Deciphering mortgage news predictions

So it's been awhile. I had a decent lunch with a successful mortgage broker yesterday; talking about what makes for a good broker, what's new in the industry, etc. I was going to talk about what he shared with me but then this morning I read this article on the future of Canadian mortgages which predicts a tightening of the rules in November for lenders and what it means for the bottom line to consumers.

In really simple terms, banks/lending institutions have a set limit of how much they can lend/carry in their mortgage portfolio. I don't know the exact number but safe to say it probably rhymes with 'millions'. They also have to have a reserve of capital (eg. cash or bonds) in case a number of mortgages defaults. Many lenders have borrowers get their mortgage insured, and one of these insurers is CMHC, a federally owned company. If a mortgage that is insured by CMHC goes into default, the lender gets the full amount of that mortgage back through CMHC. Because CMHC is a federal entity, that means it is funded through us average, tax-paying Canadians. The more CMHC pays out, the more tax-payers would be on the hook as federal revenue would now go towards paying out banks/lenders instead of more socially responsible infrastructure projects and whatnot. 

Still with me? 

Anyways, this article is stating, among other things, the federal government wants lenders to increase their capital reserves, just in case more mortgages start going into default, especially when they consider the future of Vancouver and Toronto housing markets. 

For simplicity, a lender has a set amount of money to lend every year as per their business plan (100%). Of that money, they need to hold (say...10%) back in case of defaults. 

Now it's guesstimated they will have to hold more back, (let's make it 20%), meaning there is less money available for them to lend. So what does that mean for you?

If you already have a house and are making payments with no plans of shopping around for refinancing when your term is up, not much. However, I always strongly suggesting to take a look around - why pay 6% interest when you could be paying 3%? 

If you have a house and are planning on shopping around to find the best rate, it is still highly probable to switch as you will already have equity in your home, there's no real surprises for the lender and as long as your economic situation hasn't changed, you would be considered a strong candidate for lending. You could still contact me and I will give you honest advice about whether you should consider switching.

If you are buying a house - well, here's where I am guessing it is going to be a bit more difficult. You are going to want to show plenty of cash reserves in place, perhaps a longer and better credit history. The Bank of Mom and Dad will probably still be needed to meet the minimum down payment. 

But above all - when you first time homeowners get approved, and I strongly suggest this for all home shoppers, look for a house you can afford, not one that you think you want. Take your time shopping and consider all the factors in the years to come. There will be plenty of time to get your dream home when you can truly afford it.

And as for my lunch, it was great. He told me about what he likes about being a broker, what he thinks makes him successful. He has always enjoyed math and solving puzzles, which is ultimately what being a broker is; taking a set amount of facts, dismissing the ones that aren't relevant then looking for solutions. While there are many lenders out there, the all have their own particular niches. It's our jobs as brokers to find the niche that works for you, the client. 

Your happiness is our happiness. 

(Okay, I just added that last bit)   

-jay