How will the market (and the banks) adapt to the new mortgage rules in 2018 – with Mortgage Jake

Speaker 1: Welcome to the True Condos’ Podcast with Andrew la Fleur. The place to get the truth on the Toronto condo market and condo investing in Toronto.

Andrew la Fleur: Okay, it’s my pleasure to welcome back to the show, returning guest. Always great to chat with, Jake Abramowicz, AKA Mortgage Jake. How you doing Jake?

Jake Abramowicz: Thank you Andrew, I’m off to a good start this year, how about you?

Andrew la Fleur: Doing well just getting back into the grove myself after a nice holiday break. And, here we are back talking about the market.

So, the new stress test B20 Stress Test is here.

Okay, now what?

Jake Abramowicz: That’s a good point, now what?

Andrew la Fleur: That’s a big question. What are your thoughts so far as in this new reality that we’re in?

Jake Abramowicz: I’ve been having a lot of chats about this with colleagues, with realtors, with the public. And I mean, I think that the first six months will be key in how this stress test gets adapted and accepted by the buying public.

But, I want to emphasize or stress, no pun intended. That, only about nine percent of buyers are affected by this test. And by, affected. It means that they simply can’t borrow as much as they would have liked too. That doesn’t mean that they are completely out of the market. They just might have to shift what they end up purchasing.

I also want to say that, there are lenders, very strong Credit Unions in Ontario, that can still underwrite under the old rules. However, they’re not very aggressive in their underwriting. They’re rather conservative. So, let’s not take that to mean that their skirting any rules or anything like that. They’re still taking a very moderate approach to their underwriting, but they’re still able to underwrite in the pre-stress test era.

So, we have options. We have lenders for now. But, at the end of the day clients will just have to adjust. And the reason I say the first six months is, I’m already seeing a couple of announcements from banks after the stress test was implemented, with regards to policy updates that, if it’s a pre-construction deal, purchased prior to the stress test being implemented. They will still underwrite under old rules. That was, TD and First National for example.

So, it’s clear that OSFI and the banks and lenders are all working together, every week and day and what have you. And I’ve been told that OSFI’s talking to the banks every day and monitoring the situation closely, which makes me happy to hear because, they didn’t just change the rules and throw the keys away and say. “You deal with it.” It’s clear that there’s a lot of back and forth dialogue with regulators and bankers. So, that’s good.

Because, if there’s a major change to the market we will see obviously, our economy will be hit simply because as I wrote in one of my blogs this week. 14% of our labor force is currently directly, or indirectly, related to real estate. So, in reality the government of Canada, has to keep our housing really strong.

So, the first six months will really kinda tell where we are in this test and how much of a major impact, or minor, it will have moving forward.

Andrew la Fleur: What’s your sense, what’s your vibe, in talking with actual purchasers. People buying especially, not so much investors but, people buying homes and condos for themselves as they come to you and they talk to you. What sorts of questions are they asking? Is there a lot of confusion about the stress test still? People understand it? Or, as you said it. It actually doesn’t really affect, that many people so it’s not really, a big issue at all.

What are your thoughts on that?

Jake Abramowicz: Primarily for single income purchasers. There is confusion and anxiety because, first time buyers now, can qualify for 23% less than they would have prior to the change. With 20% down or more.

So, in that case there was a lot of anxiety and I did a lot of pre-approvals for those people. But, in general, the buyers that have come to me after December 31st. I’ve quickly explained to them what’s happening and for the most part, people are not overly concerned because, for clients who have dual incomes, I’ll tell you. We have a very strong income base in Toronto with my clients. So, there isn’t too much of a worry.

And frankly, the stress test again meant, and I’ll put this really easy to numbers. Prior to the changes, you could have borrowed up to seven times income. After the changes now, you can borrow five times income. And you’d be surprised how many people I say. “Well, look. You can borrow five times income.” And they say to me. “Oh, we don’t even want to go that high. We’re looking at two to three times income based on our preferred budget.”

So, it’s not going to cause a huge market correction or ripples in the market cause, most people are not going to the levels that they can go to, anyway.

Andrew la Fleur: Right, right. Very interesting that you mentioned as well, and I’m starting to hear this trickle … This news trickling out as well about, lenders officially announcing that for pre-construction purchasers, contracts entered into before January 1st of this year, they’re being Grandfathered in. They’re still being able to qualify those people without the stress test.

Jake Abramowicz: Yeah. It was a very big surprise to me yesterday, that this announcement came out by TD and First National and I think, other lenders will follow suit.

But what happened is, when the stress test came out, I found that the majority of lenders and banks simply didn’t know what’s going to happen. And the same thing happened last time when the previous stress test was announced, the five to 19%; let’s call it the High Ratio Stress Test. Banks didn’t know how to implement it.

But, as time passed they realized. “Wait a second. There’s a lot of pre-construction buyers out there. That bought before and, they should be Grandfathered.” And, it happened. And the same thing looks like it’s going to happen this time.

Now, initially we were told if it doesn’t close in four months, new rules apply. Now, we’re told if you apply by May 31st, 2018 regardless of when you’re closing date, old rules apply. Okay, good. I’m seeing that lenders and banks are starting to adopt the policy the way that they feel is up for the risk tolerance.

And, that’s something that I want to emphasize. When the B20 rules are announced, there are general guideline for lenders to follow. They are not have to follow them to a T. Each lender makes their own policy based on the guidelines. So, I know of a couple of major banks that started stress testing as early as December 15th, and the majority of them went all the way to December 31st.

So, these are all internal policies that they’re creating and, those policies are very fluid. So, it’s clear that more lenders will come to the table with better news with respect to pre-approvals, Grandfathered old deals and what have you.

Andrew la Fleur: Big question I have along those lines is, this is going to potentially hurt lenders’ business obviously, eliminating some customers perhaps, or allowing some customers to take a much smaller mortgage than before. My question is, are lenders really just going to sit back and allow that to happen? Or are lenders actually going to adapt their own policies? Are they going to look at their debt ratios and things like that and adjust things so that, they can still take on more mortgages?

Jake Abramowicz: Very interesting question and here is a three part answer. First, renewals because, they are now stress tested. Lenders will be much stronger in the renewal department than ever before. So, if someone’s renewing today with any of the Big Five, any mortgage lender. They will have a much harder time to move that deal around. Therefore, the renewal side of the business will grow for the lender. So, that’s one way to offset the potential loss in revenue from new customers.

Secondly, I’m seeing …

Andrew la Fleur: Sorry, just to pause you there. Just, can you break that down a little bit more? What do you mean exactly by renewals? You mean when, somebody’s mortgage is up and they need to renew their mortgage, the five year term or whatever is up. Because, when they’re staying with the same bank, they don’t go through any stress test, right?

Jake Abramowicz: Absolutely none. Correct.

Andrew la Fleur: You don’t go through any approvals. The bank doesn’t check anything, they just give you the mortgage again.

Jake Abramowicz: They give you the mortgage again.

Andrew la Fleur: Assuming you’ve been paying for it. But, if you’re shopping around to different banks, is that what you mean?

Jake Abramowicz: Exactly. So, at renewal time the lender will give you a rate that will not be extremely competitive. Because, they know inherently, you are very comfortable with that bank or lender already. Now, that it’s going to be even more difficult for you to shop around at renewal because, of the stress test. The lender will be further … Will not have a further incentive to give you a great rate.

Andrew la Fleur: Right, right.

Jake Abramowicz: [crosstalk 00:08:39] with whatever.

So, that is one way that they will offset their losses and revenue from the new up customer acquisition side, by giving you a slightly worse rate than you would normally get.

And, I want your listeners to know that, lenders are absolutely not qualifying people unless, you make a big mistake, which is missing mortgage payments repeatedly.

Andrew la Fleur: Right.

Jake Abramowicz: A lender will qualify you on renewal by looking at your file. Looking at your risk profile overall, and your repayment history. And, if you’re late they will ask you again. “Hey, let’s take a look at your file.” It doesn’t happen very often but, it has happened.

So, always be one time.

But, that’s one way that lenders will offset this potential loss in revenue. Is by, keeping more of their current customers at higher rates. So, it’s very important to shop around because, there are still [crosstalk 00:09:29].

Andrew la Fleur: Right, right. That’s the key message there, yeah. Basically, if you have a mortgage that’s coming up, you can anticipate that. The offer that you get to renew it, is gonna be … It’s normally, not a great offer as you said because, they just play into the fact that most people just sign it and don’t even look at it.

But now, you’re saying it will be even potentially, be worse than usual too, because they know that it’s going to be harder for people to shop around because, it’s harder to qualify.

So again, the key message there is, you definitely want to speak to somebody like Jake or a great mortgage broker, who’s going to be able to advise you on, is this right competitive or not? Should you be shopping around or not? Can you qualify even to look at another lender or not? You may or may not have that option, I suppose now.

Jake Abramowicz: Absolutely. It’s a simple five minute call, I’ve done two of them today. Where, in both cases I advised the client, stay with your lender and here’s why. You’re in a contract position, you’re in-between work. You’re making less money. Reason X, Y, Z.

So, it does not … It’s not going to take you more than five, 10 minutes to assess with a broker but certainly, I recommend everybody at renewal time, figure out your options elsewhere. And, if you’re happy with your bank. Let’s get you get the best rates, right?

Now, another thing that’s happening, a new trend is. A lot of these banks and lenders are coming up with Alt Time Products, that if a clients not going to fit under the A Channel, AKA the best rate, the best terms. There will be sub prime, alternative prime products like a home trust, like an equitable bank. But, there will be much more competition in that space.

So, that’s another way that the lenders will simply, offset the loss in new customer acquisition by, placing them with a different set of products that might be priced higher but, will be a little easier to get the mortgage.

And third, I agree with you. Lenders and banks are not just going to let their profit margins drop because of this test. They will implement policies and make exceptions. One thing that I’ve been hearing about is longer amortizations. Higher GDS/TDS ratios, which are in plain English are, the percentage of income that can go to servicing your debt. Right now, the maximum typically, is 35 to 39%. That may increase as well.

So, there will be new policy changes coming, and they are fluid. But, they are coming, in order for these banks and lenders to become competitive and figure out a way of being able to offer buyers mortgages.

Andrew la Fleur: Interesting. Yeah, very interesting especially on the ratios there and how they may respond with that.

Cause I mean, every reaction there’s always a reaction, right? I mean, my first thing I always think of when new government policies like this come into place. I think, “Okay, how is the market going to respond?” I mean, the government is trying to interfere into a free market process. Socialism at work kind of, the thing. But, it is a free market so, there’s always a response to it. It’s always interesting to see how companies and individuals will respond.

And, there always is a response and, there always is … The market adapts and things change and it’s fluid and, we always freak out at first. But in time, we always adapt to everything.

Amortization, another one you mentioned. Five, 10 years ago 35-40 year Amortizations that was out there. That was normal. We haven’t seen those in a while. And now, what do you know? They may be coming back. It’s interesting … Old is new again.

Jake Abramowicz: Yeah. You know, you hit the nail on the head with the word “adapt”. I believe that this market will adapt and buyers will adapt to the changes. Just like they did in the previous go around.

Now, yes. Some buyers simply … With the previous stress test with the five to 19% high ratio buyers. Some people, very few, decided not to buy. They waited, they saved up some more money. Or they, increased their income. They changed jobs, what have you. But, overall, the majority of people, if they need it they get a co-signer. They get a gift from parents. There are ways that people adapt really easily to changes and, our market has been very resilient in the past and I believe, it will continue to do so moving forward.

Andrew la Fleur: Interest rates, this year. We’re now seeing some good news in our economy lately, things have been going well. Donald Trump is telling us is the greatest economy of all time, every day on Twitter and so on and so forth. But, let’s be honest, let’s be serious.

The economy does seem to be doing quite well overall. Job market and everything is looking quite good. Inflation is still super, super low. But, now they’re starting to talk about maybe two or three interest rate hikes coming this year from the Bank of Canada. Your thoughts on that and what mortgage rates might look like a year from now.

Jake Abramowicz: Yeah so, I do believe that next week we’ll see an increase by a quarter point by Bank of Canada. It’s basically already been forecasted and foreshadowed by the bank based on, the numbers that came out. Our jobless number is now at only 5.6 unemployment rate. One of the lowest if not, the lowest that we’ve seen.

I am very concerned that the majority of our growth is in FIRE, which is Finance Insurance Real Estate. I’m not concerned to the point where, that shouldn’t be a driver of our economy but, if on one hand the Bank of Canada is saying, “Housing is at a bubble or it’s at a peak.” As, they’ve been saying in the past. They’re trying to curb that growth.

On the other hand, our economy is growing, in large part due to FIRE again, Finance Insurance Real Estate. How are they going to balance that?

I’m also wondering what will happen when inevitably, NAFTA will get ripped up because, they are all basically, it’s been predicted that, that will happen. It will be major changes and impacts on Canadian exporters. So although, prime rate should go up at least, twice if not three times this year. I don’t quite frankly think, that it’s going to continue that trend upwards, after.

So, we can see today prime is at 3.2. We can see easily, a prime rate of 3.7 by the end of 2018, maybe even, 4.05 by that point … I’m sorry, 3.95. After that, I don’t believe prime will continue to rise. And let’s face it. 3.95 is still a very decent rate. Frankly overall, in the long term, fixed rates are also up, quite large. They’re up one percent over a year. Last year, a competitive five year was around 2.29 – 2.39. This year, competitive five year is around 3.29 to 3.49.

So, I’m seeing rates up across the board. Again, still in historically low levels. But, they are trending up. So, anyone who has a mortgage now, start prepaying as much as possible. Anyone that’s looking now, you’re still getting very attractive rates. And, not everybody is suitable for a five year, Andrew. And this is one thing I wanted to say is, clients call me and say, “What’s your best five year?” And my first question is, “Why do you want a five year?”

Sometimes you take a one, two, or three and it’s quite attractive under the three percent mark. But overall, most rates are increasing and we’ll see a mid three to high three range rate in fixed and variable by the end of the year.

Andrew la Fleur: So, what is the move right now? Classic debate. Variable versus fixed. I’m seeing variable rates at close to record lows on various sites and what not, that advertise rates. But you said fixed rates are quite a bit higher than they were a year ago, but at the same time probably going to be some interest rate hikes this year.

So, what’s the move right now? Variable or fixed?

Jake Abramowicz: Great question. So, if someone’s in a variable rate and, they’ve got a good discount off prime and that’s key. They got 75 to 100 bases points or percent off of prime. And they’re in the 2.3 to 2.4 mark and, they want to stay in variable. I’d advise them to stay put as long as, they’re setting their payment at least, 75 to 100 bases points higher.

So, if they’re paying interest at 2.4 they should actually, set they’re payment at 3.4 and, dump that difference into principle. And give themselves a one percent budgetary kind of, buffer.

If they’re unable to do that and they’re simply looking for lowest payment possible. Then, depending on the term they have left. I would consider they should lock it in.

Also, depends on mortgage size and where you are in your lifestyle. I had a client yesterday, call with a 1.5 million mortgage. That frankly, couldn’t really withstand much more of an interest rake hike and, I advised them to lock in and they will.

And, I had other clients in 220K mortgages that the values of their homes are a million and they had tons of equity and, they were happy riding the roller coaster of variable because, they’ve seen the rates come down and then now, they’re seeing them inch upwards.

It depends on the spread you have between what you’ve got available and, what the lender will offer you and, that will really dictate along with, how long will you stay in the property? Because remember, fixed rate mortgage penalties are much greater than variable penalty mortgage rate penalties if you break early.

So, we have to have that overall discussion.

Andrew la Fleur: Yeah. That’s a great tip especially for investors. One of the things that’s often overlooked is that term. The term of your mortgage. So many investors with condos, they don’t plan on holding that property for too long but, they forget they lock into a five year mortgage. They want to sell the thing after year two or year three. Kids gotta go to university or you want to buy something else or, whatever it may be. “Oops, I’ve got a five year fixed mortgage and my penalty for breaking this thing is huge.”

So, what is your advice to … How do you coach or talk to the … Let’s say the, condo investor who’s closing on a condo, needs a mortgage today and they’re debating the term of the mortgage. How do you sort of, coach them through that today?

Jake Abramowicz: Definitely two to three fixed or, five year variable. And, most investors are savvy investors, they know what they’re doing. They can withstand certain fluctuations and rates. Depending on the income coming in from the property as well, will dictate that discussion.

But, I’m 100% agreement with you Andrew. A two to three year fix is usually, the longest window that they will need a certainty in terms of, rate. But, after that, they may not know if they’re going to continue holding the property. So, it’s a long enough period but, it’s a short enough period.

Or, they go five year variable if, the property is very cash flow positive and they can withstand a bit of a rate bump.

Andrew la Fleur: Awesome. Great. Great chatting with you again Jake and getting an update.

Anything else is on your mind that you want to talk about as we are heading into 2018 with the mortgage market?

Jake Abramowicz: Well, overall I think that, the market will be healthy but, it will be primarily driven by consumer sentiment. I want to people to really focus more on the numbers and less on the headlines. I think that the media is doing a great job in the last few years of sensationalizing our real estate.

But in general, look beyond just the headline. Read it, talk to the experts yourself, myself and really get a good feel of what’s happening out there because, a lot of times what we read is not necessarily true and quite often, I point that out to the globe on social media.

And, it’s important to look past the screaming bad news.

Andrew la Fleur: Absolutely. More important than ever. Yeah, absolutely.

Great. And once again Jake, if people want to get a hold of you and get in contact with you, what’s the best way for them to do that?

Jake Abramowicz: I’m at mortgagejake.com. You can find me on there. I have a brand new website, it’s just being launched. I’m on social media under mortgagejake on Twitter and of course, you guys can call or reach out to me in email. 416-910-4448 anytime and I’ll make myself available, as always.

Andrew la Fleur: Great. Thank you Jake.

Jake Abramowicz: Thank you, talk to you soon.

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