Mortgage Lending Landscape Be in the know Patrick Gibbon National Manager, Business Relationships PMA Economic Summit September 27, 2012
Mortgage Lending Landscape Be in the Know Agenda 1. What are the most recent changes? 2. Why the changes? 3. Implications of the change 4. History of mortgage regulation changes 5. Impact of historic changes 6. What does this mean for You! 2
Most recent change: On June 21, 2012, the Department of Finance announced important changes to High Ratio Insured Mortgages; changes took effect July 9, 2012 and include: Reduced maximum amortization period from 30 to 25 years Reduced maximum Loan-to-Value (LTV) for refinance transactions from 85% to 80% Purchase price must be less than $1 million Tightened gross debt & total debt ratio calculations (39% & 44% respectively) 3
What has changed cont d On the same day, the Office of the Superintendent of Financial Institutions (OSFI) provided an interim update on Draft Guideline B-20 Residential Mortgage Underwriting Practices and Procedures. These include: Background & credit history of borrower Income Verification Down Payment Verification Debt Service Coverage Appraisal Process & Collateral Management Loan-to-Value (LTV) Ratio restriction on Home Equity Line of Credit (Heloc) 4
Why the Changes Ongoing concerns surrounding high household indebtedness Ensure long term stability of Canadian housing market - Fears of an over heated Canadian housing market Promote savings through Home Ownership & help them be debt free faster Reinforce the importance of borrowing responsibly Help curb Canadian households from getting over extended Reduce the numbers of Canadian households vulnerable to economic shock and interest rate increases Hold true to the intended purpose for High Ratio Mortgage Insurance 5
Implications Curb Household Debt Levels Effort to curb the relentless rise in the household debt-to-income ratio (currently over 150%) tighter mortgage insurance rules have shaved an estimated 2-3 percentage points from household credit growth in the past 5 years According to CMHC, 2011 LTV restrictions on refinancing made the largest impact on the number of mortgages they insured in 2011- new mortgage recouped by end of 2011 only refinance activity remained depressed Household debt growth decreases to a pace more in line with income bucking a 5 year trend Material impact to homeowners with excessive unsecured debt Increase personal investment requirement for investors or renovators 6
Implications Potentially reduced affordability & borrowing capacity Reduced amortization will have material impact to a borrower s capacity roughly equal to a 9% decrease in buying capacity According to Canadian Association of Mortgage Professionals, 27% of total mortgages outstanding in 2011 has an amortization of between 25 to 30 years. Compared to 8% between 30 to 35 years and only 6% with amortization greater than 40 years Material change to how much house a client can buy (considerations :save longer, buy smaller) Table 1. Impact of Allowable Amortization on Mortgage Payments and Borrowing Capacity Mortgage Assumptions Average Household Income ($) 75,000 Available Down Payment ($) 50,000 5-year Fixed Interest Rate (%) 3.80 Other Household debts ($) 0.00 Annual Property Tax & Heat 4,960 Amortization Period 30 Years 25 Years Pre-qualified Purchase Price $391,758 $357,950 Equivalent Decrease in Buying Capacity (%) 9.0 Illustration purpose only Calculated by TD Canada Trust 7
Implications: Potentially reduced affordability & borrowing capacity cont d Maximum amortization reduction from 30 to 25 years translates to an interest rate impact to be 0.9 percentage points or about $140 per month on an average priced home Qualifying at 5 year benchmark rate will similarly decrease buying capacity (considerations: customers chose longer more stable mortgage terms and stay in homes longer to build equity Forces home buyers to consider their affordability both in the short term & long term consider future interest rate increase and build in a cushion 8
History of Mortgage Regulation Changes 9
What does this mean for You? Mortgage lending changes will continue stay informed First time & repeat buyers are confused count on you for information & clarity Take control of the home buyer and be more hands on in the process offer more personalized service and facilitate the full transaction Qualify your buyer income, down payment, credit Help manage buyer s expectations right from the beginning protect your pipeline 10
Thank You