More New Mortgage Rules Coming to Benefit Condo Investors?
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The Federal government has proposed another major new change to mortgage qualification in Canada. If approved, this change would add huge demand for condos – both to buy and to rent. Find out what these changes are and what they mean for condo investors with Jake Abramowicz – mortgage agent and returning guest of the show.
JAKE ABRAMOWICZ INTERVIEW HIGHLIGHTS
0:35 New mortgage changes that are potentially coming down.
2:57 What’s happening in the market right now?
5:16 Happenings in the variable side.
6:45 Prime rate news in 2015.
9:51 How can a Bank just arbitrarily have their own prime rate?
14:35 What is B20 Rule?
18:55 Housing Market overall.
21:08 Take on Warren Buffett & Berkshire Hathaway getting involved with Home Capital.
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, Jake Abramowicz. Jake is a mortgage agent with Mortgage Edge, and he is from mortgagejake.com. Jake, welcome back.
Jake Abramowicz: Thank you, Andrew. I love being on the show. I really appreciate it.
Andrew la Fleur: Yeah, we had great feedback from our chat last time we spoke in the fall. There’s some new mortgage changes that are potentially coming down the pipe and we want to talk primarily about that today. We’ll talk about a few other things before we do that, though. I’d love to hear your take on this, because last time you had a great take on things and we had some good feedback, so that’s what we’re gonna do today, if that makes sense.
Jake Abramowicz: Yeah, definitely.
Andrew la Fleur: Great. Maybe we’ll start with where we ended off last time, which was around the big little changes that came down the mortgage market in the fall, October of last year. There was a bunch of predictions and thoughts made on how it would affect the market, and who the winners and losers would be under the changes that came into place in the fall. Now that you’ve had quite a bit of time to sit on it and think about it, where do you see you were correct in your predictions and assumptions on what would happen, and where were you maybe, “You know what? I thought this was gonna happen, but it didn’t actually happen.”
Jake Abramowicz: Yeah, definitely. I think you were bang on on one of the predictions that we both got from that, which was the condo market was gonna remain strong because of affordability issues. Because if somebody can qualify before a stress test with 700 and then after it for 500, well guess what? 500 will get you more of a condo option than a house option in the GCA. What I thought was gonna happen that didn’t was the 750 to 999 house purchase price I thought was gonna soften a little bit, only because those buyers would be squeezed downwards, and it didn’t happen. Frankly, as you know, those values from 750 to 999 skyrocketed and went over a million.
Clearly what people did was they got around the stress test, and the stress test was geared towards buyers with less than 20% down, less than a million purchase price. What they did was they either increased the down payment to 20%, or they added mom, dad, sister, brother cosigner. That market was super strong, and then the million plus market in housing and condos … well, condos maybe to a lesser degree. You can speak to that more than I can, but in housing, especially was very strong. There wasn’t much of a material impact at all and that was surprising that no real market, except the first time buyer was only 5%. That’s the buyer that got squeezed the hardest, and got pushed down the ladder the most.
Andrew la Fleur: Interesting. What’s happening in the market right now, today as we record this interview in early July? What kind of rates are you able to give to your clients now, fixed rates, variable rates? What’s the trend right now on these?
Jake Abramowicz: Yeah. Good question. With the stress test that came out last year … I predicted another thing that I forgot to mention, which was there’s gonna be a great differentiator in mortgage rates. Before the stress test happened, if 10 people called me and they were all buyers, I could give them within a .1% to .2% difference in rates, a kind of a range, “Hey, you’re gonna fall in this bucket, you’re gonna fall in this bucket.” For the first time ever, we saw and we are continuing to see a mass differentiation in how each costumer’s being priced, investor, self-employed, refinance, condos, credit over 680, credit under 680. It used to be three or four questions I would ask to get you a mortgage quote. Sometimes now it can be as much as 15 before I can know what quote I can give you.
The fact of the matter is, if you have less that 20% down, and I know this will sound very opposite the proper theory, but if you have less than 20% down, you will continue to get the best rates. That’s because the lenders and banks can securitize the mortgage and sell it off to CMHC, and essentially have no skin in the game if there is a default. With 20% down, or more, they now have to have either more of a risk tolerance and/or put up their own money, so those mortgages are seeing a bit of a higher rate.
Right now, the typical five year is around 259, a week ago it was around 239, and those rates are only going up with RBC announcing an increase in their rates. When that kind of thing happens, when a five-year money up but not the one through four-year money, what a lot of smart clients do is they shift their targets, they’re taking a shorter term, and playing the short game, rather than sticking in to a longer term. That, again, depends on each client’s needs and wants and preferences, right?
Andrew la Fleur: Right, right. Fixed rates are sort of trending up a little bit right now. As you said, RBC has come out and said they’re raising their rates a little bit. Of course, we’re talking about, still, historic lows overall.
Jake Abramowicz: Yes, minuscule.
Andrew la Fleur: Minuscule. What about on the variable side of things? What’s happening there?
Jake Abramowicz: As of this morning, again I believe last Friday in July, the jobs numbers just came out and now there is a 96% chance of an increase in rates either in July or September, and that’s shot up from 30% just a month ago. It’s pretty much guaranteed that the Bank of Canada has given such a strong language that rates will rise, and they were waiting for today’s report. The jobs numbers came out strong. It’s almost 100% chance that rates will rise. Now, I want to quantify this because you made a good point. Minuscule, very small rise in rates.
A quarter point rise in your interest rate on the variable rate mortgage equals $12 on 100,000. If you owe $1 million on your mortgage, you will pay $120 more if rates go up by a quarter point. To me, that is absolutely no reason to panic and suddenly decide that you have to lock in, because if you lock in, you’re going to face much higher penalties if you break. You might be locking in at a much higher rate than what you could get should rates come back down, which they very well might because rates move with seasonality, just like the housing market. It’s expected rates will go up by a quarter point. A quarter point does not mean very much in your overall house budget and mortgage payment, but it is still an increase in your rate and it is still an increase in your cost, so be aware of that. That’s where rates are headed on the variable side.
Andrew la Fleur: Now, here’s a question, back in 2015, when the prime rate went down in response to the oil crash, if we recall, the banks did not pass along the full decrease in that rate to variable borrowers. There’s much consternation amongst the variable borrowers, myself included, when that happen, but now that rates are going up, what do you think is gonna happen? Will all the banks … If rates go up a quarter point, will all the variable rates go up a quarter point? Or will they say, “You know what? We took too much from you 2015, we’ll give it back to you now.” What do you think is gonna happen?
Jake Abramowicz: No, it’s a great question, and I’m smiling because I just had a chat with my colleague and we made a bet, $100 bet. There is, in my opinion, no chance that if a bank has an option to increase rates by a quarter, that they won’t do it. For example, TD Bank’s prime rate is 285 and everybody else’s prime rate is 2.7, and the real prime is 2.5. I don’t believe any single lender will say, “You’re right. We’re gonna give you guys only a 15 bump, or a 10 basis point bump.” It’s gonna be the full quarter point bump. I fully, fully believe that, just because banks, at the end of the day, they’re profit machines and the driver is shareholders. I don’t think that they’ll pass on the savings to us. I don’t ever remember when they have.
Andrew la Fleur: Right.
Jake Abramowicz: Unfortunately.
Andrew la Fleur: At the same time in 2015, we never … At the time, we said we’ve never seen banks do what they did there, which was not pass along the full rate type, which was sort of an unprecedented move at the time.
Jake Abramowicz: No.
Andrew la Fleur: I think-
Jake Abramowicz: It did happen once before.
Andrew la Fleur: It did?
Jake Abramowicz: It did happen in 2007 or 2006, I believe. Don’t quote me on the number, but I’ll find out for you and give you a quote on it. It happened before, but the NDP government back then, they were not in power, but they were a pretty vocal opposition party. They made such a stink about it that eventually, the banks that, “Okay, you’re right. We’ll match the prime of Bank of Canada.” Yes, on the way down the banks have to limit their “losses” they’re not losing money but they’re losing profit. On the way up, there’s no limit to that, so there’s no reason why, in my opinion, they would say, “Hey, we were wrong a couple of years ago. We’ll do right by you now.” I just don’t believe it’ll happen. I know that, theoretically, they absolutely should say … If prime goes up to 275, you should really only go to 275, because right now your prime is 27, or 285, if you’re with TD.
That’s not gonna happen. I think a quarter point bump will be a quarter point bump, and we’ll always see, from now on, kind of a … Until prime is much higher, prime not being what true prime is. That’s why most of your mortgage contracts say, “Your prime rate is linked to the bank of Royal Bank of Canada, TD Canada Trust, or Scotia Bank Prime,” because a lot of these mortgage lenders link their primary not to the Bank of Canada. As a matter of fact, nobody does. They don’t want to be caught flat-footed saying, “It’s linked to BLC, it’s linked to RBC.”
Andrew la Fleur: Right. We’re getting technical here, but I think it’s an interesting question to ask, is just to understand how can … maybe you know, maybe you don’t know, but how can the banks just arbitrarily have their own prime rate when, like you said, like 95% of the time in history, the prime rate has been tied indirectly to the Bank of Canada prime rate. Why is it now they said, “You know what? Uh, we’re just gonna make our own primer rate.” Like how is that doable all of a sudden?
Jake Abramowicz: It’s a great question. I think the problem is that lending is a very fluid environment, and nobody foresaw a seven-year low in rates. Really no one forecast …. A typical rate cycle is about five years. Now we’re in year seven, where finally rates are going up. I’m gonna get to that in a moment about why rates are going up, besides the economy growing.
I just feel like the banks have maybe missed their own forecast, which is very possible. Economists are not always right, as we know. 50% of the time, actually, they’re probably wrong. The banks just simply said, “Oh yeah, we’ll give you the prime reduction. We’ll give it to you.” Wait a second. Hold on a second. Oil crash. We’re borrowing money at the overnight rate, we’re gonna lend it to you at the prime rate, so there’s not enough of a juice for us here, we’re gonna have to adjust this because rates have been so low.
There’s not a stake being made. You know why? Because rates are 2.7, 2.5, and not 4.7, 4.5. If we were talking about 4.7% versus 4.5, I think there would be much more vocal opposition, especially if prime went up from 1% to 2%. By then, I think more and more Canadians will come in tune and say, “Wait a second. There’s a 20 basis point spread here. Let’s get that back to normal,” but it’ll give the banks enough catch up time. Right now, I just think that they were able to make this decision because they’re the ones lending the money. At the end of the day, they set the rules. Kind of a monopoly, if you think about it. When Shell, Esso, and Sunoco all have the same gas prices, what’s going on? It’s kind of the same thing, but [crosstalk 00:11:39] strong players in the market, so what’s the alternative, right?
Andrew la Fleur: Right, right.
Jake Abramowicz: I wanted to touch on one thing about rising rates in variables, because I just didn’t want to forget this part. Although I do believe the economy is getting better, I still think the Bank of Canada is making a little bit of a mistake. We still don’t know what the full effect of the Trump administration will be on our trading with the United States. When you hear the IMS and the OECD [callinng 00:12:03] Canada, you guys have a vast field of value, whatever, problematic housing market. I believe a lot of this change in direction has to do with external foreign pressures and not just local national economy, so we’ll see how much rates will go up. I truly don’t believe they’ll go up more than 50 basis points within a year. A quarter now, see what happens.
We have to remember the higher rates go, the less people have to spend on certain things like vacations, shopping, going out, and the economy will then suffer again and then rates may come back down again. A 50 basis point jump is not the end of the world, in my opinion, or even a 45 point jump. I think they’ll be very slow, but I think they’re doing this because the U.S. has done it as well and they’re like, “Wait a second. We gotta kind of lock in step here and march in with them too.”
Andrew la Fleur: Yeah, it’s only attractive, like we could talk about this all day. You can start talking about oil prices, you can start talking about the effects on the Canadian dollar, and stuff.
Jake Abramowicz: Totally.
Andrew la Fleur: Yeah, I would agree that … It seems to me that a lot of it is external. If you talk to exactly the average Canadian on the street, so to speak, has the economy grown? I think it’s better off suddenly, we need higher interest rates, kind of thing, when most people would say, “No.” Their experience is it’s not really any better. If we talk to somebody in Alberta about higher interest rates [inaudible 00:13:31] charge you for treason, right?
Jake Abramowicz: Yeah, yeah. That’s [crosstalk 00:13:35]
Andrew la Fleur: It’s an interesting point.
Jake Abramowicz: Canada doesn’t have a Canada housing market, it’s a big, big geographical area. Actually funny enough, today’s job reports reported strong numbers in Alberta, part-time jobs, and in Quebec. Well, guess what? We’re not seeing those impacts here in Ontario, and yet everybody’s prime rates will go up, right? Yeah, we’ll see what kind of impact they will have, and how much they will go up and when, but I don’t believe that it’s gonna be a dramatic turnaround all of a sudden to 4% or anything in that region.
Andrew la Fleur: Interesting. Okay, let’s get to the heart of the matter here, which is why I wanted to talk to you primarily, which is these proposed changes from [inaudible 00:14:16]. Once again, potentially, you’ve been tweeting about it, writing about it, Facebooking comments and stuff, potentially huge here. Tell us what are these changes? How likely are they to happen? What is gonna be the impact of them, in your opinion?
Jake Abramowicz: The changes that are proposed for now just came out on Wednesday. Technically they’re called B20 updates. Last year the B20 rules came out, and the recommendation was anyone between 5% and 19% down, have to be stress tested to prove that they can afford a 2% jump in their interest rate at renewal. Now the proposal is everybody, no matter of the down payment, 5% or 50% down have to be stress tested. If you take a 2.59 mortgage from a bank, five-year fixed, you’re not gonna qualify at that number. You’re gonna have to prove through your income that you can afford 4.59, so they’re looking at a 2% variance between qualifying and between actual contract rates.
For the record, because a lot of people ask me, no you’re not gonna pay 4.59. You just need to show that you have the financial resources to do so, if rates were to go up. What kind of impact this will have is very easy to quantify. Right now, if you make 100 grand, let’s just use that number because it’s nice and even, you can borrow seven times your income, if you have 20% down, so about $700,000 – $720,000. Under the new rule, you’ll only be able to borrow around 5.2 to 5.5 times your income. That wipes out 150,000 to 180,000 in mortgage affordability. That’s a big number.
You know, Andrew, you were one of the first people that I saw on social media that made the following point: when this happens, guess who’s gonna benefit? Condo owners, condo investors, because that’s the lowest hanging fruit for a buyer to get into a market, the first time buyer especially, where they’re priced out of houses. No, I don’t think that the [inaudible 00:16:16] me that going for a million still will be 900,000 overnight. Yeah, maybe it’ll soften a little bit in price, but the condos will be the biggest benefactors of this, and houses will be the biggest ones to lose, especially the higher you get in the price scale. Until you get to the luxury market, where two million plus, two million five plus, it doesn’t matter. You’ll qualify because there’s a lot of buyers with big down payments, big incomes, and big cash.
I think the million to two million market will suffer, the suburbs will suffer, the condos will be great because of this change, if and when it happens. This is a proposal by the bank of Canada and the Federal Ministry of Finance. What could happen now is the banks will come in with the lobby groups and say, “Hold on a second, guys. What about a 1% variance in prime, or to the rate instead of 2%?” There may be some modifications to this, but I truly believe that this will happen in like a month to three months, and this will be the new stress test for everybody involved.
Andrew la Fleur: Wow. So you think it is going to happen? I mean, this is a dramatic change. It was one thing to put it on the under 20% crowd, but now to put it on everybody, you’ve gotta show that you can pay a mortgage that’s 2% higher than the mortgage rate you’re actually getting. I mean, if you’re getting variables, like 2.5% higher-
Jake Abramowicz: Right, but suck it up. The variable rate mortgages have always qualified at that standard.
Andrew la Fleur: Right, right.
Jake Abramowicz: People who qualify for variables have already passed the stress test. As a matter of fact, not to throw too much water on the market, but the fact is, I stressed that, so a lot of my buyers had 20% down anyways, because I tell them, “Guys, in five years we may see 1% jump in rates.” Or, “I want you to pay this down ASAP. If we pay it down now, you’re not gonna have much of an impact.” Not every broker, not every banker does that activity, and some buyers don’t qualify under the stress test. We’re not gonna see a massive exodus of buyers, we’re just gonna see an adjustment in expectation, just like we did with the original stress test that came out.
It’s not gonna be good for housing. It’s not gonna be a great thing for the housing market when there is less money to borrow, that’s for sure. I know why the Bank of Canada and Federal Ministry is doing it, it’s just because they’re afraid of if rates do tremendously go up in the future, then what? What will happen to the Canadians who have battled with the debt?
Andrew la Fleur: Wow.
Jake Abramowicz: Yeah.
Andrew la Fleur: Interesting times.
Jake Abramowicz: Unfortunate.
Andrew la Fleur: Yeah, we’re seeing this huge … all this turmoil in the market, but the bottom line is if you look at the housing market overall, we’ve got approximately 100,000 coming to GTA every year and we don’t have enough houses for them to come in. We’re punting the problem really down the road, I think, because-
Jake Abramowicz: We are.
Andrew la Fleur: … we’re just … Okay, they’re trying to mess with the demand side of the equation, as opposed to the supply. They’re trying to pull out buyers left and right, but those buyers eventually are gonna buy. It’s not like people are gonna say, “Well, the government’s just making it too difficult to own a home, I’ll just rent for the rest of my life.”
Jake Abramowicz: No.
Andrew la Fleur: No, you’re just delaying it, delaying it, delaying it. Eventually, another tsunami of buyers are gonna hit the market, maybe it’s next year, maybe it’s two years down the road, three years, and we’re gonna be right back where we started.
Jake Abramowicz: Don’t forget that this is the liberal government that’s doing this. The fact of the matter is, if there’s a change in platform in two years when the next election happens … I think it’s in two years, well, guess what?
Andrew la Fleur: [crosstalk 00:19:53], yeah.
Jake Abramowicz: Yeah, the conservatives have been really the drivers of this market, if you think about it, because they brought in the exotic loans and these zero down, 40 year [inaudible 00:20:03]. They’ve brought in lower rates, they never announced any stress test. They let the market do what it wanted to do. I’m not being pro liberal, pro conservative, or anything here, I’m just saying if the market, if the government changes, that could change things, as well. It’s for the better, from a borrowing standpoint. This is not forever. Right?
Andrew la Fleur: Right.
Jake Abramowicz: What I’m really worried about, though, is people who need to refinance. If someone needs to refinance, they should do this now because, if they won’t qualify under the stress test, well guess what? They’re gonna have to go to a private lender, and instead of paying 2.5, 2.7 on the mortgage, they’ll pay 10% to pay off their 20% credit cards, right? I don’t want that to happen. I want people to borrow at the lowest possible rates to get out of that ASAP and then to use that equity to keep investing. Because over the long haul, as you’ve seen, Andrew, it’s the best place to park your money as far as I’m concerned, is more housing.
Andrew la Fleur: Absolutely, 100%. While I have you, we might as well touch on the Warren Buffett and the Home Capital, I’ve done podcasts and stuff on it, but would love to hear your take on Warren Buffett and Berkshire Hathaway getting involved with this Home Capital. There was a lot. Again, a lot of concerns and worries about that a month of two ago, but no one’s really talking about it anymore. What are your thoughts?
Jake Abramowicz: From a broker’s perspective, I’ve always used Home Capital, or worked with them as a big partner of mine. Right now they are still limited in terms of what they can do. The rates are higher, the mortgage amounts are somewhat restricted, the [inaudible 00:21:37] of values, meaning how much mortgage against your value they’ll give you, but they’re really coming back. I’m seeing a lot more action and conversation from them. The sheer fact that Buffett came to the table, in such a short time, was such a good investment. He’s not selling this investment anytime soon, at least that’s what he said. He’s got a soft spot in his heart for Canada. It made me really, really happy to see that, because that … the idiot, Marc Cohodes, the guy who is the short fellow, the most vocal opponent of home capital, he’s made his billions. He’s made his money already, but that guy just needed to be put in his place, and who better to do that than a soft spoken, quiet investor that’s really potentially the best investor in the world, to do that to him.
Because really, if I was to bet my money on Marc Cohodes verus Warren Buffett, I would put my entire earnings, or net worth into Warren Buffett any day of the week and twice on Sunday. I think it was a dramatic turnaround. It’s helped the other lenders that are in the space turn around. It’s brought a lot of confidence back to those lenders. They know there’s a lot of capital, like Equitable Bank, Canadian Western Bank, which is optimum. The alternative prime space, which is growing, is getting better. That’s great, because there’s a ton of people that fit in that mold that pay a little bit more under rate, but get mortgages done, and we need to service those people because they’re as equally important as are the prime super credit, super income buyers, right? Everyone deserves a chance to borrow money if they can prove that they can pay it back.
Andrew la Fleur: Well said. Yeah, very well said.
Jake Abramowicz: It’s a good thing. It’s outstanding. It’s fantastic. I fell off my chair when I saw it, and I kicked my trading broker because I had a buy order for Home Cap at 690 and it didn’t get filled, and now it’s at $16. But that’s okay, because I’m more happy that the industry felt a positive reaction that my pity little profits that I would have made a big deal.
Andrew la Fleur: You were gonna buy at 690, but it bottomed out at $9, is that what you’re saying?
Jake Abramowicz: No, no, I bought it at … It bottomed out that day at 710, 720, and I just kept having like a bit of a supplement on it and my order just never got filled. Then, to be honest with you, July was such a busy, busy month that I kind of was just not paying attention to what was happening to Home. I’m not a trader, by any respect, I just play with the little bit of money here and there on the market, but I was very close to the situation. Then I see Buffett’s name and I’m thinking … because I heard a lot of rumors. I heard other companies that were looking at buying in and there was, supposedly, 70 suitors and in three days, the guy picks up the phone, doesn’t do research on his airplane, and decides to buy into it. That’s amazing. I’ve push those 70 people aside and look what happened.
Andrew la Fleur: He’s so smart, so smart too, right? I mean-
Jake Abramowicz: Yeah, it is big.
Andrew la Fleur: … he takes the debt side and he takes the equity side.
Jake Abramowicz: Absolutely. It got him out of that super high interest that they had. The way it happened was amazing. I just hope, obviously, that Home when it comes back fully, will be as strong as they were because they’re a very important player and a very good player in our market, and they serve a lot of customers that need mortgages, so yeah.
Andrew la Fleur: Which is exactly what Warren Buffett said in his interview with the Globe and Mail was basically, “Look, like not everybody fits the mold. Like you need lenders like this in the market to … They serve a very important part of the market.” He said, “Look, if you looked at my, if I did a mortgage application myself, I probably wouldn’t fit the mold of what the big banks are … you know, you have to fit in this neat and tidy box,” he’s like, “I probably wouldn’t fit in that box myself.”
Jake Abramowicz: No, no, I know. It was so funny because the interviewer said, “I’ll lend you money. I’ll lend you money, Mr. Buffett.” He was right, he takes a very small salary, a very small salary, considering his net worth. And guess what? That borrower today, if he called me, I don’t know if he’d qualify for a typical mortgage at a big bank at that salary, so there you have it.
Andrew la Fleur: Warren-
Jake Abramowicz: [crosstalk 00:25:46] ways.
Andrew la Fleur: Warren Buffett probably couldn’t get a mortgage on a typical Toronto house, there you go.
Jake Abramowicz: That’s it. That’s the full headline on Huffington Post tomorrow.
Andrew la Fleur: Yeah. He bought his own mortgage company, so he could get a mortgage. He’s moving to Toronto.
Jake Abramowicz: That’s it, that’s it. Then he buys the $30 million [inaudible 00:26:03] estate, there you go. Overall, I was thrilled to see it. There’s been no follow-up negatives of it and why would there be? It’s just interesting. We’ll see what continues down the path. You know?
Andrew la Fleur: Right, right. Great. Okay, Jake, it’s been great chatting with you. If people want to get a hold of you, what’s the best way for people to do that?
Jake Abramowicz: Best way is you can find me on Facebook, just Google facebook.com/mortgagejake. I’m all around twitter @mortgagejake. And you can always call me, 416-910-4448. I’m always around, I love what I do. I’ve been around for a long time, and I’ll give you the goods if you need any help, any questions, problems you have, let me know and I’ll give you my advice.
Andrew la Fleur: Great. Thanks, Jake.
Jake Abramowicz: Thank you, Andrew. I really appreciate the opportunity and good luck to all your investors and buyers.
Andrew la Fleur: Thank you.
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