BC Sunshine Coast real estate by Menno at Royal lePage Real estate on the BC Sunshine Coast

There’s a glut of money on the financial markets yet there are persistent rumours that the Canadian Federal Government may continue its strategy of discouraging excessive consumer borrowing. How could they achieve that?

There's a lot of foreign money in Canada right now. It's been pouring into the country since Canada's economy is a haven of stability compared to many other countries.

It’s still easy enough. If you need money (for a house, car or credit card), you make an application at a financial institution and they may give you the loan. Of course, you’ll be carefully looked at by the financial institution of your choice. They will only deal with you if (almost) everything is a-okay.

In the more specific example of a mortgage application, a bank will only give you money to buy a house after looking at various aspects of your personal finances: your credit score, your various assets and of course: your sources of income. The banker wants to make sure that you’ll pay back the money … plus interest.

A credit score is a simple number: the higher it is, the better. Your various assets will also give the bank a fairly clear picture of what’s going on. Income is also pretty straight-forward in many situations, for instance for those that earn a regular income. The income slips that you receive will provide easy proof of your situation – which can also be easily verified by calling your boss.

There are many ways to differentiate between the various groups of borrowers in the country. Some are deemed a better risk than others for a multitude of reasons.

HOW ABOUT PROBLEM GROUPS?

A fairly large percentage of prospective home buyers do not immediately meet all the underwriting rules that exist. This isn’t necessarily because the applicant is unfit for money – there can be many interesting reasons for this. For instance, some fall into the “self-employed” group, where income isn’t always so easily determined. From this group (about 13% of borrowers), banks have routinely accepted “stated income” reporting. Many fear that “stated income” loans open the door to “liar loans” that are out of touch with normal lending rules.

A new round of mortgage rules from Ottawa may include tough new measures for calculating how the self-employed qualify for loans. Since our Federal Government remains concerned about the possibility of an inflated housing market, it may want to crack down on the practice where consumers self-disclose what they make when applying for a loan. None of this is happening just yet. The housing market appears to have slowed down a bit; the government may want to see what will happen next. One might fear that if the market picks up, that we will see more changes to the existing rules. The Bank of Canada insists that parts of the Canadian real estate market are probably overvalued. Policymakers are monitoring to see if further steps are needed to cool it.

Many people have been borrowing more money over the last few years (for real estate and other things) on the strength of our record-low interest rates. This was to be expected … after all when things (like money itself) are so cheap, people tend to gather more of it.

The more money we're borrowing, the more we'll have to pay back later. In the meanwhile, however, it helps to spin up the economy quite effectively.

THE  MONEY MARKET IS SENDING US A MESSAGE

Various measures have already been taken by the Federal Government (Central Bank)  such as bringing down the amortization period. Those methods have been effective. If more needs to be done, the appropriate authorities will take steps. Stated-income mortgage products have become popular during the most recent housing boom, allowing more banks to get involved in lending to the self-employed.

There are self-employed individuals that have great credit scores yet won’t be able to validate their ability to pay by showing their income on their CRA notice of assessment. Possibly, people with stated income could have to make a higher down payment than the normal 20%, the level that exempts consumers from buying expensive mortgage default insurance. Today, some self-employed applicants are qualifying for loans based on the assumption that they have a lot of write offs, like car payments and housing costs associated with home office costs. The assumption still is that self-employed people have an advantage from a tax perspective.

The Federal government is trying to walk the "near-impossible" line between an easy money supply and controlled, responsible borrowing.

AVOIDING MAKING PROBLEMATIC LOANS

The government appears to be zooming in on marginal borrowers so we don’t get into a U.S. type of situation where mortgage defaults have ended up crippling an entire nation. These days, banks are usually reluctant when it comes to dealing with declared income. What they look for is financial behaviour, then put more weight on that. New rules for self-employed borrowers could have a major impact on the market. It could be more difficult for them to prove income.

Since we’ve just seen the maximum amortization period come down from 30 years to 25 years (for insured mortgages), there’s no fear that this will happen again soon (as from 25 to 20). As before, non-insured mortgages (80% LTV or less) would still be exempt from that rule change although most banks follow the same system (but not all banks).

To avoid the over-heating of the financial markets, the government has come down with a number of rules to limit all-too-easy access to large amounts of cash. Further tightening can take many different forms, some of which we may even already expect. It would, for instance, be a possibility to bring the limit for insured mortgages (at 80% currently) back down to 75%, where it was about 10 years ago. This would require more people to purchase default insurance (the 75 to 80% group) and it would make the entire mortgage market a little bit more secure.

Boom and bust are key words that the Federal government tries to avoid. By limiting the housing boom, we hope to lessen the possibility of a later housing bust.

MORE FRINGE RUMOURS

Another rumour has it that the Federal Government is looking at the possibility to include all condo fees (strata fees) in the qualification calculations. Up to now, just 50% of those fees are taken into consideration, which has let in a larger number of borrowers because more people would qualify under the 50% rule.

All of these possible rule changes only target those that are currently applying at the cusp of their financial abilities. By making the rules a bit tougher, those that are deemed to be most vulnerable will only qualify for slightly lower amounts – which may have the effect of cooling the overall real estate market somewhat, as well as making the lending market less risky.

It's a good idea to study for more understanding of the mortgage and financial markets. The blog articles highlighted below may help to put you on the right path.

MORE mortgage blog articles are always available on these pages. A sampling can be found here:

Fixed-rate mortgage are so popular again: http://www.mennorealty.ca/Blog.php/fixed-rate-territory

About mortgage rates now and later: http://www.mennorealty.ca/Blog.php/record-low-1

Are we looking towards financial uncertainty? http://www.menno.ca/?p=19564

What about refinance and renewal: http://www.mennorealty.ca/Blog.php/renewal-1

Financial markets and lowest rates: http://www.mennorealty.ca/Blog.php/buy-more-lowrates