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Old way-new way FB A recent Scotiabank survey reinforced what most of us already know: the Internet is radically changing banking.

The bank found that:

  • 96% of Canadians rely on the Internet for information.
  • 89% of Canadians say it’s easier to get info online than through other sources.

In turn, by 2020 less than 1 in 10 financial transactions will occur in branches, predicts Scotiabank CEO Brian Porter. “At the same time, we expect sales through digital channels to increase materially – likely in excess of 50% of total products sold,” he told the Financial Post.

That’s exactly why the company has invested billions in fintech, including a new technology “factory” in Toronto, which will house 350 new online engineers and designers. There, it hopes to spit out brand new web tech that will do things like simplify the mortgage application process (which its “Rapid Lab” team is already piloting at certain Scotiabank branches).

“We’re moving from a paper-based approach to a more technology-enabled, digitized approach,” a spokesperson told Reuters.  (We can only hope that includes e-Signing, something customers love for its convenience.)

All of this is shifting employment at the bank. While Scotiabank is ramping up mortgage tech jobs, it announced job cuts to its adjudication centres and mortgage operations last fall. There’s no better glimpse of human resource efficiency than at its Tangerine subsidiary. Tangerine serves two million customers with just 1,000 employees (compared to 23 million with more than 89,000 employees at Scotiabank).

Tailored Pricing

Half of those who use the net for research feel overwhelmed by the amount of data it presents. So it’s no surprise that 70% of Canadians still rely on advisors for mortgage advice. Seventy per cent is a lot but it used to be closer to 100%, so times are changing and Scotiabank knows it.

With consumers comparing rates online, pricing is more of a factor than ever. That’s partly why Scotiabank has quietly joined the low-frills mortgage movement. Its new “Value Mortgage” follows the lead of BMO, which has had a stripped-down mortgage since 2010.

Compared to Scotiabank’s regular mortgage, the Value Mortgage has:

  • A rate that’s roughly 10-15 basis points lower
  • 10% lump-sum prepayments instead of 15%+
  • Once-a-year lump-sum prepayments or payment increase instead of the ability to make them anytime
  • An annual 10% payment increase option instead of 15% plus double-up
  • 90-day rate holds instead of 120 days
  • STEP product not available
  • No porting

The Value Mortgage has no refinance restrictions, which is a big plus compared with BMO’s “Smart Rate” mortgage, but the lack of portability could be a major turn-off. It requires borrowers to potentially pay a penalty in order to move their mortgage to a new property. Albeit Janet Boyle, Vice President, Real Estate Secured Lending assures, “We will work with customers up front to ensure they are selecting the term that is right for them and fits with their future plans.”

Scotiabank’s low-frills pricing is currently only available in branches. When asked if the product will be available to brokers, who account for roughly 40% of Scotiabank’s volume, Boyle said there are no such plans “in the immediate future.” That’s largely because brokers already have access to deeper rate buydowns than branch reps.

Scotiabank-Logo-PNG-03791-1Encouraging Conversations

Scotiabank now offers three brands of mortgages:

  1. The “Value Mortgage”
  2. The “Flexible Mortgage” (Scotiabank’s regular mortgage)
  3. The “Rewards Mortgage” (which comes with an annual cash reward and Scotia Rewards® Points)

This isn’t by accident. The bank intentionally wanted to create more customized mortgage options.

“We did a lot of behavioural research on what customers want to pay for,” says Boyle, who acknowledges that the Value Mortgage “appeals to a very small segment of borrowers.”

“The approach of having three mortgage solutions has really worked well for us on a national basis,” she says. “Customers like to research on the Internet but they prefer to sit in front of a person,” and having different options lets Scotiabank bankers strike up a dialog about what needs and goals are important to clients.

As for pricing, the bank is constantly investing more in data analytics to better understand its customers. Ultimately, says Boyle, “The customer profile and their relationship with the bank determines the rate.”

 

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Last December, the credit union trade group released a paper on credit unions’ role in the mortgage industry. While somewhat belated, it contains statistics worth mentioning and statements worth debating, not the least of which is their take on mortgage brokers.

Here, in no particular order, are some of its key points. The source is the Credit Union Central of Canada (now called “Canadian Credit Union Association” or CCUA):

CUs in the Mortgage Market

  • 58%: The percentage of credit union loans that are residential mortgages
    • In 1961 it was just 12.7%.
    • “…residential mortgage lending is now at the centre of credit union business,” notes Rob Martin, author of the report.
  • 8.9%: The average annual increase in mortgage balances at credit unions, from 2009 to 2014
    • Compared to 5.5% at banks over the same period.
  • Mortgage market share (outside of Quebec):
    • Highest penetration: 35.9% in Manitoba
    • Lowest penetration: 4.5% in Newfoundland
    • Ontario: 5%
  • 380: The number of communities in Canada in which a credit union is the only financial institution physically present.
    • It’s truly hard to overstate the importance of credit unions to small and rural communities.

Default Statistics

  • 0.29%: Mortgage arrears rate among federally regulated institutions (e.g., banks)
  • 0.13%: Mortgage arrears rate among provincially regulated institutions (e.g., credit unions)

“Credit union mortgages have very low arrears when compared to other institutions…below that of all other institutions with mortgages in [mortgage-backed securities] pools,” according to the report.

Sound Underwriting

Credit Unions FB

In the past, competitors have knocked certain credit unions for their higher loan-to-values, lower qualifying rates, stated income programs, cash-back mortgages and/or longer amortizations. But these criticisms don’t reflect the underwriting prowess of credit unions.

In actuality, the report notes that when compared to other lenders’ CMHC-insured mortgage performance, credit unions:

  • Make fewer default insurance claims 
  • Have lower early delinquency rates (EDRs)
  • Have a higher Misrepresentation Susceptibility Index (MSI) score, meaning they’re better able to detect mortgage fraud and other misrepresentation by borrowers, and
  • Arguably have better knowledge of their local markets, since they lend in their own communities.

Potential Effects of an Insurance Deductible

CMHC has publicly disclosed that it’s evaluating ways for lenders to share more default risk on insured mortgages. Speculation is that CMHC may impose a deductible on lenders when they make an insurance claim.

To that, CCUA says, “If a deductible is significant, the likely impact will be increases in mortgage credit costs for consumers and a reduction in mortgage credit availability for…home buyers. The impact of these changes will be most significant for lower income Canadians, Canadians living in rural/remote regions, or in areas with a fragile economic base.”

It adds: “These outcomes would…be at odds with CMHC’s role to serve underserved areas and fill gaps in the market.”

Effects of Low-Ratio Insurance Tightening

CMHC has cut back insurance for mortgages with a loan-to-value of 80% or less. It has also increased the costs to lenders for insuring and securitizing those low-ratio mortgages.

CCUA states: “…the elimination of low-ratio transactional mortgage insurance may have [a] similar negative impact on…homeowners in small urban centers and rural areas.”

Low-ratio insurance is vital to certain credit unions that operate in illiquid local housing markets. That’s because insurance mitigates property risk—important with rural properties that have less certain valuations than active urban properties. Low-ratio insurance is also key for securitizing mortgages on smaller market properties.

Credit Unions and Mortgage Brokers

Here’s where the paper gets a bit questionable.

CCUA commented on the rising use of mortgage brokers, which it says increased their share of mortgage originations from 22% in 2005 to 31% recently.

CCUA positions credit unions’ “limited reliance on mortgage brokers” as an advantage, stating:

“This development points to an increased commoditization of mortgage products and a general decline in consumer loyalty to a single financial institution when seeking a mortgage…Consumers are increasingly willing to look beyond their primary financial institution for a mortgage and they are making a choice of institution largely on price.”

That begs the question, what is the implication? Do they mean that if you’re a consumer who doesn’t prioritize loyalty and wants an outstanding rate, CUs aren’t for you?

The report says the big six chartered banks source 27% of total mortgage customers through mortgage brokers, whereas CUs obtain 18% of members through the mortgage broker channel.

“The lower reliance of credit unions on mortgage brokers should not be surprising given the stronger customer satisfaction and loyalty displayed by credit union customer/members,” Martin notes, citing “FIRM survey” data to back his argument.

That’s one heck of a claim, and a somewhat specious one at that.

Perhaps if more CUs acknowledged consumers’ growing broker preference, and perhaps if more CUs chose broker distribution, the credit union industry wouldn’t be stuck at just 8% market share, a number that hasn’t grown materially for years.

Credit unions offer exceptional service and support their communities admirably, but they don’t get enough exposure. That exposure is exactly what brokers deliver. This fact is evidenced by:

  • Established lenders like Scotiabank—the top lender in the broker channel, and one that relies more on brokers to bring in mortgages than its own retail channel
  • New lenders like Manulife—which strongly endorsed brokers with its recent entrance into the market
  • Credit unions themselves—witness the robust mortgage growth of broker-channel CUs like Meridian, DUCA Financial, Coast Capital Savings and many others.

CU executives who buy into the proprietary distribution argument better have a foolproof online marketing plan or an inspired local marketing strategy. Otherwise, they’re missing out on a tremendous funnel of new business through the broker channel. Brokers deliver highly qualified borrowers for a one-time fee. CUs then keep all the renewal and cross-sale revenue for their members—not too shabby a deal.

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Back in December when the finance department hiked minimum down payments, it said the change would “dampen somewhat the pace of housing activity over the next year.”

If “somewhat” means “barely noticeable,” then the regulation has achieved its goal, at least in Toronto and Vancouver.

Effective February 15, the minimum down payment rose — up to 2.5 percentage points — on homes between $500,000 and $1 million. Since then, there’s been no perceptible slowdown in Toronto and Vancouver home sales. Those two cities, which are among the fastest-appreciating markets in Canada, were the primary targets of the Department of Finance’s new policy.

 

Vancouver Avg home price

In the first full month following the rule change, the Canadian Real Estate Association (CREA) says that sales of single-family homes over $500,000 were the highest ever in March, in both Toronto and Vancouver.

“While it is still premature to reach a verdict on the efficacy of this measure to cool Canada’s two hottest markets, the early evidence suggests that it had little effect to date,” RBC economist Robert Hague said in a research note. 

A breakdown of home sales by property value, courtesy of the Toronto Real Estate Board and the Real Estate Board of Greater Vancouver, further illustrates the runaway sales of higher-priced homes.

 

March data reveals that homes valued between $500,000 and $1 million rose 28% in Toronto and 27% in Vancouver compared to last year. There’s no telling what sales would have been without higher down payments, but take a $750,000 home, for example. An additional 1.67% down payment isn’t exactly an insurmountable obstacle for most buying at that price point.

First-time buyers will take the brunt of these changes. “The affordability of homes in these mar­kets has taken a further hit…,” points out National Bank Financial in a report this week. Following the rule implementation, “…The time required to accumulate a minimum down payment for the representative home increased in Q1 by 11 months in Toronto and by 34 months in Vancouver.” 

Moreover, while regulators have not materially slowed higher-risk housing markets, larger down payments have nonetheless had two positive outcomes. For one, new buyers in the $500,000 to $1 million range now have more to lose if they don’t pay their mortgage. In addition, as Hague notes “…We believe that the measure has enhanced the degree of prudence in the mortgage adjudication process.” And there’s nothing wrong with that.


Sidebar: Sales of homes valued at more than $1 million also exploded in March, up more than 60% in Toronto and Vancouver.


By Steve Huebl & Rob McLister

 

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Gender inequality FBOne in four British Columbia parents have bankrolled part of their child’s home purchase, and they’ve done it through down payment assistance.

In fact, down payment gifts and loans are the second-most common way that parents financially support their adult children. That’s according to a recent Vancity poll. (“Resolving debts” for their kids is the #1 way parents help out with money.)

But parental support has an interesting bias. Depending on your gender, you can expect significantly more down payment support from the folks.

Specifically, males were twice as likely as females to have received down payment money from mom and dad. The survey found that 39% of males aged 18-34 acknowledged receiving down payment money from their parents—compared to just 19% of females.

“We cannot explain the reason for this difference in numbers,” said Vancity spokesperson Lorraine Wilson. “…It requires further research on why there is a difference in inheritance expectations and realities for females.”

We’re no social scientists, so we can only speculate here:

  • Is there a cultural gender bias? In some parts of the world, men commonly receive double the inheritance of women. It’s baked into their religion.
  • Is it like the wage gap? When it comes to pay, men make more than women on average. But that gender gap doesn’t carry over to inheritances, at least not in North America (according to this research).
  • Do men more often “take care” of their damsels by coughing up most or all of the down payment?
  • Do men buy homes earlier than women?
  • Are women better savers than men?

In truth, we can only guess at why women don’t (or can’t) tap their parental ATM as often for down payment funds. It might make a good university thesis for those so inclined.


Poll Methodology from Vancity: “Insights West conducted [this] online survey for Vancity from January 22 to January 27, 2016. The survey polled 403 adult British Columbians who are “older than 65 and parents of at least one child” and 401 adult British Columbians who are “aged 18-34 and have at least one parent aged 65 and over.”

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CondominiumsIf you want to know how condo investors operate, CMHC has a new report for that.

It just released its 2015 Condominium Owners Survey (COS), and it’s stuffed with facts and insights on income property activity.

One key stat, for example, is the number of condo flippers (buyers who “anticipate holding their unit for less than 2 years”). CMHC estimates the number at just 8% of all condo investors. That’s markedly less than some housing bears would have us believe (which is exactly why hard data is so important; thank you, CMHC).

Below are some of the other mortgage-related highlights.

Propensity to Finance

  • 53% of condo investors put a mortgage on their last purchased unit
    • That compares to 59% of all homeowners, per StatsCan
  • About 20% paid cash
    • Versus 11% for all homebuyers, says Mortgage Professionals Canada

 

Down Payments

  • 20% of investors put down less than 20%
    • Since most lenders only lend up to 80% loan-to-value on rentals, most of these investors likely chose non-prime lenders, bought in a partnership and/or just flat-out lied (i.e., told the lender they’re buying an owner-occupied or second home property, which is fraud)
  • 45% had a down payment of 20%+

 

Term Selection

  • Most condo investors (53%) took the faithful 5-year term
  • Interestingly, 18% took a term over five years
    • That’s almost 4 times the ratio of all homebuyers combined
    • Given how high 7- and 10-year fixed rates are, this goes to show how some investors value consistent cash flow over upfront interest savings
    • This stat is also partly explained by the fact that 60% plan to hold their investment condo more than five years
  • Just 5% took a 1-year term or less

 

Amortization

  • 12% of investors who mortgaged their last condo chose an amortization period more than 25 years
  • 42% took a 25-year amortization
  • 31% went with less than 25 years

 

Rate Choice

  • 37% took a variable rate mortgage
  • 45% picked a fixed rate
    • Compare that to the general population of recent homebuyers, where 3 out of 4 chose a fixed rate
    • Investors overall are clearly more comfortable with rate risk
  • 12% chose a fixed and variable rate (i.e., a hybrid mortgage. This 12% is double the average for all Canadian homeowners.)

 

If you want all the details on this study, read more on CMHC’s website.

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Market share 3

The titans of the broker business stayed on top in 2015.

Scotiabank and First National have been the #1 and #2 lenders in our space for 18 straight quarters. In fact, the last time they weren’t first and second, FirstLine was in business.

The only way their dominance in the broker market could possibly be challenged near-term is if they unexpectedly pulled back from the channel, and don’t bet on that.


READ MORE

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D+H report cover

D+H released some useful new mortgage consumer data last month, and it yielded some surprises. I covered a few of the key findings in this Globe story over the weekend, but below are the stats in more detail. (Our comments in italics.)

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The study segmented consumers into two types:

  • ‘New’ borrowers, or those originating a new mortgage on a new property
    • Two-thirds of these folks are first-time buyers
    • They tend to be younger, more likely to use a broker, more likely to buy additional products (e.g., Mortgage Insurance, Line of Credit) and more nervous at the beginning of the mortgage process
  • ‘Re/Re’ borrowers, or those renewing or refinancing an existing mortgage
    • These folks tend to be older, more confident and much more likely to use a bank or credit union/CU

Transaction Types:

D+H says mortgage transactions can be broken down as follows:

  • 47%: Renewals of existing mortgages
  • 18%: Refinancing of existing mortgages
  • 24%: New mortgages – First-time buyers
  • 12%: New mortgages – Prior mortgage experience

Where people got their mortgage:

  • 62%: Obtained their mortgage through a bank
  • 29%: Obtained their mortgage through a broker
  • 8%: Obtained their mortgage through a credit union

How applications are taken:

  • 62%: Completed their application at a broker’s office or a lender’s branch
    • For the majority, personal one-on-one service still wins out
  • 11%: Were taken by phone
  • 10%: Used an online form
  • 7%: Had an adviser come to their home
  • 7%: Met an adviser at a local coffee shop or restaurant
  • 36%: Completed a paper application

Approval times:

  • 1 day: The median time for approval
  • 15%: Received approval in a week or longer
    • It boggles the mind how some “A” lenders think an approval in 5+ days is reasonable

Cross-selling:

  • 72%: Obtained one or more additional products with their mortgage
    • 36%: Mortgage Life Insurance
    • 30%: Line of Credit
    • 24%: Appraisal (We wouldn’t have included appraisals as a “product” for these purposes, but anyway…)

Individuals vs. Institutions:

  • 63%: Said they value the individual over the institution
    • Individuals matter more, but the reputation of the financial institution becomes increasingly more important to the older age groups

Information Sources:

  • 72%: Sought information on rates from their own financial institution (FI)
  • 54%: Sought information from other FIs
  • 31%: Sought information from brokers

Self-sufficiency:

  • 48%: Of previous applicants feel they could do everything themselves online for their next mortgage
    • The exact question D+H asked respondents was: “Having gone through the mortgage process, do you feel confident that should you need to obtain another mortgage in the future, you could do everything yourself online?” 
    • Near half is almost unbelievable. Does this reflect some overconfidence, or a consumer that is coming of age given today’s breadth of online mortgage tools?
  • For those that did not think they could do it alone, the biggest barriers were needing help/advice (32%), not knowing enough (22%) and not being confident enough (17%)

Survey

Knowledge of Mortgage Terms

Borrowers had a good working knowledge of some terms, and others, not so much:

  • 86%: were aware of the term “pre-approval”
  • 84%: were aware of the term “closed term mortgage”
  • 81%: were aware of the term “amortization”
  • 55%: were aware of the term “rate hold”
  • 49%: were aware of the term “high ratio”
  • 43%: were aware of the term “portable”

Research Habits – Segment Difference

  • 58%: Of new mortgage applicants are likely to search for how much mortgage they could qualify for
    • Vs. 25% for “Re/Re” applicants
  • 58%: Of new mortgage applicants are more likely to search for who could provide their mortgage
    • Vs. 24% of “Re/Re” applicants
  • 41%: Of new applicants are likely to search for what documentation is needed
    • Vs. 26% of “Re/Re” applicants
  • 30%: Of new applicants are likely to search for what steps are involved in the mortgage process
    • Vs. 13% of “Re/Re” applicants

Decision Drivers (All shares sum to 100%)

Of all the factors impacting where to get their mortgage:

  • 17%: said the “mortgage rate” had the highest importance
  • 12%: said “no unexpected charges”
  • 12%: said “special mortgage features”
  • 33%: Of applicants said the ability to only get a mortgage online was a barrier to selecting that provider

Best and Worst:

In rating the mortgage process:

  • Highest grades (A/A+) were from applicants who had time to read the documents before signing, who were dealing with an originator they knew, and who completed the application verbally
  • The worst grades (C) were from applicants who felt pressured to sign documents without the time to read them, who were also under time pressure to close, and who had completed a pre-approval

Location of Application Completion

  • Those who complete the application at home were more positive about the application process overall
  • Those who complete the application in an office or branch give higher grades than do those who completed the application on a website
    • This and the stat above it support the concepts of mobile mortgage specialists and brokers who make house calls
  • The entire process was deemed slightly less positive if paper forms were used

Sore Points in the Process

What caused the most pain during the mortgage process:

  • 30%: said it was the “amount of paperwork” involved in the application process and fulfilling conditions
  • 27%: said it was the fact of being “unsure if I got the best rates”
  • 20%: said it was finding time to meet with the broker/bank rep/credit union rep

Information sought before start of the transaction

  • 72%: searched for the rates being offered at their financial institution
  • 54%: searched for the rates being offered at other financial institutions (banks/credit unions)
  • 31%: searched for the rates being offered by mortgage brokers

Consumer survey 2

Best Sources of Information

Here is what people called the best sources of mortgage information:

  • 35%: said a bank branch/credit union
  • 21%: said a mortgage broker
  • 17%: said online through a bank/credit union website
  • 7%: said online information (in general, e.g., through Google search, etc.)
  • 7%: said online through a mortgage website(s)

Top Reasons for Not Using the Same Mortgage Originator Again

  • 56%: because they had a bad experience or dispute with them in the past
  • 51%: because they did not provide the best rates
  • 40%: because they “made me feel pressured”

 


Survey Details:  D+H conducted this survey online in September 2015 and used a sample size of 400 consumers who had completed a mortgage transaction in the past 18 months. The study included borrowers from both the retail and broker channels. Here’s the full report.

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RateHub report coverLender and broker executives are keenly interested in how today’s mortgage consumers are engaging with technology, so they’ll likely be pouring through RateHub.ca’s new Digital Money Trends Report.

Based on RateHub user data and opinion surveys, this new report yields fresh data on mortgage search habits. Among other things, it finds that:

  • Canadians use mortgage-related keywords in search engines more than 700,000 times per month
    • 142,600 of these are rate-related, which shows there’s more on people’s minds than just the lowest rate
  • 28,600 searches are related to mortgage brokers
  • “RBC” is the most popular bank-related mortgage search topic with 72,000 hits a month
  • “Dominion Lending Centres” is the most popular brokerage-related search at 6,600 searches
  • Two-thirds of rate-site users are male and between 26 and 45 years old

Product Preferences

The report profiles what kind of mortgages people are hunting for online. Not surprisingly, 5-year fixed rates continue to be the most researched product; 42% of all RateHub.ca searches were for 5-year fixed mortgages.

Notably, variable rate searches reached a four-year high last year. 42% of all RateHub.ca user requests in 2015 were for variable rates, up from 15% in 2012.

RateHub says this implies that Canadians expect interest rates to remain low over the medium term, and that they are looking to take advantage of the lowest rates in the market to combat rising housing prices.

In this author’s experience, it’s also reflective of the type of mortgage holders who visit rate sites—typically a greater mix of well-qualified and well-educated borrowers who can better handle rate risk. It also speaks to today’s broader awareness of the historical out-performance of short-term and variable-rate mortgages.

Source: RateHub.ca

 

  • Only 1 in 5 of its users’ searches were for non-5-year terms
  • Less than 1% of requests in 2015 were for 10-year fixed terms, down dramatically from 13% in 2012. It would help if lenders priced more aggressively on 10-year terms, but 10-years are disproportionately expensive to fund/securitize and manage (since borrowers can escape after five years with just a 3-month interest penalty).

Source: RateHub.ca

 

“The majority of our customers are a younger demographic, they are skeptical about the products offered by their primary financial institution, and they are accustomed to comparison shopping online like they do with travel, through sites like Kayak or Expedia online,” said Alyssa Furtado, Founder and CEO of RateHub.ca. Being rate-driven, tools like RateHub.ca have worried some in our business. They believe that rate sites will de-emphasize personalized advice and drive down commissions. That has indeed happened, but not to a great degree (so far). Mind you, rate sites are still early in the adoption curve.

 

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MPC Mortgage reportMortgage Professionals Canada (previously CAAMP) released its marquis fall mortgage research report this month. We’ve extracted all of the trends that seem new or notable.

You’ll see the most relevant findings below. (Data points of special interest appear in blue.)

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The Market Overall

  • 9.74 million: Number of homeowner households in Canada (up from 9.62 million in 2014)
  • 5.71 million: The number of households who have mortgages and may also have a Home Equity Line of Credit (HELOC)
  • 520,000: The number of households who have no mortgage but do have a HELOC
  • 2.15 million: The number of Canadian households who have HELOCs
  • 3.51 million: Number of households who are mortgage-free (down from 3.98 million in 2014)
  • $3 trillion: The total amount of home equity wealth in Canada
    • By comparison, Canada’s annual GDP is about $1.8 trillion. Imagine knocking 20% off home prices, and the wealth devastation that would have—particularly for people who rely on their home equity for retirement.

 

Housing and Mortgaging Activity During 2015

  • 5%: Percentage of Canadian households that buy a home in any given year
  • 89%: Percentage of homes purchased in 2015 that have mortgages or a HELOC
  • 76%: Percentage of 2015 homebuyers choosing fixed rates
  • 20%: Percentage of 2015 homebuyers choosing variable/adjustable rates
  • 4%: Percentage of 2015 homebuyers choosing combination mortgages
    • Hybrids continue to be the most undermarketed and underrated mortgage type available, especially with so much rate uncertainty (and not just rate hike uncertainty, but rate cut uncertainty)
  • 660,000: Number of homes purchased in 2015 (existing and resale combined)
  • 590,000: Number of households who bought a home and financed it (mortgage and/or HELOC) in 2015
    • 15% chose both a mortgage and a HELOC (typically a “readvanceable mortgage”)
  • 1 million: Number of homeowners who renewed or refinanced their mortgages during 2015
    • And convenience continued to trump absolute savings as the large majority renewed with their existing lender

 

Mortgage Types and Amortization Periods

  • 24%: Percentage of mortgages on homes purchased during 2014 or 2015 that have extended amortization periods
  • 23%: Percentage of mortgages with amortizations of 26-30 years
  • 1%: Percentage with amortizations over 30 years
    • Thank you to the lenders who continue to offer 35-year amortizations (RMG, B2B Bank, Alterna, Vancity, Coast Capital and so on). You do a tremendous service to well-qualified borrowers who prefer payment flexibility

 

Actions that Accelerate Repayment

  • 950,000: Number of mortgage holders who voluntarily increased their regular payments in 2015
  • 1 million: Number of mortgage holders who made a lump-sum payment in the past year
    • That’s about 17.5% of mortgagors
  • $15,300: The average lump-sum payment amount

 

Renting Secondary Suites

  • 14%: Percentage of mortgage holders who rent or plan to rent out part of their home
    • For many of these folks, it’s now easier to qualify for a mortgage, courtesy of insurers’ more generous add-back rules
  • 21%: Percentage of those who rent out (or plan to rent out) a portion of their home, who indicated: “I need to rent a room/unit in my home to afford my mortgage”
    • Given that secondary suites have been an important income source for homeowners, Dunning says it would be useful to clarify and simplify the processes for complying with municipal standards. We second that idea as most new landlords don’t know all the requirements to have a legal suite

 

Recent Homebuyer Mortgage Choices

  • 45%: Percentage of mortgages that were obtained from a Canadian bank
  • 42%: Percentage of mortgages that were obtained from a mortgage broker
  • 13%: Percentage of mortgages that were obtained elsewhere

 

Interest Rates

  • 3.07%: The average mortgage interest rate in Canada
    • Compare that to 3.50%, the average interest rate in the 2013 fall survey
    • Average actual rate for 5-year fixed-rate mortgages (2.81%) has been 1.87 percentage points lower than typical “posted” rates
  • 2.80%: The average interest rate for mortgages on homes purchased during 2015
  • 2.67%: The average rate for mortgages renewed in 2015
  • +/- 1/2%: Estimated change in annual credit growth for every one point change in mortgage interest rates

 

Home Equity

  • 49%: The average percentage of home equity for homeowners who have a mortgage but no HELOC
  • 75%: Percentage of the 5.71 million homeowners with mortgages (but not HELOCs) who have an equity ratio of 25% or more
  • >300,000 (3%): Number of homeowners who have less than 10% equity
  • $136,000: The average approved HELOC value
  • 10%: Percentage of homeowners who have fully utilized their available HELOC

 

Equity Take-Out

  • 9% (850,000): Percentage of homeowners who took equity out of their home in the past year
  • $70,000: The average amount of equity taken out

 

Sources of Down Payments by First-time Homebuyers

  • 21%: The average down payment made by first-time buyers, as a percentage of home price
    • Dunning notes that this percentage has remained stable over time, at 20% of the purchase price
    • The report notes that, “the rapid rise in house prices means that required down payments have increased relative to incomes”
    • “Given the increasing burden of down payments relative to incomes, that stability is surprising,” Dunning said
  • 19%: Percentage of down payments by first-time buyers that came from family or friends (in the form of loans or gifts)
    • The long-term average is 15%
  • 26%: Percentage of down payment funds for first-time buyers that is loaned from financial institutions
  • 8%: Percentage of down payment funds that come from RRSP withdrawals
  • 93 weeks: The amount of working time at the average wage needed to amass a 20% down payment on an average-priced home
    • This is up from 53 weeks two decades ago

 

Homeownership as “Forced Saving”

  • 50%: Approximate percentage of the first mortgage payment that goes towards principal repayment (based on current rates)
    • This ratio rises incrementally with every mortgage payment a borrower makes
    • Mortgage payments now include a higher amount of principal repayment, “in both absolute dollar terms and as a percentage of the monthly payment.” This suggests that homebuyers are “now entering into very aggressive forced saving programs,” says Dunning
    • By contrast the first payment principal ratio was 31% a decade ago when rates were at around 4.7%, and 13% two decades ago when rates were at around 8.2%

 

Mortgage Payments as a Percentage of Monthly Wages

  • 39.5%: Mortgage payments in 2015 as a percentage of monthly wages
    • 38.6% is the long-term average

 

On The Recent Minimum Down Payment Change

  • 155,000: The number of home sales each year (out of 620,000) valued at $500,000 or more
    • 120,000-125,000: Number of these that have mortgages
  • 10,000 (2%): Percentage of annual homebuyers that would see increases to their required down payments as a result of Ottawa’s new rule
    • This is obviously peanuts. It’s almost like the Department of Finance created a rule for rule’s sake, not that this author is complaining
    • More on the new down payment rules

 


Sidebar:  This year’s report was based on responses from 2,001 Canadians.

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CD Howe surveyThe “sustained low interest-rate environment” has caused a “significant minority” of Canadians to take on more mortgage debt than they can comfortably manage. That was the conclusion from a recent study by C.D. Howe.

Out of all the study’s findings, the one garnering the most headlines was the percentage of homeowners with a mortgage debt-to-disposable income ratio in excess of 500%. That number has rocketed from 3% in 1999 to 11% in 2012 (the latest data available). That’s upwards of half a million households.

That led the study authors, Craig Alexander and Paul Jacobson, to suggest that the federal government “may want to consider further policy actions to lean against the shift towards significantly higher mortgage burdens.” This is despite their conclusion that “the majority of Canadians have been responsible in their borrowing.”

Coincidentally, this study came out right before the Finance Department raised minimum down payments. That measure addressed some of Alexander and Jacobson’s concerns, but not all. They note that highly mortgage-indebted households are more likely to be

  • in the lower-income quintiles
    • i.e., not buying the $500,000+ homes targeted by the new down payment rules
  • younger Canadians who have recently entered the housing market
    • the average first-time buyer’s purchase price is $293,000, says the DoF, again, less than $500,000
  • from provinces with the biggest housing booms.

Also concerning is the fact that roughly 1 in 5 mortgage-indebted households have less than $5,000 in financial assets to draw upon if they lose their job or face surging interest rates. Worse yet, 1 in 10 have less than $1,500 in financial assets and are considered “extremely vulnerable to a negative economic or financial shock.”

“This represents an inadequate financial buffer,”  say the study’s authors, “as the Statistics Canada Survey of Household Spending indicates that average mortgage payments are more than $1,000 a month, before taxes and operating costs.”

All of this speaks to two risks. The first is obviously the financial risk to the borrowers themselves. Even if arrears rates stay contained as expected, no one wants families backed into a debt corner, doing things like racking up unsecured debt to finance secured debt.

The second risk is systemic (i.e., what happens to our financial system if default rates are higher than anticipated?). Default insurers claim they can withstand a U.S.-style housing sell-off without dipping into taxpayer pockets. (By the way, we are assuming/hoping that insurer’s stress tests rest on adequate assumptions.) But the mortgage market would nonetheless endure painful market volatility, huge risk premiums and illiquidity. These effects would be (will be) exacerbated if debt ratios continue moving in the wrong direction.

Hence, if home prices in T.V. (Toronto/Vancouver) continue climbing in 2016, the DoF may not be finished it’s policy tightening. Lowering maximum debt ratio guidelines and increasing minimum credit scores (especially for borrowers making small down payments) could get more attention in Ottawa.

But Alexander and Jacobson wisely recommend that any new mortgage rules be targeted. The last thing anyone wants are weak markets getting weaker with a national policy intended to rein in T.V. lending.

Moreover, given enough time, natural economic forces would address some of the imbalances we’re seeing, specifically

  • higher prices would curtail demand
  • higher rates would crimp affordability, and hence prices (best not hold your breath on this one)
  • higher incomes would improve affordability and debt ratios (for many)
  • housing supply would catch up with demand (maybe not in the major single-family urban markets, but definitely with multi-family units and suburban housing)

But policy-makers are likely not content to let the “invisible hand” correct household debt risks on its own. So keep an eye on this chart through the first half of 2016. It may have magically predictive properties for new mortgage rules.

National Average Home Price


Other notable findings from the survey:

  • B.C. has gone from a primary mortgage-to-disposable income ratio of 250% in 1999 to 375% in 2012 (Remember that’s an average, so many are above this ratio)
  • Ontario’s average mortgage-to-disposable income ratio rose from nearly 200% to around 350%
  • The share of young households (age 25 to 34) with ratios above 300% has increased by almost 27 percentage points
  • 14% of those aged 25 to 44 have ratios above 500%, along with 16% of those 65 to 75 years old vs. just 5% of those aged 45 to 54

Ultimately, debt service ratios (a.k.a., affordability ratios) are far more predictive of losses than debt-to-income ratios, and Canada’s average debt service ratio isn’t far from its long-run average. But we may never realize how close some people are to the edge until interest rates or unemployment spike.