Monday, May 14, 2012

Homeowners Beware

Homeowners Beware!

That's the ominous intro to the above newscast story on the upcoming changes to Canadian bank regulations.

We have discussed this topic a couple of times (and it's something I raise with colleagues regularly).

The OSFI – the Office of the Superintendent of Financial Institutions - is the organization which regulates Canadian banks.  In the early part of the year they released an announcement about upcoming changes to banking regulations.  This was followed by a  discussion paper on those changes.

It's the common procedure for changes implemented by the OFSI.  And rarely are the implemented changes all that different from those outlined in the discussion paper.

Hence the news story.  Some of those changes are HUGE.  And they will be implemented by the end of the year. The OFSI wants banks to tighten up when it comes to renewing your mortgage.

  • They want verification of a home’s true value (not the bidding-war price).
  • They want the elimination of cash-back mortgages.
  • They want to make sure that when your mortgage is renewed you would still qualify for that mortgage.
  • And most importantly... they want your loan-to-value ratio to still be intact when your mortgage renews.

In a rising real estate market this is never a problem.  But there are markets where values have fallen (hello Okanagan and Vancouver Island).

And in the Lower Mainland, as inventory hits seasonal highs, as the flood of Asian buyers evaporates, as the Spring Market disappears and sales plummet... are price drops all that far off?

Garth Turner provides a striking example of how this could affect everyone:
"If you bought a $400,000 place in 2010 with 5% down, then your mortgage is $380,000 and your LTV is 95%.

If the same place is worth $340,000 in 2015 (after a 15% correction) when the loan renews, then the LTV means the maximum loan is $323,000. If you took a 3% VRM when you bought, with a 30-year amortization and made 5 years worth of payments, then (counting in the mortgage insurance premium), you still owe $349,000 upon renewal. So, you’d have to come up with $26,000 in cash to maintain your home loan – after spending $101,457 on mortgage payments.

Let’s see, that’s a downpayment of $20,000, plus $101,457 in payments, plus a $26,000 mortgage renewal payment – or a total of $147,457 in cash for a home worth $340,000 on which you still owe $323,000.

This is a nice, simple example of why all those horny young virgins with their 5% downpayments are at risk of being wiped out financially."
For years everyone has assumed that the banks will renew your mortgage without question.

It is a topic we have raised numerous times on this blog and anytime we have raised the issue with local banks we have received vague, noncommittal answers.

Well... the OFSI is now making sure we have an answer to that question.

And the mainstream media is starting to spread the message.

Homeowners Beware!


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