Joe Sammut, Mortgage Broker at Mortgage Architect walks us through some of the changes the new mortgage rules passed by the Bank of Canada will bring, and how it will affect homebuyers with 20% down.
What is the Bank of Canada benchmark rate?
What is the purpose of this new mortgage rule?
What is the new qualification rate? What was the old qualification rate?
What is the element of the stress test that has to do with debt servicing or percentage of debt servicing?
What is a TDS ratio?
What is the credit score you need to qualify for a bank mortgage?
What is in the qualifying ratios of a GDS of 35%?
Why are there now more competition in the condo market?
Which segment of the population will be affected by the new mortgage rule?
What is the default rates for mortgages?
Who are some of the lenders that have bulk insured mortgage portfolios?
How are people with more than 30% down affected by new mortgage rule?
Why homeowners who wish to refinance the home to take equity out are affected under the new mortgage rule?
How are the new mortgage rules meant to slow down the real estate market rather than crippling it?
How real estate investors are affected by the new mortgage rules?
Why is it better to own a condo rather than renting somewhere else?
Why is it in every body’s best interest to own something?
Davelle: Welcome to the Morrison Report. I wanted to create a podcast that would give people insights into the Toronto real estate market, you can follow me on Twitter at DavelleMorrison, and on Instagram as DavelleMorrison, and you can like my business page on Facebook.
Davelle: Thanks everyone for joining me today on the Morrison Report, I have with me today Joe Sammut who is a mortgage broker, and Joe, do you want to tell us a little bit about yourself and where you work?
Joe: Hi Davelle, thanks very much, my name is Joe Sammut, and I am a broker with Mortgage Architects, I was one of the founding partners of Mortgage Architects 10 years ago, and we’ve built it into what today is considered to be one of the largest brokerages in Canada.
Davelle: Awesome, that sounds great.
So today we really wanted to talk to Joe about what in the world is going on with the new mortgage rules, and what does that mean for people. So, where do you want to start, Joe?
Joe: You …
Davelle: Cause there’s so much!
Joe: The question is … but the question is so precise, what in the world is going on in the mortgage market, and the real estate market because, since the announcement came out two weeks ago, what I can say is that there is a lot of misinformation, there a lot of untruths. And there are a lot of people that are trying to make themselves sound perhaps smart or be the first ones out with information, and unfortunately a lot of the information is either coming out incorrectly, or it’s being misconstrued by the listeners. But there’s a lot going on, and it’s primarily designed to perhaps … not necessarily cave the market or crash the market, it’s designed to perhaps slow it down and keep it calm, level things off, because things are growing at quite a rapid rate.
Davelle: Got it, okay. So, what’s the first thing that you would say then … I guess the first change that buyers will notice with the new mortgage rules?
Joe: The biggest change that came out was that all mortgages, let’s assume all purchasers with less than 20% down, have to now qualify under what they call the Bank of Canada benchmark rate, or otherwise referred to as the stress test. And that qualification rate is today 4.74, and basically what’s that saying is that we will be able to give you a rate of, let’s call it 2.4, 2.44. But for safety purposes, we want to, and have to now, as of Monday the 17th, we have to now qualify you using a rate of 4.74.
Joe: And it’s really designed, it’s primarily designed to show that people can meet that stress test, and can withstand any upheaval in rates. It’s really being designed to make sure that all parties are protected, most importantly the consumer, because we would hate to see people getting in at a rate of 2.4, and then having rates jump to 4% and then not being able to afford the same house that they just purchased.
Davelle: Right, of course.
Joe: So, and let me preface that by saying, I’m not saying rates are going up, I’m just saying that again, stress tests are designed to make sure that they can withstand any upheaval in rates, if it was in fact to take place. So where that differs from the old rule is that prior to Monday, you could have purchased the home at less than 20% down, and chose a five year term, and have qualified on the 2.4 rate. Now, you can’t. Now you have to qualify on the benchmark, which again is 4.74.
Joe: That rule was reserved previously to any term other than a five year term. So somebody was taking a variable mortgage, a one, two, three, four year term, they had to meet the stress test, by using the Bank of Canada benchmark. It was five year buyers, or five year [inaudible 00:04:14] that were more or less kept out of that ruling, now they’re all part and parcel of the same thing, they all have to meet that stress test regardless of what term you choose.
Davelle: Wow, so what about, is there an element of the stress test which has to do with debt servicing, and percentage of debt servicing?
Joe: Yes, if you have an individual who qualify on what is called a GDS, TDS ratio, if your credit score is greater than 680, you can qualify with a GDS ratio of 39 and a TDS ratio of 4-3-4, and maybe we should plan another broadcast to discuss that.
Davelle: Yeah, Cause I was about to say, back up for a second, I thought that you had to have a minimum credit score of 600. You’re saying it’s gotta be 680?
Joe: You have to have a minimum credit score of 600, just to qualify for a bank mortgage.
Davelle: Got it, okay.
Joe: But in order to qualify for those higher qualifying ratios, you need to have a decent score greater than 680.
Joe: So what’s that saying is that, and let’s just look at it right from the bottom up, if you have a decent score of 610, you would have to meet qualifying ratios of a GDS of 35 and a TDS of 42.
Davelle: So 35%, you’re going to highlight for us, and you’re saying 35, you mean 35%, right?
Joe: 35%, that’s right. That’s right.
Davelle: And can you tell us what is in that 35%?
Joe: What that means, or what that takes into consideration is that you are allowed to use up to 35% of your income to service the debt of the house you are buying, or of the property you are buying. So, taking into consideration that mortgage costs, heat component, property taxes, maintenance fees if it’s a condo, again, you are allowed to use up to 35% of your income if your beacon score is less than 680.
Joe: If your credit beacon score is greater than 680, you are eligible to use up to, or allowed to use up to 39% of your income to service that debt.
Davelle: Wow, so the difference is essentially 35% or 39% depending on what your credit score is.
Joe: And then the second qualifying ratio is a TDS ratio, which stands for total debt service ratio, that states that you’re allowed to use up to 44% of your income if your beacon score is greater than 680. If your beacon score is less than 680, you have to stick within 42% of your income. And what a TDS ratio is, is taking into consideration the carrying costs of the property you are buying.
Davelle: Mm-hmm (affirmative)
Joe: So all of those functions I discussed earlier, plus all of your outside debt. So if you have car loans, lines of credit, credit cards, we have to incorporate that into your total debt service ratio.
Joe: Again, you are only allowed to use up to 42% of your income or 44% of your income if your credit’s good enough to service that debt.
Davelle: Wow. So, where should we start. Let’s go to, let’s say before you were qualified to spend 650,000 dollars of a mortgage, does that mean now you are only qualified for 500,000 dollars of a mortgage, around there?
Joe: We’d have to run the specific numbers, because as I mentioned, some of the numbers that come into consideration would be property taxes.
Joe: Maintenance fees, and then all of the outside debt. So a 650,000 dollar buyer two weeks ago may be somewhere today between 550 and 575, depending on a couple of other factors. But I just worked on one, just yesterday where an individual two weeks ago was approved for 450, and they are now qualified for 375. So, from that standpoint they were affected, but at the same time perhaps got them to a point where they’re looking at a more realistic acquisition, something which is not going to stretch them too far, and they know full well they’ve got the safety in place to make sure that if there was a bump in rates, that they’d be able to afford the same property.
Davelle: Wow. It sounds like …
Joe: Affordability is[inaudible 00:08:04] effected.
Davelle: Yeah, it just, it sounds it’s created more of a competition in the condo market now, because, if I think of someone, who’s, let’s say able to spend 650 on a house before, and now they’re kicked down to 575, well, now they’re really into the condo market, and they really can’t get a house. And that person who, say 450 before, and they’re now down to 375, they’re looking at again, a one bedroom condo, but still it would be tricky to find that.
Joe: It could be, or, keep in mind that if they were looking at a house at the 650 mark, and now they’re qualifying ratios are being impeded by these new rules, and they are are moving down to, or moving over into a condo market, you now have to take into consideration a maintenance fee that you didn’t have on the house.
Joe: So, depending on that, factoring into the TDS ratio, I mean the GDS and the TDS ratio …
Joe: That could … We don’t know yet how that’s going to impact people, and as I’ve mentioned, there’s a lot of calculations which have to come into play in order to figure out how much somebody’s going to qualify for, how this is in fact going to impact them. The individual I was referring to yesterday, that I dealt with yesterday, they were originally a 450 condo, if they had stayed in the condo market, they would have been reduced to, again, 360, maybe 375. But if they moved to a house where they don’t now have a maintenance fee, they can bump their purchase price up to 425.
Joe: So, like I say, there’s a lot of moving parts when calculating the GDS and TDS rule, or ratios. And it’s not a steadfast or set fast rule where somebody’s going to qualify for say 25% less today than they did two weeks ago. And that I think is where the media is perhaps relaying the information quite irresponsibly, because they’re coming across, letting everybody believe the sky is falling, and that they’re not going to qualify for what they used to qualify, and it’s going to be a dramatic shift. And it doesn’t necessarily mean that that’s going to be the case.
Davelle: But it’s funny, because the way that you describe it to me, I’m thinking “the sky is falling.” And if I was one of those people, who’s been kicked down to those numbers, I just think they’ve taking home ownership away from some of the first time home buyers now, because all they really could afford is a condo, and a small condo at that.
Joe: On that note, I agree. To a certain extent. The reason I say that is because there were, and there have been for many many years now, a certain segment of the population that are buying that perhaps shouldn’t have been buying. And the reason they shouldn’t have been buying is they can’t withstand that upheaval in rates. And again, not saying that rates are going anywhere, but in the event they did, and these people qualified just by a hair, based on using, let’s say, a 2.4% five year rate in the past …
Joe: They can find themselves in a lot of trouble when it comes to refinancing or selling the property and getting themselves out of a situation that they then can’t afford. So, what this new rule is going to do, it most certainly will impact a certain segment of the population, but it’s not as widespread as the media is reporting it to be.
Joe: It’s going to be, in my opinion, a very small percentage of the population that might now be squeezed completely out of the market place.
Joe: But, it’s a select, and not to sound as though it’s being targeted, but it is a perhaps a segment of the buying population that might want to reconsider that decision to buy because they could be biting off more than they could chew, if there’s a change in the market.
Davelle: I mean, I guess I look at the default rates in general in Canada, and it seems to me that the default rates for mortgages aren’t really that high. What would you say the default rates are like?
Joe: Not at all. 0.01%. They’re nonexistent. The default rates are very very low.
Davelle: So it seems like the government fixing a problem that we don’t actually have.
Joe: The jury’s still out on that. Because what’s gonna happen is by these mere changes, or by these changes that have gone into effect, as I say, a certain segment of the population gonna be effected. It’s gonna make another segment of the population a lot stronger, perhaps. It’s gonna make the qualified buyers already … Individuals that have already been qualified, because their income is good, their credit is good, and they’re living within those ratios, it’s going to make them even stronger, going forwards, whereas, you are absolutely right, that smaller segment of the population could very well be squeezed out. But this is going to have a complete, it’s going to have a trickle down effect in a number of different areas, it could very well level off house prices, it could perhaps see the reductions of some house prices, or property prices, it could very well also amount to a small increase in rates, and the reason for that is because of the conventional business, so forget about the high ratio stuff that we’ve just been talking about …
Joe: But the conventional business, so people that have 20% down or more, some of those mortgage portfolios are insured through CHMC, Genworth and Canada Guarantee in the background, and the cost of those funds are going to become more expensive because the insurers are no longer wanting to insure, or bulk insure conventional portfolios. So lenders are having to pass some of those costs over to the borrowers. So it could very well raise rates somewhat. But, again, not to a level that’s going to be cost prohibitive, or earth shattering. Again, let’s not forget that we’re at a historical low interest rate marketplace with rates right now as low as 2.39, 2.44.
Joe: These are absolutely the lowest rates in Canadian mortgage history. We have house prices that are at right now the highest they’ve been, because they just continue to climb.
Davelle: Mm-hmm (affirmative)
Joe: So this is going to see, I believe, the effect of this is going to cause some sort of a leveling off in the marketplace, a resettling for lack of a better word, whereby we’re going to be able to sit back and assess what people are buying, why they are buying it, and how they are going to be able to afford it. So I do, I mean these changes I do embrace them, the one thing that is very disheartening for myself and a number of people in our industry is that there’s so much miscommunication and so much misinformation. There are people out there, individuals that have no concern whatsoever from an affordability standpoint, but they are already panicking wondering what’s going to happen with their mortgage when it matures next year.
Davelle: Hmm. Interesting.
Joe: Yeah, it’s pretty, the phone calls that we’re fielding are very very interesting, because there are people that are frightening just based on what they’re hearing, or how they’re interpreting the information. And one thing that’s happened this week is that a new date has been set and that is November the 30th …
Joe: Which is another date that the banks have more or less come out and said, or the finance department has come out and said, we’re going to revisit this one change and we will let everybody know what we’re going to be doing come November the 30th. And what that will pertain to, or what’s that going to include would be conventional mortgages.
Davelle: So you’re talking to people who are putting more than 20% down, might be effected after November the 30th.
Joe: Not necessarily in a bad way, right now they are effected in a bad way, based on how the rule reads as of last Monday. People with 20% down with certain lenders were going to also have to meet that stress test. And a number of people have got together and more or less lobbied the finance department to say, “hold on a second, this is going way too far, too fast, too extreme.”
Joe: So, they’ve stepped up and said, “Okay, you know what, we’re going to revisit this,” and as of right now, conventional business is being done the exact way it was two weeks ago. And high ratio is changed. High ratio changed, and just for your listeners, high ratio is less than 20% down. That has changed, you now have to qualify based on the benchmark rate.
Davelle: Got it. So, let’s say your somebody who, you’ve got a mortgage, and let’s say your going to do a refinancing next year of that mortgage. Does that mean if they stick with their same lender, they’re okay, but if they have to go to a different lender, they’re going to have to re-qualify under the new rules?
Joe: If they are staying with the exact same lender with the exact mortgage amount that’s outstanding, and the remaining remonetization and all of that, and all they want to do is renew the mortgage …
Joe: They don’t have to do anything. They can stay put, they can stay where they are. If they need to refinance the home to take equity out for whether it be debt consolidation or renovations, children’s education, whatever the case is, and they need to access additional equity out of the home, then that’s going to be subject to whatever the new rules are that come out on November the 30th.
Davelle: Got it. Wow.
Joe: We don’t know what they are yet, that’s the problem. We don’t know what the new rules entail, and we don’t know how it’s going to impact people, but as I mentioned to many people I’ve spoken to in the last two weeks, the lenders in this country, whether they be a big bank or a model line lender, they are all providing a service to the Canadian public that are trying to buy a home or trying to refinance their homes, and they’ve done a very very good job up until now. Now what’s happened is the Bank of Canada, the finance department has come out with these swift changes. The banks and the model line lenders have all voiced their concern, and the finance department has finally said this week, “you know what, we have to revisit some of these changes. Because we know that, again, they were a little bit too swift and too severe.”
So they understand that they don’t want to cripple the market, they’re not trying to cripple the real estate market or the mortgage market, they’re basically saying, “we have to slow things down so they don’t grow at the pace that they have. And we have to make sure can afford these mortgages just in case there is a blip in the market and rates do rise.”
Davelle: Got it.
Joe: If they do rise, we want to make sure the insurers, who are insuring these mortgages in the background, like CHMC, Genworth and Canada Guarantee, that they have enough funds in their coffers to pay claims, in the event there are deficiencies on the mortgages.
Davelle: So let’s talk about real estate investors, let’s talk about how are real estate investors I guess effected by the new mortgages rules, because I did understand that some lenders are no longer lending to real estate investors, is that correct?
Joe: That’s a great question, because the rule, or the announcement of these new changes came out two weeks ago, and almost immediately, some lenders, who were in the rental program, backed out of the rental program. Some lenders who were in self-employed mortgage programs, backed out of them. Since the rule came into effect on Monday, and more discussion have been had, very many of those lenders have jumped back in.
Joe: They’ve said, “Hold on, wait a second, yeah, we want to keep lending in this arena, and we want to keep lending alive and well, so we will still lend on rentals, and we will still lend to self-employed individuals.”
Come November the 30th, we don’t know yet, what going to happen.
Joe: But as of right now, conventional business as we knew it is alive and well.
Joe: High ratio business has changed, and it has been an interesting week, because we’ve had lenders jumping in and jumping out, raising rates, dropping rates, it’s been so interesting because it’s been a yo-yo, nobody has known what they should do simply because there’s been no clarity from the government.
Davelle: Right. Wow. Yeah, I just feel like they’ve just sort of given some of the first time home buyers a bit of a kick in the stomach because, like I said before, some of those people do have to sort of think about condos now, and I think they’ve almost created more competition in the condo market, amongst buyers of condos, but they’ve also created more competition amongst renters now as well, because some of those people who qualified before, they can’t buy, and so now they’re forced to rent, and, in fact, just this week I had a phone call from somebody, they have a condo for sale downtown, and they said, “Oh, we know with the owners interested, be interested in renting it out instead of selling it.” I said, “No, they really do just want to sell it.”
He was just talking about how difficult it was for him to find a place to rent now, because there were so few rentals on the market, so I feel like this is going to affect the market in other ways.
Joe: It certainly is, as I mentioned, there’s going to be a huge trickle down effect, and I believe that our lending community, and Bank of Canada, the finance department, they don’t want to see the economy suffer because of this, they don’t want to see the housing market suffer, but they do want to slow things down, and I truly believe they’re going to sit back and wait and see what happens over the next several months, and perhaps come back in the new year and say, “all right, we’ve adjusted this way, now we’re going to tack and jibe and go this way, and we’re going to correct this, we’re not so concerned about that anymore.” And that, the next six months is going to give us plenty of time to sit back and figure out how in fact these swift rule changes are impacting people. And there’s going to be people who sit down and find remedies to solve all these problems.
Joe: But to your point, you know, there are going to be, there is going to be some more competition in the rental market. For those people who … The sad thing is, they’re perhaps giving up because they, based on what they’re hearing, they think they should be giving up.
Joe: That’s the real sad reality here, is that there are people who are backing out of the market, potentially, and not that I’ve heard of many of them, but there are people that will consider backing out of the market because they think they should, when in fact that might be the furthest thing from the truth, maybe now is when they hammer down and figure out exactly a way to get into the market, because they will know it’s affordable, at least they will know they’ll have that stress test in the background, that makes sure that they can afford it.
Joe: So, I’ll give you an example, I have a client who has been speaking to me since April of this year so, what’s that, that’s six, seven months. They have gone from 650,000 dollar homes up to 750,000 dollar homes and we were talking two weeks ago how these new rules, or the announcement of the new rules were scaring them, and they were going to get out of the market. So I said, “why get out of the market, why don’t you just look at something, if you’re stressed, and concerned, let’s change and shift gears and go down to perhaps 600,000.”
Joe: And they wanted no part of it. They wanted nothing to do with it. So we sat back and we waited, and I got a call from them on Tuesday saying they were going to see a house that was listed at 599,000, and they got it for 625. So, my point is, and they’re over the moon, they are completely over the moon and in love with what they have just acquired. But two weeks ago, with the media reporting the way they were, with their 760 stretching their limits just too high, they didn’t see any light at the end of the tunnel, and now they’ve got it, they bought their house.
Joe: So I think this is going to force people to be more realistic, it’s going to force people to sit back and take stock in what they’re doing, why they’re buying, where they’re buying and how much they’re willing to spend. So from that standpoint, it’s going to be interesting, it’s going to be an interesting adjusting over the next few months.
Davelle: Interesting, I mean it almost sounds like the perception isn’t quite the reality, however, it has forced, or taken, some buyers out of the market so that, for example, that couple you were talking about, they were able to get a 599 house for 625, because if this was spring that 599 house would have sold for 700,000.
Joe: That’s why we were doing our numbers at 750, 760. Because we thought it would be exactly like it was in the spring, but I don’t know what the effect of the … Again, it wasn’t a price reduction, it was in fact over the list price.
Davelle: Of course.
Joe: But it wasn’t perhaps as crazy as it might have been in the spring, you’re right.
Davelle: Yeah, so it just sounds like if buyers are willing to stick it out, this is actually a good time for them to buy, because everybody else is sitting on the side lines waiting to see what happens, they’re not coming to the party, but basically this is a good time for people who are willing to stick it out to get into the market, and get something.
Joe: 100%. And the key thing to keep in mind, for anybody that’s listening, is that there are people convincing themselves to get out of the market just based on what they’re hearing and how they’re interpreting it.
Davelle: Mm-hmm (affirmative)
Joe: Look into it. And ask the questions, and go through the numbers and speak to people who know. It’s interesting, it’s great you’re getting this information out there because there are people who are so deflated right now, they’re deflated thinking they can’t buy, never will buy, they missed the bubble, or they missed the wave. The fun is just beginning now, now it’s time, as you said, there are people who are going to sit back and perhaps rethink things and find out that they, you know, they’re going to be able to get into the market, just perhaps at a different price point than they were thinking.
Davelle: Right, right. Interesting, but, I guess on the same note, it is kind of, it is deflating for some people that now are told that they can only, they have to spend less, and like I said, that pushes them into a condo versus a home, and it’s funny, maybe it’s something that I belabor because I think that for people to generate more wealth for themselves, I do believe it is better for them to own a house over a condo. Because I see the value appreciating in a house much faster, so I think when people take that opportunity away from people, I guess I feel that, I think that is sad. Because I think that everybody should be able to get the opportunity to purchase a house if they want to.
Joe: There is truth to that for sure, but the other thing to keep in mind is that regardless of what you buy, whether it be a house or a condo, it’s still making you money opposed to renting and making your landlord money.
Davelle: Absolutely. Absolutely.
Joe: You know, from that standpoint, I said to many people, “well, you can’t buy that 600,000 dollar home, just because you don’t qualify, why don’t you look at that 400,000 dollar condo.”
Joe: It’s better to own the condo rather than renting somewhere else for 1700 dollars a month. If in fact owning a home is what you want to do, there’s nothing wrong with renting, there’s nothing wrong with being a tenant or there’s most certainly nothing wrong with being a landlord. But at the same time getting into the market is the first step, because the minute you get in, you’re less frightening to do it a second time.
Davelle: Right, absolutely.
Joe: The first time is always … That’s the biggest plunge, and that’s where people get so nervous they convince themselves to get out of the market, or they take that plunge and get in and then look at what happens. They still need somewhere to live.
Joe: So, getting into something regardless of whether it be a condo or a detached, semi-detached home, town home, they’re getting in. And that’s, I think, the key thing that people need to realize, they need somewhere to live.
Joe: Where do they want to live, do they want to live in something they own, or something they rent. And either scenario is fine, as long as it works for them.
Davelle: Yeah, absolutely. I mean obviously I am biased, I think it’s a good thing for people to own, because, yeah, that spending 1700, 1800, 2000, 2400 dollars a month in rent I think is certainly a lot of money. Now that being said, on the other note, I’m also a landlord, so, I love my tenants who are willing to spend that much money because that helps me. So, I guess I stood on both sides of the fence, but ultimately I do think it is in everybody’s best interest to own something so that they are paying themselves first, and you know, at least that way when they retire, they own wherever they’re living, because at that point I’m assuming they probably wouldn’t have a mortgage anymore, but they don’t owe any rent to anybody. Which I think is that’s where you want to be when you retire, you don’t want to owe anybody anything.
Joe: Absolutely, I agree with you.
Davelle: Awesome. Well, thanks so much with chatting with us today, Joe.
Joe: Thank you.
Davelle: No problem. Where can our listeners reach out to you, where can they find you?
Joe: They can email me at Joesammut@mortgagegate.ca or toll free at 1-888-575-4403 extension 21.
Davelle: Awesome, thanks so much Joe for joining us today, and you’ve been listening to the Morrison Report, you can find me on Twitter at DavelleMorrison, or on Facebook or Instagram at DavelleMorrison as well. Hopefully you’ll listen to us again.
Davelle: Thanks again for joining us today for Toronto real estate market insides, and you can reach out to me at email@example.com or on Twitter at DavelleMorrison. See you soon. Thanks for listening.