Canadian banks expected to tighten home equity line of credit access as aid measures wind down

Real Estate DAZADA DIAMOND 30 Apr

Canadian banks expected to tighten home equity line of credit access as aid measures wind down

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TORONTO — Canadian banks are expected to tighten access to home equity lines of credit (HELOCs) when coronavirus-linked government assistance programs end in a few months, as lenders seek to limit credit to already-stretched borrowers, industry watchers said.

Such lines of credit — which allow homeowners to borrow back equity in their properties — have seen limited drawdowns since the coronavirus outbreak sparked an economic collapse, with many struggling borrowers using the federal government’s stimulus measures and banks’ loan payment deferrals to get by.

But as lockdowns ease and businesses reopen in the fall, and federal aid and mortgage deferrals wind down, borrowers will likely try to tap home equity lines of credit, particularly if unemployment remains elevated.

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Officials have warned about the dangers of home equity lines of credit, but obtaining a precise figure for Canadian Heloc debt has proved tricky.

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Borrowing on Helocs to fund everything from home renovations to car purchases has grown faster than residential mortgages since 2017, and undrawn commitments at the large Canadian banks stood at $120 billion.

Canadians using their homes as ATMs in a swooning housing market put financial system at risk: DBRS

COVID clauses await wary buyers still venturing out in Canada’s home-selling season

That would prompt banks to clamp down on HELOCs to reduce the risk of spikes in sour loans, which the banks are already bracing for, investors and mortgage brokers said.

“HELOCs, in some ways, have the potential to magnify risk on banks’ balance sheets, because in times of stress, people want to draw on them,” said Ben Rabidoux, president of research firm North Cove Advisors.

“If (federal aid) runs out before we see a return to prior employment levels, we would see people draw down on HELOCs. Maybe that’s what forces the banks to rethink that exposure,” he said.

An early sign of that came when Bank of Nova Scotia stopped allowing borrowers to use HELOCs for downpayments on investment properties about two weeks ago, Rabidoux and mortgage broker Ron Butler told Reuters. The bank declined to comment.

In the United States, JP Morgan Chase & Co said this month it would stop accepting new HELOC applications temporarily.

HELOCs, in some ways, have the potential to magnify risk on banks’ balance sheets, because in times of stress, people want to draw on them

Ben Rabidoux, president of research firm North Cove Advisors

Home equity lines of credit are cheaper than other loans because they are secured by the home. But the requirement for only interest payments, and easy access to additional credit as borrowers build equity in their homes, raises the risk of borrowers taking on too much debt.

For banks, the position of HELOCs behind the first mortgage could leave them unable to recoup the full amount if property values decline, highlighting the risk.

Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal and Canadian Imperial Bank of Commerce (CIBC) said they have not yet changed requirements.

Laura Dottori-Attanasio, who runs CIBC’s personal and business banking unit, said there hasn’t been any notable increase in the use of credit lines, as Canadians remain cautious about taking on additional debt.

HELOCs accounted for 17 per cent of Canada’s six biggest banks’ total mortgage books in the first quarter, so risk is limited, said James Shanahan, an analyst at Edward Jones.

Canada’s biggest banks require the mortgage and lines of credit combined to be 80 per cent or less of the value of the home, and the HELOC alone cannot exceed 65 per cent.

Martin Pelletier, portfolio manager at Wellington-Altus Private Wealth Counsel said banks could require borrowers to repay both interest and principal on HELOCs, rather than just interest as a way to limit exposure.

When borrowers have missed payments on other credit products, banks have reduced HELOC limits to the balance owed, to manage default risk, but they haven’t done so for all clients, Butler said.


Coronavirus outbreak to exert downward pressure on Alberta housing

Real Estate DAZADA DIAMOND 29 Apr

Coronavirus outbreak to exert downward pressure on Alberta housing

The impact of the COVID-19 pandemic on the already-battered Alberta housing segment will persist over the next few quarters, according to the Alberta Real Estate Association (AREA).

“This is an unprecedented time with a significant amount of uncertainty. It is not a surprise to see these concerns also weigh on the housing market,” said Ann-Marie Lurie, AREA chief economist.

Alberta’s average home price was $371,022 last month, having declined by 2.64% annually. The number of new listings dropped by 14.54%, while the stock of homes available in the market contracted by 5.76%.

Provincial sales fell by 8.5% during the same time frame. Activity in Calgary and Edmonton shrunk by roughly 10% and 3%, respectively.

These observations were supported by recent Q1 figures from Royal LePage, which found that Calgary had nearly flat housing prices (0.1% annual drop to $469,156), while Edmonton suffered a notable decline (1.4% year-over-year to $371,118).

Fortunately, the market will have considerable support despite the mobility restrictions associated with the anti-coronavirus policies currently in force.

“Measures put in place by the government and lending institutions to help support home owners through this time of job and income loss will prevent more significant impacts in the housing market,” Lurie said.

Aging population means advance planning for homebuyers

Down Payment & Buying DAZADA DIAMOND 28 Apr

Aging population means advance planning for homebuyers

Aging population means advance planning for homebuyersCanada’s population is aging and the country is set to have a significant increase in seniors in the coming years but is the housing market ready?

A new report from Sotheby’s International Realty Canada and the Mustel Group, reveals that aging homeowners are concerned about their living arrangements in their senior years.

With an estimated 1 in 5 Canadians of 65 years and older by 2024, the challenges for the real estate industry is being able to meet the demands of a cohort of seniors that wants to age in their own homes.

In one of the first studies into the housing aspirations of aging Canadians, the survey of 1,764 homeowners of ages 54 years or older in Metro Vancouver, Greater Calgary, Greater Toronto and Greater Montreal, found that 46% considered their needs in older years when they bought their current home.

Factors that are important to these buyers include safety, transit links, and grocery stores.

Within the home, a main level bathroom, and either single-level living or potential for a bedroom on the main level are important. For condos, elevators, fitness and wellbeing facilities, and security were top considerations.

No desire to move
The survey confirms the trend for aging Canadians to want to remain in their own home – and their current home – as long as possible.

Little more than a third of respondents said they expect to sell their home in their lifetime and just 14% expect to move to a new city, with a similar share expecting to move to a different neighbourhood in their current city.

Of those that do expect to sell, downsizing (54%) and freeing cash for lifestyle expenses (25%) are among the top reasons.

Condos are the top choice of those who plan to sell. This is particularly apparent in Montreal, Vancouver, and Toronto.


Canadian reverse mortgage debt tops $4BN for first time

Down Payment & Buying DAZADA DIAMOND 27 Apr

Canadian reverse mortgage debt tops $4BN for first time

Reverse mortgage debt increased 13 per cent over one year, as more seniors choose to stay in their homes

Reverse mortgage debt in Canada has topped $4 billion for the first time, according to Office of the Superintendent of Financial Institutions (OSFI) filings analyzed by housing blog Better Dwelling.

A reverse mortgage is a mechanism for those who have paid off their mortgages to tap into their home’s equity, receiving a monthly or lump-sum payment. It is popular among retirees as it allows them to stay in their home while giving them an income. It is usually only payable upon sale of the home, or death, which means that it is paid off before the rest of the estate is passed to the beneficiaries.

This is a 13 per cent increase from one year previously and the first time in Canadian history that reverse mortgage debt has topped $4 billion.

Better Dwelling reverse mortgage debt
Source: OSFI regulatory filings; Better Dwelling

However, the blog pointed out that the rate of growth for reverse mortgage debt is slowing, as the 13 per cent year-over-year increase for December was the lowest growth rate in many years (see graph below). It added that residential mortgage credit is growing at 5.1 per cent as of January 2020.

Better Dwelling reverse mortgage debt growth change
Source: OSFI regulatory filings; Better Dwelling

The report came at the same time as a Sotheby’s International Realty Canada survey found that the vast majority of older Canadians want to stay in their current homes, in preference to downsizing or moving, for as long as possible.


Canada’s Housing System Is Cracking under the Crisis

Latest News & Economy DAZADA DIAMOND 24 Apr

Canada’s Housing System Is Cracking under the Crisis

Renters are asking why they should pay their landlords, while landlords fear losing their own housing.

Mazdak Gharibnavaz was laid off from his job at the end of February, and applied for B.C.’s emergency rent supplement as soon as applications for the program opened on April 9.*

Gharibnavaz was able to pay rent for April, but it’s a different story when it comes to May. He still doesn’t know whether he’ll get the $300 supplement by the time his rent is due, and although he was able to successfully apply for employment insurance, that benefit only covers up to 55 per cent of earnings.

Before the impacts of COVID-19 started rolling through the economy and Gharibnavaz was working full time, his $1,500-a-month rent already ate up half his pay check.

Now, with the prospect of that income cut in half and no idea when the $300 will come through, the math just isn’t adding up. Applications for another emergency benefit, a one-time $1,000 payment from the B.C. government, haven’t opened yet.

“With food and utilities, it doesn’t make sense to pay rent,” said Gharibnavaz, who also sits on the steering committee of the Vancouver Tenants Union.

“Just in terms of income, the percentage that it would eat up from what I get from EI would be overwhelmingly high.”

BC Housing staff said they have received 45,000 applications, are in the midst of processing 12,000, have sent 3,000 payments and are ready to send 1,100 more.

Renters and landlords feel pressure

Economists say this situation is completely unprecedented: a worldwide pandemic that has most people staying home, restaurants and other businesses closed, borders shuttered, and millions suddenly unemployed. In Canada, federal and provincial governments have rushed in with a number of income and rent support programs to try to stave off the worst of the economic damage.

In Vancouver, the city with the highest gap between housing prices and incomes in North America, renters have been left questioning why they should pay so much of their now meagre incomes to landlords.

Meanwhile, landlords — especially smaller “mom and pop” landlords who rent a basement suite or a condo — are anxiously wondering if their tenants will be able to pay the rent, so they can in turn pay the mortgage.

“These are a lot of people, their housing is contingent on them having a secondary suite, that’s how they got their mortgage financing for their principal residence,” said David Hutniak, the CEO of LandlordBC.

“They all have regular jobs or they’re pensioners on fixed incomes, and we’re getting a lot of very nervous folks.”

851px version of LandlordBCCovidCollectionGraph.jpg

Homeowners can apply for a mortgage deferral, an option the Canada Mortgage and Housing Corp. is now allowing banks to offer for CMHC-insured mortgages.

But that option doesn’t make sense to the most vulnerable homeowner-landlords. People who bought in the last three years are “heavily-leveraged,” said Hutniak, and absolutely depend on rental income from a secondary suite to make mortgage payments.

While mortgage deferral stops payments for a time, the interest continues to be added to the outstanding principle of the mortgage and “when your payments start again, your mortgage payment might be based on the total amount you then owe,” according to CMHC — meaning deferral will cost homeowners more in the long run.

‘Which side are you on?’

The B.C. government put an eviction moratorium in place on March 25, which has eased some fears, said David Hendry, an organizer with the Vancouver Tenants Union.

But he’s concerned that renters who haven’t been able to make a deferral agreement with their landlord could face eviction after the eviction ban is lifted, while those who have signed rent deferral agreements will just end up paying even higher rent payments after the crisis is over.

“Renters will not lose their homes during the state of emergency if they are unable to pay all of their rent, and the government is continuing to look at how to support renters coming out of this crisis,” BC Housing communications staff wrote in an email to The Tyee.

With high rents across B.C., but especially in Vancouver, Hutniak would like to see the B.C. government increase the amount that renters can get for the rent supplement (currently $300 for individual renters, or $500 for renters who have dependents).

The Vancouver Tenants Union is urging renters and small landlords to band together to push for a complete rent and mortgage freeze — not deferrals.

“We’re launching a campaign… to get small landlords to try to look at the big picture here and say, ‘Which side are you on?’” Hendry said.

“Does it make sense to try to get blood from a stone and harass your tenants, or does it make more sense to push pressure on your member of Parliament and the big banks and try to get real cancellation of mortgage payments?”

851px version of VancouverMortgageCovidGraph.jpg

But that idea raises alarm bells for Kevin Milligan, a professor of economics at the University of British Columbia.

Milligan consulted with the federal government on the design of the Canada Emergency Response Benefit, a $2,000-a-month benefit widely available to COVID-19-impacted workers even if they aren’t covered by employment insurance.

“I’m formally in favour of the… model where we front families the money and then they continue to make payments,” Milligan said.

“The economy is not set up for people to take stuff for free — in the same way that the right way to handle people who are short of money for food is to give them money to go buy food, rather than allow them to go and take food from the grocery store without paying.”

Despite the unprecedented shock of COVID-19, the economy can handle rent and mortgage deferrals, Milligan said, where the deferred payments are expected to be made up at some point in the future.

When it comes to how close Canada is to exhausting government’s financial resources, Milligan said “we’re not there yet” — but if the crisis continues much longer, that will change.

“The magnitude of the federal level intervention is pretty massive,” he said, with the federal government paying around $40 or $50 billion a month to fill in the gaps left by the halted economy.

Compare that to Canada’s normal monthly gross domestic product — $200 billion a month — and the magnitude becomes clear: federal interventions currently make up about a quarter of GDP.

“That’s why we all have to hope that the crisis abates soon,” Milligan said.

Will Vancouver real estate prices fall?

As to how the crisis will affect the wider real estate market, it’s anyone’s guess. Listings are down sharply, but realtors say some sales are still happening at pre-pandemic prices.

David Hutchison, a Vancouver realtor, said he expects to see that change the longer the crisis goes on. He said it’s unlikely banks will give mortgages to people whose only income source is the CERB benefit.

“People have asked me a number of times over the years, what would it take to shock the Vancouver housing market,” Milligan said.

“I’ve always said, ‘Well I suppose there are a few things and one of them would be give me 10 per cent unemployment and things would look very different.’

“Now I think we’re going to have 10 per cent unemployment.”

As for Vancouver’s notoriously tight rental market, Hutniak said he’s heard of renters, especially students, giving notice and simply leaving the city. And going by rental listings posted on Craigslist, some property owners are now listing their suites as long-term rentals because Airbnb bookings have dried up.

“There are going to be increased vacancies as we go forward… so in theory that will have some impacts on rents,” Hutniak said.

“But we were already at zero vacancy, so is it going to influence the wider market? I’d say not.”


One in 20 Homeowners Have Missed a Mortgage Payment Due to COVID-19

Latest News & Economy DAZADA DIAMOND 23 Apr

One in 20 Homeowners Have Missed a Mortgage Payment Due to COVID-19

While Canadian lenders stepped forward with unprecedented measures to assist those affected by the COVID-19 pandemic, there were still some homeowners unable to make their mortgage payments over the past month.

As many as one in 20 homeowners (6%) said they missed their mortgage payment recently due in part or in full to the ongoing pandemic, with another 5% declining to answer. That’s according to new data from Forum Research. The survey, which polled 1,335 people on April 13, found that of those who had already missed a mortgage payment, upwards of three quarters (76%) said they will miss another mortgage payment before the pandemic ends. Although Forum Research cautions that this is based on a very small sample size.

missed mortgage paymentsNearly half (46%) of the survey’s respondents said they were denied mortgage assistance, such as a mortgage deferral, from their financial institution, while 8% said they successfully received assistance.

According to the Canadian Bankers Association, as of April 9 nearly 600,000 Canadians had so far been approved for some form of mortgage deferral assistance.

Renters also reported a high percentage of missed payments, with up to one-sixth (14%) saying they missed a rent payment due to the pandemic. And of those who said they hadn’t missed a payment, 1 in 10 (13%) said they expected to miss a future payment.

Mortgage Rates Falling

Follow a rapid rise in mortgage rates last month, risk premiums due to market and liquidity concerns are falling by the wayside and lenders are quickly bringing their rates back down.

This includes both fixed and variable rates for new borrowers, with some lenders reducing rates by as much as 30+ bps over the last couple of weeks.

But there’s still a ways for them to fall in order to reach historical levels, according to some observers.

“This time last year, the lowest widely available uninsured 5-year fixed was 145 bps over the 5-year government bond,” wrote Rob McLister in a recent post. “Today that spread is 221 bps. If spreads get back to the 150-bps range in 6-12 months and bond yields linger around these levels, a new borrower with a $300,000 5-year fixed could save up to $17,000+ in interest over five years.”

consumer confidence chartConsumer Confidence Plunges

Unsurprisingly, consumer confidence in Canada has dropped off a cliff in the face of the COVID-19 pandemic.

The Bloomberg Nanos Canadian Confidence Index fell to its lowest level since it began tracking data in 2008, with a reading of 38.7, down sharply from a mid-50s range recorded at the start of the year.

The survey found an increased level of anxiety among consumers. Four out of five (79%) said they believe the country’s economy will worsen before it improves, which is up from 74% just last week. Prior to that, the last high was 57% set in 2008.

A full 36.9% of Canadians also said their finances have worsened over the past year, reaching a new record.


Recession’s on its way. How bad will it be?

Latest News & Economy DAZADA DIAMOND 22 Apr

Recession’s on its way. How bad will it be?

Sales, prices in Alberta’s housing markets going downhill

Real Estate DAZADA DIAMOND 20 Apr

Sales, prices in Alberta’s housing markets going downhill

Sales, prices in AlbertaAlberta continues to reel from the one-two punch of the oil shock and COVID-19, with Calgary and Edmonton posting downward trends in their home prices.

Sales in Calgary were more active during the first quarter compared to the same time last year, but the market’s average home price was almost flat with a miniscule 0.1% annual drop to $469,156.

“With a decline in listing inventory, we had expected to see modest price gains this spring. Now we are waiting to see how long the pandemic lasts and how much damage the economy sustains,” Royal LePage Benchmark broker and owner Corinne Lyall said.

Even if the economy opens up again as early as the end of Q2, Calgary’s average home price will still fall by 0.5% this year, down to $463,000. Should the virus impact last until late summer, the aggregate might decline by 4.0% annually to $451,300.

Meanwhile, the average housing price in Edmonton shrunk by 1.4% year-over-year to end up at $371,118 during the first quarter.

“Edmonton’s softened real estate prices and continued low interest rates were attracting buyers to the market as they saw good value in larger homes,” Royal LePage Noralta Real Estate broker and owner Tom Shearer said. “Now that the market has been paused by the pandemic, consumer confidence and employment levels will determine the new norm when market activity resumes.”

The long-term impact on the region’s prices is similar to Calgary’s prospects: If business activity resumes by the end of the second quarter, Edmonton’s aggregate will likely drop by 1% annually to $370,800. An economic restart by late summer will mean a decrease of 3% to $363,300.


CREA: National home sales weakened markedly last month

Real Estate DAZADA DIAMOND 17 Apr

CREA: National home sales weakened markedly last month

CREA: National home sales weakened markedly last monthThe coronavirus pandemic has drawn first blood as national home sales declined by 14.3% month-over-month in March, according to data from the Canadian Real Estate Association (CREA).

“March 2020 will be remembered around the planet for a long time. Canadian home sales and listings were increasing heading into what was expected to be a busy spring for Canadian realtors,” CREA President Jason Stephen said. “After Friday the 13th, everything went sideways.”

This offset the 7.8% annual increase in non-seasonally adjusted activity, and accompanied a 12.5% monthly drop in new listings.

The national average home sales price also went up by 12.5% year-over-year, but CREA Senior Economist Shaun Cathcart said that looking at this figure alone might lead to misleading conclusions about the state of the market.

“Numbers for March 2020 are a reflection of two very different realities, with most of the stronger sales and price growth recorded during the pre-COVID-19 reality which we are no longer in,” Cathcart said. “The numbers that matter most for understanding what follows are those from mid-March on, and things didn’t really start to ratchet down until week four. Preliminary data from the first week of April suggest both sales and new listings were only about half of what would be normal for that time of year.”

TD Economics supported these observations, saying that the outbreak clearly marked the beginning of a different, more challenging era.

However, “equally important is the fact that listings have cratered alongside sales, as pandemic pressures have forced potential sellers to the sidelines. This is keeping markets balanced and maintaining a floor on prices,” TD Economics said. “The sharp decline in March new listings (with another massive drop likely to occur in April) suggests that financial stresses have not (yet) compelled households to list their homes en masse.”


The Top 7 Misconceptions About Reverse Mortgages

Mortgage Tips DAZADA DIAMOND 16 Apr

The Top 7 Misconceptions About Reverse Mortgages

How much do you really know about reverse mortgages? Maybe you know that reverse mortgages can help Canadians 55+ access the equity in their home, tax-free. Maybe you know that tens of thousands of Canadians are using a reverse mortgage as part of their financial plan. But did you know that there are 7 common misconceptions when it comes to understanding reverse mortgages in Canada. As Canada’s leading provider of reverse mortgages, HomeEquity Bank can help set the record straight.

  1. If you have a reverse mortgage, you no longer own your home

Nothing could be further from the truth. You always maintain title, ownership and control of your home – HomeEquity Bank simply has a first mortgage on the title.

  1. You will owe more than the value of your home in the end

Also, untrue. Every CHIP Reverse Mortgage from HomeEquity Bank comes with a No Negative Equity Guarantee(1) which states that as long as you – the homeowner – have met your obligations, the amount you will have to pay on the due date will not exceed the fair market value of your home. In fact, over 99% of HomeEquity Bank’s customers retain equity in their home when they decide to sell, with over 50% of the home’s value remaining after the loan is paid back (on average).

  1. Only people younger than 62 can apply for a reverse mortgage

In Canada, the CHIP Reverse Mortgage is available to Canadian homeowners aged 55 and older. In fact, as you age you are more likely to qualify for a higher amount on your loan. A reverse mortgage is a lifetime product and as long as the property taxes and insurance are in good standing, the property remains in good condition, and the homeowner is living in the home full-time, the loan won’t be called even if the house decreases in value.

  1. Failure to make payments can result in eviction

This myth is one of the most common when it comes to reverse mortgages. The CHIP Reverse Mortgage does not require any monthly payments, meaning you can’t miss payments in the first place.

  1. Arranging a reverse mortgage is very expensive

This is also untrue. Much like a conventional mortgage, an appraisal of your property and independent legal advice is required, and your responsibility to pay for. The only remaining cost is a one-off closing and administration fee. When you compare this to the costs of “rightsizing” to another home, you will find a much more affordable option in a reverse mortgage.

  1. Reverse mortgages have much higher interest rates than conventional mortgages

While it’s generally true that interest rates are a bit higher than a traditional mortgage, the difference is not excessive. Plus, making monthly mortgage payments is simply not a viable option for many retired Canadians, and – even if it were – many would struggle to qualify for a traditional mortgage in the first place. For these reasons, many retired Canadians are choosing reverse mortgages over conventional solutions.

  1. You won’t be able to pass on your home to your children

The idea that your children won’t be able to inherit your home is a complete myth. Your heirs will always have the option of keeping the property by paying off your reverse mortgage after you pass away. Plus, HomeEquity Bank’s No Negative Equity Guarantee, (1) states that if the home depreciates in value and the mortgage amount due is more than the gross proceeds from the sale of the property, HomeEquity Bank covers the difference between the sale price and the loan amount. Therefore, you will never owe more than the fair market value of the home.

To find out how much you could qualify for, try our reverse mortgage calculator, or contact your DLC Mortgage Broker.