1 capital for the four banks with exposure,” it said. “As of 3Q23, all banks had CET1 ratios comfortably above regulatory minimums.”

OSFI’s reasoning for cracking down on fixed payment variable-rate mortgages

OSFI has repeatedly voiced its concerns about fixed payment variable-rate mortgages, first singling them out in its Annual Risk Outlook for 2023-2024.

Most recently, during testimony before the Standing Senate Committee on Banking, Commerce and the Economy earlier this month, Routledge said increasing mortgage balances associated with negative amortization “increases their vulnerability, and increases the risk of default.”

“The variable rate product with fixed payments is a dangerous product in our view because it puts the homeowner in the position of an extended extended period—not always, but in this environment certainly—it can put the homeowner in the position of paying a flat rate of, say, $2,000 a month, and the interest on their mortgage is $3,000 a month,” Routledge said.

And while Routledge said OSFI’s role is not to “impose a judgment on product design,” he did say OSFI would “like less of that product.”

In response to stakeholder feedback on these new capital requirements that the implementation timeframe is “very tight,” OSFI responded by saying it was important to “address the risk in a timely manner.” As such, the new capital requirements will take effect in fiscal Q1.

This article was written for Canadian Mortgage Trends by:

The average asking rent in Canada has increased by about $175 over the past six months, and is now nearly 10% higher compared to a year ago.

As of October, the average rent price for all unit types reached $2,178, according to data from Rentals.ca‘s latest monthly data. That’s up 1.4% compared to September, but slower than the 1.8% monthly increase seen back in August thanks to seasonable factors.

One-bedroom rent prices were up a whopping 29% year-over-year in Red Deer, Alberta, while Halifax, NS (+20.6%) and Markham, ON (+20%) also saw outsized gains.

The national average rent for two-bedroom units has now surpassed $2,300 a month, up 1.7% from September and +11.7% compared to a year ago. The largest increases were seen in Oakville, ON (+23.5%) and Quebec City, QC (+17.6%).

High rents are contributing to inflation

Average rents in Canada are now up over 31% compared to the low of $1,662 reached in April 2021.

This steep rise means rent prices are now a leading contributor to the country’s headline inflation rate, which the Bank of Canada is desperately trying to bring back to its target rate of 2%.

As of September, rent inflation has shot up to 7.3%, according to data from Statistics Canada—the fastest pace since 1983. It’s now the second leading contributor to overall inflation, after mortgage interest cost, which is up 30.6%.

On a monthly basis, rent inflation from August to September was 0.8%. That means that of the headline CPI inflation reading of 3.8% in September, 0.8% came from rent inflation alone. Another 2.6% came from mortgage interest cost.

“It’s a big issue,” noted analyst Ben Rabidoux of Edge Realty Analytics. He pointed to the more than 700,000 non-permanent residents added to the population over the past 12 months—which includes international students and foreign workers—as a major contributing factor to the upward pressure on rent prices.

In response to housing affordability concerns, the federal government recently announced it plans to level out its targets for new permanent residents coming to Canada. The target for 2024 and 2025 will increase as planned to 485,000 and 500,00, respectively, and hold steady at 500,000 in 2026.

“These immigration levels will help set the pace of Canada’s economic and population growth while moderating its impact on critical systems such as infrastructure and housing,” Immigration Minister Marc Miller said.

Alberta leads the provinces in rent price growth

Rentals.ca reported that Alberta once again posted the fastest year-over-year increase in rent prices, which were up 16.4% in October to $1,686.

Rents were also up sharply in Nova Scotia (+13.6%) and Quebec (13.3%), thanks to both strong population growth and “large infusions of new rental supply priced at above-average market rents,” Rentals.ca noted.

The slowest annual increases were once again seen in Manitoba (+5.5%) and Saskatchewan (+4%).

Calgary and Montreal lead rent growth in Canada’s largest cities

Calgary continued to lead rent price growth in October, with an average year-over-year increase of 14.7% to reach $2,093. Montreal saw the second-fastest pace of growth at 10.8%, with an average price of $2,046.

Here’s a look at the year-over-year rent increases in some of the country’s key markets:

• • Calgary, AB: +14.7% ($2,093)
  • Regina, SK: +13.7% ($1,273)
  • Montreal, QC: +10.8% ($2,046)
  • Ottawa, ON: +10.6% ($2,197)
  • Halifax, NS: +9.5% ($2,017)
  • Winnipeg, MB: +7.4% ($1,521)
  • Vancouver, B.C.: +4.4% ($3,215)
  • Toronto, ON: -0.8% ($2,908)

This article was written for Canadian Mortgage Trends by:

An interesting new survey suggests a growing number of Canadians may be getting ready to move back into the housing market.

The newly launched survey by Dye and Durham indicates one in ten are looking to sell their primary residence and move into a new one within the next 12 months; double the number who made the move in the past year.

The number of respondents planning to expand their holdings is also up significantly with 8.0% saying they intend to buy an investment property or vacation home in the next year.  That is nearly double the 5.0% who did so in the past year.  First-time buying decisions are also getting stronger.  Eight percent of respondents expect to jump into the market, up from 4.0% who actually made a purchase in the last 12 months.

The sidelines of the housing market will still be crowded though.  The survey suggests 23% of Canadians will bide their time until interest rates come down.  Nearly a quarter (24%) say they are waiting for prices to ease.

A separate survey of people who have bought a home in the last 4 years (by a popular real estate marketplace) shows that the buying decisions of 93% of respondents were influenced by rising interest rates and competitive markets.  At the same time 43% said they wanted to buy before prices increased further.

Nearly a third (30%) of the respondents say their finances are tight right now, with 10% saying they are unable to meet basic needs.  Still, they do not regret their purchase with 45% saying they will still be happy even if there is another interest rate increase this year.

This article was written by First National’s marketing team.

Over the next few days, the new federal cabinet will gather in P.E.I. for their summer retreat. This is their first opportunity to get together and set priorities ahead of the return to Parliament in mid-September.

As they work to address the pressing issues of “making life more affordable” and “building more housing,” we ask that they keep front of mind how their decisions will impact an entire generation of Canadians and their dream of homeownership.

The demographics of Canadians impacted by the rising cost of housing have shifted recently. It now includes young middle-class professionals and young dual-income families living and working in urban centres. These are groups that in previous generations would be buying their first home but are now unable to do so.

It is not that the dream of homeownership is just further down the line, but that it feels completely unattainable.

A growing sense of hopelessness

Talking to peers in Vancouver, Calgary, Toronto and Ottawa, there is a shared sense of hopelessness in seeing a path to owning a home. It is a national issue where there is opportunity for the federal government to take a leading and convening role. It is encouraging to see a new housing minister in Sean Fraser and a renewed focus on addressing housing affordability.

Urban millennials are a key voter demographic that the Liberals have looked to over the past eight years and undoubtedly will in the next election. The current state of disillusionment and apathy within this group is palpable when it comes to housing affordability.

These sentiments can have the power to keep voters home on election day or even drive some to a populist alternative.

Whether it is record-high home prices leading to an insurmountable down payment or two additional interest hikes this summer further increasing mortgage costs, housing has not been this expensive in recent memory. Higher mortgage costs have been a key contributor to Canada’s stubborn inflation, with an increase from June’s 2.8% to 3.3% in July.

At the same time, rents are up significantly, eating into potential savings for a first home. The average monthly rent for a one-bedroom in Toronto is now more than $2,600 a month, up over 11% from last year. Vancouver is averaging $3,000. Even in Calgary, which traditionally has been immune to the high housing costs, one-bedroom rent is now at $1,800 a month, up 18% year-over-year.

Market conditions as they are mean that unless you have wealthy parents or an inheritance to help with a down payment, there is little hope of getting into a home, townhouse or even a one-bedroom condo.

Potential solutions

So, what can be done? One possible measure is a commitment from the most recent Liberal election platform, which is also supported by their opposition across the floor.

The federal government could increase the insured mortgage cut-off from $1 million to $1.25 million, and index it to inflation to better reflect today’s housing prices.

Why is this relevant? The average price of a home in the country’s largest centres, both in Greater Vancouver and Toronto, is now over $1.1 million. Any home over $1 million does not qualify for mortgage insurance and therefore requires a 20% down payment. Enacting this platform commitment would help more first-time homebuyers to afford a down payment.

In recent public opinion polling from Abacus Data measuring the top three issues facing Canadians, housing affordability and accessibility ranked third, ahead of the economy, and following only the rising cost of living and healthcare.

The government has the opportunity to reflect an understanding of the pressure the current market and economic conditions are putting on young Canadians hoping to buy a home someday and establish their lives.

Policies and messaging can benefit from empathizing with those millennials feeling this in their everyday lives.

This was written for Canadian Mortgage Trends by:

Your payment schedule is the frequency that you make mortgage payments and ranges from monthly to bi-monthly, bi-weekly, accelerated bi-weekly or even weekly payments. Below is a quick overview of what each of these payment frequencies mean:

Monthly Payments: A monthly payment is simply a single large payment, paid once per month; this is the default that sets your amortization. A 25-year mortgage, paid monthly, will take 25 years to pay off but includes the added burden of one larger payment coming from one employment pay period. With this payment frequency, you make 12 payments per year.

Example: $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization you would have a monthly payment of $4,156.19. No term savings; no amortization savings.

Bi-Weekly Payments: A bi-weekly mortgage payment is a total of 26 payments per year, calculated by multiplying your monthly mortgage payment by 12 months and divided by the 26 pay periods.

Example: $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization you would have a bi-weekly payment of $1,915.98 with term savings of $177 and total amortization savings of $1,769.

Accelerated Bi-Weekly Payments: An accelerated bi-weekly mortgage payment is also 26 payments per year, but the payment amount is higher than a regular bi-weekly payment frequency (take the monthly payment, divide by two, then multipy by 26.  Compared to regular bi-weekly this adds two extra bi-weekly payments per year). Opting for an accelerated bi-weekly payment will not only pay your mortgage off quicker, but it’s guaranteed to save you a significant amount of money over the term of your mortgage. This frequency also allows the mortgage payment to be split up into smaller payments vs a single, larger payment per month. This is especially ideal for households who get paid every two weeks as the reduction in cash flow is more on track with incoming income.

Example: $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization you would have accelerated bi-weekly payments of $2,078.10 with term savings of $1,217 and total amortization savings of $145,184. Plus, you would save 4 years, 12 months of payments by reducing scheduled amortization.

Weekly Payments: Similar to monthly payments, your weekly mortgage payment frequency is calculated by multiplying your monthly mortgage payment by 12 months and dividing by 52 weeks in a year. In this case, you would make 52 payments a year on your mortgage.

Example: $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization you would have weekly payments of $957.50 with term savings of $253 and total amortization savings of $2,526. You can move to accelerated weekly payments to save even more!

Prepayment Privileges: In addition to fine-tuning your payment schedule, most mortgage products include prepayment privileges that enable you to pay up to 20% of the principal (the true value of your mortgage minus the interest payments) per calendar year. This can help reduce your amortization period (the length of your mortgage).

By exercising your prepayment privileges, you can take time off your mortgage. For instance:

• Extra $50 bi-weekly is $32,883 total savings and an additional 1 year, 2 months time saved
• Extra $100 bi-weekly is $62,100 in total savings and an additional 2 years, 3 months time saved on your mortgage
• Extra $200 bi-weekly is $111,850 in total savings and an additional 4 years, 1 month of time saved on your mortgage.

Understanding the different payment frequencies can be key in managing your monthly cash flow. If you’re struggling to meet a large payment, breaking it up can be effective; while the same can be true of the opposite. Individuals struggling to make a weekly or bi-weekly payment, may benefit from one monthly sum where they have time to collect the funds.

Contact a Dominion Lending Centres mortgage expert for more information or download our My Mortgage Toolbox app from Google Play or the Apple Store and check out the different payment calculators!

Published by my DLC Marketing Team.

Home sales and prices continued to ease in July following the two latest rate hikes from the Bank of Canada.

On a seasonally adjusted basis, home sales fell 0.7% from June to July, according to the latest monthly data from the Canadian Real Estate Association. This marks the first monthly contraction in six months.

While sales of existing homes were up in five of the 10 provinces, including Saskatchewan (+9%), Quebec (+5.1%) and Alberta (+4%), the declines in B.C. (-2.6%) and Ontario (-5.5%) were enough to reverse the upwards trend seen in recent months.

Calgary remained a notable exception, where home sales are up 9% since the Bank of Canada resumed its rate hikes.

“With the growing impact of interest rate hikes and our expectation for a slowing labour market, the real estate market could continue to lose momentum in the months ahead,” noted National Bank’s Daren King.

King added that the record demographic growth Canada is experiencing is helping to prevent a “significant” drop in sales.

National average price down 18% from peak

CREA reported that the national average home price (not seasonally adjusted) continued to fall in July to $668,754. While that’s up 6.3% compared to a year ago, it’s down over 18% from the peak reached in February 2022 of $816,720.

“Following a brief surge of activity in April, housing markets have settled down in recent months, with price growth now also moderating with its usual slight lag,” said Shaun Cathcart, CREA’s Senior Economist.

“Sales and price growth are already showing signs of tapering off further in August in response to the Bank of Canada’s mid-July rate hike and messaging regarding above-target inflation for longer than previously expected,” he added. “We’re probably looking at another round of ʻback to the sidelines’ for some buyers until there’s a higher level of certainty around interest rates going forward.”

Cross-country roundup of home prices

Here’s a look at select provincial and municipal average house prices as of July.

*Some of the movements in the table above may be somewhat misleading since average prices simply take the total dollar value of sales in a month and divide it by the total number of units sold. The MLS Home Price Index, on the other hand, accounts for differences in house type and size and adjusts for seasonality.

Resale market is returning to balance

CREA also reported that the number of newly listed homes continued to increase for the fourth straight month, rising 5.6% from June. “Building on gains of 2.8% in April, 7.9% in May, and 5.9% in June, new listings have gone from a 20-year low in March to closer to (but still below) average levels by mid-summer,” CREA noted.

This caused the sales-to-new listings ratio to ease to 59.2%, down from 63% in June and a peak of 68% in April. Supply also ticked up to 3.1 months of inventory from 3 in June.

“With sales dipping and resale supply on the rise, markets are moving towards being more balanced,” said TD Economics’ Rishi Sondhi.

National Bank’s Daren King also pointed to a rise in cancelled listings in the month, which he said indicated a “loss of momentum in the real estate market.” He said it’s “a sign that some sellers are discouraged by recent interest rate hikes.”

Looking ahead, real estate markets are expected to face continued headwinds from elevated interest rates, even if the Bank of Canada remains on hold from here.

BMO’s Robert Kavcic notes that interest rates are likely to remain at current elevated levels into next year, which will continue to act as a headwind for the housing market.

This article was written for Canadian Mortgage Trends by:

Home Renovations – Reality vs. Television.

Watching home renovation shows is inspiring, often providing us with ideas for our own spaces. However, there is a bit of a downside when it comes to these shows – they can be misleading when it comes to the renovation process.

While we may want to recreate something from one of these shows, without knowing all of the ins and outs, you could be starting a project you’re not ready for! In order to sort out what is real and what is television magic, we have broken down some of the components that go along with a renovation.

Budget & Financing

When it comes to most home renovation shows, there is little to no discussion regarding finances. In reality, if you’re looking to renovate your home you would want to discuss with your mortgage broker or a mortgage expert from Dominion Lending Centres to determine your options.

Some of the ways that you can finance a renovation include:

1. Mortgage Refinancing: This option will allow you to borrow up to 80% of your home’s appraised value (less any outstanding mortgage balance). Refinancing your mortgage (if approved) will provide you to access funds immediately and tends to have lower interest rates than a standard credit card or personal loan. This is best suited to large-scale renovations or remodels. You will want to refinance at the end of the mortgage term whenever possible to avoid breaking your mortgage and owing penalties.
2. Purchase Plus Improvements Mortgage: This is a great option if you haven’t yet bought that home and will allow you to finance your renovation at the time of purchase. This type of mortgage is available to assist buyers with making simple upgrades, not conducting major renovations where structural modifications are made. Simple renovations include paint, flooring, windows, a hot-water tank, a new furnace, kitchen updates, bathroom updates, a new roof, basement finishing, and more. Depending on your mortgage, the Purchase Plus Improvements (PPI) product can allow you to borrow between 10% and 20% of the initial value for renovations.
3. Financing Improvements Upon Purchase: Similarly to Purchase Plus Improvements, this option allows you to finance your renovation project at the time of a new purchase by adding the estimated costs to your mortgage with CMHC Mortgage Loan Insurance. You can obtain financing with only a 5% down payment for both the purchase of your home and the renovations for up to 95% of the value after renovations! Plus, there are no additional fees or premiums and you can earn added rebates for energy-saving renos.
4. Line of Credit or Home Equity Loans: Lastly, you always have the option of utilizing a secured line of credit or home equity loan to pay for your renovation. Securing your renovation loan against the equity in your home can typically be up to 80% of the property value; accessible at any time. This will typically provide lower interest than non-secured financing and allows you to access funds at any time.

Once you have your source of renovation financing, you need to create a budget. On television, it is very hard to determine whether a renovation budget that is listed is accurate. In fact, in some cases the network or show itself even adds to the budget behind the scenes! As viewers, we are simply not aware of what has been factored into those numbers by the television producers such as design fees, permits, labour, material costs, promotional giveaways, etc.

Fortunately, when it comes to reality, you can easily create a realistic budget for your renovation by simply doing some research and requesting quotes. Working with a professional contractor in these cases is crucial to ensure all the work done is to code and to avoid any surprises down the line. A professional can also help you create a detailed budget and timeline for your project so you know what to expect. During all stages of the renovation from picking out paint and new tile to labour costs, be sure to consult your budget. You don’t want to be partway through your renovation only to find out that you’ve run out of money due to making changes or selecting more expensive materials!

Renovation Timeline

Perhaps one of the least realistic aspects of home renovation shows is the timeline. It can seem like just a few short weeks to re-do your entire kitchen, but in reality, that timeline is often stretched.

Working with your contractor to create a realistic timeline based on your goals will help make the process less stressful and ensure you know what you’re getting into BEFORE you start.

Keep in mind, just because you’re ready to renovate, that doesn’t mean a contractor will be available. You may also run into snags such as material shortages or other issues so keep that in mind when you are planning out your timeline.

Planning & Design

When it comes to home renovation television, there is often an interior designer who comes in and makes decisions without the clients; in reality, that is not the case. When it comes to a real-life renovation, all the changes would be well-documented and planned out in advance with the clients (or by the client). In addition, unlike television shows that don’t show certain aspects, you will need to ensure you get building permits and inspections done throughout your renovation. While it can be time-consuming, this is extra important to ensure that your renovation is legal and therefore covered by insurance should anything happen.

While doing a home renovation in real life is different from television, with the right planning and support team for financing and contracting, you can bring your vision to life! Contact your Dominion Lending Centres mortgage expert to get started.

Published by my DLC Marketing Team July 25, 2023