Podcast Episode #40 – What the new mortgage rules mean for you

“20 Minutes of Successful Niche Secrets – EPISODE 40”,

With Rocco Mongelli, where we discuss the impact of the new mortgage rules

 

 

“20 Minutes of Successful Niche Secrets – EPISODE 40,”

With Rocco Mongelli, where we discuss the impact of the new mortgage rules

Glenn: Hi! It’s Glenn McQueenie, and welcome to my 25-Minute Success Series podcast. Today we have a different theme that we’re going to go after. This is going to be more on the education/information realm, because I think part of your job as an agent is really to continually add more value, more knowledge, and more insight to your clients. That’s really the basis of a great consulting relationship. And it also, I think, positions you to get lots of referrals and just really be seen as the specialist in your field. So today, I’m excited. We have senior mortgage agent Rocco Mongelli from Mortgage Savvy team. How are you doing today, Rocco?

Rocco: Oh, I’m doing great, Glenn. How are you?

Glenn: I’m good! So Rocco, the reason I wanted to get you on the line here is I really wanted to talk to an expert who can give insight to more of the Canadian market (I know we have international listeners here). There have been some recent changes to the mortgage lending rules, and I just wanted you to fill us in and let us know what’s going on. But before we start, I’ve got a bunch of questions for you. Just tell me a little bit about you and your background, Rocco.

Rocco: Yeah, for sure. My background has always been in sales. I was in the corporate world back from the early ‘90s all the way up until about 2006, when I was approached by a few friends of mine who were in the mortgage industry. They knew my sales background and said, “Hey, why don’t you come and join us? We think you’d be great.” So I always had a little bit of an affliction with mortgages, and I kept my knowledge up to date even though I wasn’t in the industry. So I started with Royal Bank in 2006, and from 2006 to today I’ve had a few different roles, predominantly as a mortgage agent. I moved from RBC to CIBC and then from CIBC is when I moved over to the broker channel. And once I moved over to the broker channel, I focused on both sourcing business and underwriting, because I always thought there was a lack of knowledge within a lot of the agents who were out there putting deals together. So I said, “You know what? Here’s a little bit of a niche that I can focus on and start to underwrite deals for other mortgage agents who are either new into the business, or not as knowledgeable with all the lenders we were dealing with.” (Just to give you a background, we deal with 39 different lenders, and they all have different little quirks about them, but we always have an opportunity to get deals done). I think that’s helped me over the last few years. I’ve joined Mortgage Savvy and Rakhee Dhingra and her great team. I recently have been working with Rakhee for over a year now, but officially joined a few months ago. And that’s where I am today, both sourcing business and still underwriting deals and having to keep up to date with our dynamic industry. That’s for sure.

Glenn: That’s great. So just to be clear, I think what most agents probably don’t realize is there’s one thing to source the deal and actually get the application and to get it submitted, but then there’s a whole second part (which is probably the most important part), which is the underwriting. So can you just tell us a bit more about what the underwriter’s role is?

Rocco: Yeah, absolutely. The underwriter’s role is really to gather all the information on that particular client – their income, their debt load, what their goals are, the purchase price, the down payment, all the aspects – and really understand where to place that mortgage, because we have so many lenders out there that we can dip into. It’s not just about rate. It goes beyond rate. It goes to pre-payment penalties. What happens if you needed to break your term? What is your five-year plan? Are you looking to refinance in three years and renovate your home? We want to make sure that right from the beginning, as we’re underwriting that deal, that we’re putting them in the right situation with the right lender that will give them that flexibility to do what they want to do going forward. It’s not just about putting a mortgage deal together and having it close and not hearing from them again. Underwriting the deal is probably the most important aspect. And not only that – if you’re knowledgeable as an underwriter and being a mortgage agent, you know what the lenders are looking for. So when you are building that business case, essentially (I tell people that’s what we do – we build business cases for a living), when you are building that business case for the lender, they’re already prepared for what’s coming in, and you can really reduce that time that it takes to get an approval.

Glenn: Yeah, and I don’t think most buyers or sellers or agents really realize that it’s not just, “Here’s my income. Here’s what the rate is.” It’s really, if you don’t fit inside this perfect box with this lender, then you guys have the ability to pick them up and put them in another box (like if they’re in business for self, compared to a teacher income or something super secure). I know I’m excited to talk about these new mortgage rules, but I think moving forward, that’s really going to be the biggest value add that you’ll be doing. Of course, that’s why we’re partners with you guys, because it’s not about writing the offer. It’s not about getting the condition on financing. It’s about actually getting the approval and getting that deal to closing, because that’s when the buyers and sellers move on with their life, it’s how the agents get paid, it’s how everyone else moves in this role.

Rocco: Absolutely. And there is a solution for everyone that comes through – not only on the aid business with banks lending, but we do bruised credit lends and private lending as well. So there is an opportunity for everyone that comes through this channel.

Glenn: Right. So can you get us up to speed? I know the Office of the Superintendent of Financial Institutions I think came out originally in July and said, “Hey, we’re going to be changing some things. There’s going to be some things changing.” And then I think they reaffirmed it at the beginning of the month. So what’s been happening in news just regards to mortgage lately?

Rocco: Yeah. You touched on it. The most imminent one is the OSFI’s proposed changes to the lending guideline. So just a bit of background – last October, they introduced what was called the “stress test,” and these changes were brought in to have high-ratio (also known as default mortgages) to be qualified at the Bank of Canada rate, regardless of the term. The immediate impact was mostly to the first-time homebuyer, from what we saw, after the months that it was implemented. Now, those proposed changes would see all mortgages qualified at the Bank of Canada rate regardless of how much down payment you have (even those with 20% or more). This proposal really can, by the regulator, expand the stress test to mortgage borrowers, who will reduce how much Canadians can afford by 21%. So it will have a significant impact on the market and affordability. There’s absolutely no doubt.

Glenn: So when do these changes come into effect? What’s the timeline for this?

Rocco: Well there hasn’t been a date as of yet, but we do hear that it may happen either early sometime this quarter, or potentially by the beginning of next year. On news outlets, if you read, there’s a lot of information out there that indicated that OSFI’s in the midst of finalizing these potential new guidelines. Essentially what they’re trying to do is curb the risk of mortgage defaults due to what they say is a high household debt.

Glenn: Right. So this is probably more about protecting the balance sheets of the banks and lending institutions, and also the government who’s got to backstop it than the consumer, right? It’s really more of the back end. But the net effect is, the consumer is going to probably qualify for less of a mortgage, and will have stricter qualification criteria.

Rocco: Exactly. That’s exactly it. So now the Bank of Canada rate is sitting at 4.89%. It’s actually at 4.94%, but banks are qualifying it for 4.89% right now. If that changes, that means everybody’s going to be qualifying it almost 2% higher than the 5-year fixed rate as it is today.

Glenn: So tell me about the net impact of these new rules on a consumer? If they were qualified for, say, a $500,000 mortgage before, under the old rules (because that was the 5-year at 2.89% or 2.9%) and now they have to qualify at 4.89%, what difference will that make for them?

Rocco: Just to give you a quick example, a household income of $100,000, based on a 25-year, 5-year fixed rate mortgage at 2.84%, a person can afford a house up to $726,000 in today’s environment. Under the new rules, the same household would be able to afford only $573,000, which is approximately a reduction of $150,000. So to keep that in perspective, about 46% of mortgages outstanding in Canada are uninsured, meaning they had more than 20% down previously. So that 46% would be those who would be immediately impacted.

Glenn: So what does this really mean to the buyers and to our sellers? What’s your viewpoint on that?

Rocco: To the buyers, it means that the time to act is now – getting a real estate professional to help them look for that dream home. We can help them with pre-approvals at Mortgage Savvy. We still have that ability to help them get into their dream home based on today’s lending guidelines. With this, we can protect them from any of the changes that may come up, up to 120 days from now. For the sellers, the equity that they’ve worked so hard for can be impacted greatly as well, especially if they’re looking to take out that equity and use it for other things (like a potential next purchase of an investment home, a cottage, things like that). So it will have an impact on both the buyers and sellers.

Glenn: I don’t want to really scare the people who are listening, because I don’t think that’s what we’re trying to do. I think it’s more about, you’ve just got to keep current on what’s happening, and then govern yourself accordingly. It’s almost like that old adage that says, “You deal the hand with the cards you’re played, not with the cards you wish you had.”

Rocco: Yeah. Right.

Glenn: From my point of view, if someone was a first-time buyer, buying their first condo for, say, $400,000 in downtown Toronto, I think under these new rules, they might only be qualified for up to about $320,000. And the only challenge with that is, now the marketplace won’t match their needs.

Rocco: Right.

Glenn: For $400,000, you can get your starter condo that’s actually okay to live in, that you’d like to live in. Once you get down to the $300,000-$320,000 level, you just get inferior area, inferior suites, low levels, north-facing. So that could have a big impact on just their enjoyment of the type of property they want to buy.

Rocco: Absolutely. Absolutely.

Glenn: And then I’m thinking on the other hand, for the people who, as you said earlier, worked so hard to pay off their houses, now are like, “Okay. I don’t know. What am I going to do as I plan for my retirement? Maybe I’ll diversify a little bit instead of having all my money in my RSP and in the capital markets. Maybe I’ll buy an investment property.” I’ll let you explain what the rules are going to be, but from my point of view, if you’re going to do something, you might want to get that home equity line of credit locked up now under the old rules, because you never have to use the money, but it’s nice to have if you ever need it.

Rocco: Yeah, it’s nice to have. Exactly. And because we’re acting now and not later, we do still have that ability, as I mentioned before, to qualify you under the old guidelines, or today’s guidelines. (We won’t call them old yet, because it hasn’t happened). The equity in the market today – the market is still strong. There’s still a lot of equity in homes that homeowners can take advantage of. And yes, get into that home equity line, to have it there – and not necessarily to use it, as you said – but as a safety net, in case there are changes and it becomes more difficult to do what their plan was.

Glenn: I would say it’s always a great thing to ask for money when you don’t need money, because they tend to give it to you a lot more than when you really do need money. I know last year, we put a new home equity line of credit on our house, just as a rainy day fund – that if anything ever happened that we had to access credit – it’s there, and it’s sitting in place.

Rocco: Yeah, exactly. That’s exactly the message that we’re trying to convey as well. “Now’s the time to take advantage of that and have it as a safety net. It’s not going to hurt you. If anything, it’s going to help.” And because we still have that ability to do it under some, we’ll call it, more lenient guidelines than what’s proposed, then yeah, for sure, it’s an awesome thing to do.

Glenn: I don’t want to put you on the spot, because we don’t really know what this legislation is. They’ve been hinting at what it could be, but do you have any insight of what it would be for that homeowner who’s got a lot of equity right now – the difference between today’s rules and future rules? And again, I know I’m putting you on the spot, because we don’t really know what those are, but do you have a hunch of what that would be?

Rocco: We don’t have really a hunch. Well, I shouldn’t say we don’t have a hunch. We have a hunch – but you’re right – we don’t have anything concrete yet. Word is there’s probably a 20% reduction in affordability, regardless if you’re buying or have your home. There could be a 10-20% drop in house prices. So if you take that 20% in affordability and a 10-20% decline in home prices, that’s essentially what you’re looking at not having if you act later as opposed to earlier. That’s my hunch.

Glenn: Right. I almost think there’s this triangle. If people can imagine a triangle, at the very top of the triangle of people qualified to buy houses, there might be a couple people in Canada who can afford a $20 million, $50 million, or $100 million house. And at the bottom part of the triangle (the really wide part along the base), there might be millions of Canadians down there that can afford a $100,000 house.

Rocco: Right.

Glenn: The net effect to this is, as you move up the triangle, now you get up to the, say,  $700,000 price point, and there are ‘X’ amount of people there at $700,000. You now say, “No, you’re only qualified at $560,000,” and all of a sudden, that whole market basically disappears.

Rocco: Disappears. Exactly. Yeah, it just goes away. These changes are significant, and we’re just trying to draw awareness as to what it means. Speaking to you today is definitely going to help some of that urgency around getting into that market today.

Glenn: Yeah. And again, honestly, for the people listening – this is not dark clouds, trying to scare people. It’s just bringing awareness to it. That’s all we want to do. Just act now. Get your home equity line of credit. If you’re a seller who’s concerned about or really requires all the equity in the house for them to retire, it’s probably not a bad idea to go to market pretty soon. Again, we don’t know if prices are really going to drop 20%, but I think there are some supply and demand forces in here. If you drop the demand for houses at a certain price, then usually the market has to meet up. If a bunch of people were qualified for $400,000 condos, and now they’re only qualified for $320,000, there’s going to be a pause in the market until the sellers at $400,000 realize, “I don’t have a market anymore” and the prices have got to come down slowly. A lot of the buyers, I think, as they’re watching this, will probably even sit there and go, “Hmmm. Maybe I’ll just wait and see how this all works out.”

Rocco: Yeah, absolutely. And I agree with you – we’re not trying to draw a message of “doom and gloom” – but more so an opportunity in this window that we have, to continue to keep on that plan that people had.

Glenn: Right. So what impact will this have on people who are looking to refinance? They’re not going to take money out to buy a cottage or investment property. Just, “Hey, we’re coming up for a renewal, coming up to refinance.” What do you see happening?

Rocco: Yeah. That’s a great question, and one that usually gets pushed aside, is the refinance. Clients that are looking to refinance would be subject to the same guidelines. If you’re someone who’s looking to buy an investment property with the equity that you’ve built up, now is the time to do so, before these changes take place. Call your realtor and evaluate your buying options. Call Mortgage Savvy to help utilize that equity to your benefit. This also goes for the homeowner who wants to use that equity to renovate and help build even more equity than they have today, to bring up that value of that home. Pulling out this equity in a refinance for your home is the most inexpensive way to do so in both of those situations. One thing that we’ve seen over the last year since the original change came into effect is more of the “bank of Mom and Dad” come into play, where parents will help their kids get into homes by gifting them their down payments. And those parents, in some cases, will refinance their homes to do so.

Glenn: Right. When I was selling, I would say to my clients, “I helped you get into debt. Now my job is to help you get out of debt.” And I would always sit with them a couple years after closing and just figure out, is there a car loan? Is there credit card debt? Is there some student loan debt? Is there some stuff that’s really high-interest, unsecured debt that we can roll onto their mortgage so that their monthly cash flow is better? And at the same time, we’d always shorten their amortization down so more money was going to principal. I think this is the time for people, if they have any outstanding debt and they want to roll that and refinance it on their home – it’s probably going to be the easiest time now.

Rocco: Yeah. Debt consolidation is the most common reason for a refinance, and some of these changes are being led by the high household debt that people are carrying and those high credit cards and those high lines of credit. If we can make that a little bit more affordable for you in a refinance and open up that monthly obligation for you, then there’s more cash flow coming in, which essentially makes life a little bit easier.

Glenn: Right. So what can we do, just to better prepare ourselves right now? Any words of wisdom to new homebuyers? What would you say?

Rocco: Yeah, for sure. I think the easiest way nowadays is the pre-approvals. It’s important to understand that mortgage professionals like us can help you secure a rate under today’s lending guidelines. If you are someone who’s still on the fence about buying, we can help you get that pre-approval, give you peace of mind if these changes do come into effect, because you will be under these current guidelines. Our pre-approvals are good for up to 120 days, and it will help you make an informed buying decision without feeling that impact of the new lending criteria. Speak to your real estate professional now. The relationships that we at Mortgage Savvy have with our agents (like yourself) are not looked at as a referral source, but rather a partnership. I believe you mentioned that partnership initially. Partnering together ensures that the buyer has one place for all of their needs, and we have their best interests at heart on both ends.

Glenn: Yeah, and I have to tell you, you guys have been terrific as we’ve partnered with you. I know even in the spring when the market turned and prices went up 30% and then they dropped back down, and a lot of people were caught in between, we were very proactive together, telling our agents, “You’ve got to take the better covenant people on the offers. You’ve got to try to get more down payment. You’ve got to close a lot quicker, because you just don’t know how the market will change.” In dealing with you guys, I don’t think (and I could be wrong here), but I’m not aware of any mortgages that you guys pre-approved and underwrote that did not close, which is a bit of a miracle, because I know so many other people were really caught in the dust on that. Your case was so solid and your underwriting was so good that you ducked a bullet. We all ducked that bullet.

Rocco: Yeah. It seemed proactive, really. When we do our pre-approvals, we do it with so many things in mind like future rate changes, where we can avoid any type of changes from OSFI that are coming in. So it really is peace of mind. And when we do our pre-approvals, it’s essentially an approval, because we go through the whole process. You had asked me for some words of wisdom. What we do, along with our pre-approval, is build a five-year mortgage plan for you, and we say how you live your mortgage is really how you live your life. Typically, when you walk into a bank and get approved for a mortgage, they’re very straightforward with each one that they do (things like income and property taxes). The standards are considered, but that’s where it ends. Instead, we go above and beyond by looking at your overall expenses that life throws at you, like groceries, phone bills, vacations, social life. Taking all of this into consideration will help you understand what plan suits you best. Mortgages to us are not transactional at all, but rather a plan to better living and lifestyle for both today and the future. So it’s very important to get that pre-approval, and allow us to walk you through this process.

Glenn: Yeah. I think the real theme of this call is: it’s your responsibility as a buyer or seller, as an agent or mortgage professional to prepare yourself for the future – no one else’s. It’s better to be proactive on this instead of reactive. It’s better to be ahead of the curve right now. I guess my advice for any of the buyers who are thinking about buying, or even for all of the agents who listen to this podcast is, now’s the time to get proactive. It’s time to reconnect with your buyers. Reconnect with your sellers. Share some of the wisdom from this. And these podcasts get transcribed in a couple weeks. (We can’t always control the speed of that). Listen to these podcasts. Talk to the people at Mortgage Savvy. Talk to your agents. Agents, talk to your brokers and managers, and let’s get ahead of the curve on this. This is a great opportunity. It’s an opportunity for your buyers to get better terms, better qualifications, and get the house they want. Or they can wait and then come into the market in January, February or March, when the market’s just going to be in a bit of turmoil, I think, because all of a sudden they’re not qualified for the house that they wanted to buy. I think for sellers, there’s a bit of a choice right now. It’s not, “Fire, fire, fire! Sell your house! Run away!” It’s just, there’s an impact on this, and you have to be aware of it and just make your decision. I’m not selling my house. I’m planning on being in my house for a long time, so I don’t really think this will affect it. But if I was about to retire in a year or two and I needed every penny from this, and I was going to move down to a smaller house and take that extra money and go and invest it, then I think I’d probably get a bit more proactive about it.

Rocco: Yeah.

Glenn: And finally, for the agents, you have to know the base of this. You’re not an expert in mortgages, but that’s why you can talk to yourself, Rocco, or Rakhee and the people over at Mortgage Savvy. That’s really why we have the partnership with them. We know you need to know the working knowledge of this – but really, for your professional expertise, you’ve got to go right to the experts. That’s why I really like just working with you guys.

Rocco: Awesome. And likewise.

Glenn: Okay, just maybe a last question or two before we wrap up. Where are you sitting right now? We’ve seen interest rates go up a little bit, so there’s a bit of a split right now. Some people think they’re going to go higher. Some people say it’s done. What would you tell people right now? Do they go variable, or do they lock into more of a fixed rate?

Rocco: Yeah. It’s the most common question that we get, but every situation is definitely unique. Over the last few months, we’ve seen an increase to prime rates with an expected increase this year in this quarter (possibly in the next week, on the next announcement), and word of two more coming in next year. So that’ll be four increases in prime in a year span. Now this has a domino effect on both the variable rate mortgages and the fixed terms, for that matter. Rising interest rates will definitely tighten housing activity, which could be further impacted if these new guidelines are implemented by OSFI. For us, we would always love to chat with those in this predicament, just to help them make an informed decision. The rate environment really has been dynamic and volatile, and can change quicker than what we live on on a day-to-day basis, so understanding that fixed variable choice can significantly help for a better future. I know that maybe didn’t answer which way to go, but again, because we know that each situation is unique, for some, it could be in a variable rate mortgage. I can tell you that today, high-ratio mortgages are being incented quite a bit because of that insurance that backs the lender. There are still rates out there like prime minus .90%, which may or may not suit that individual, but it is a conversation that we’d like to have, and make sure that it’s an informed decision in the end.

Glenn: For sure. As I’m listening to you, all I can think of is the answer is, “It depends.”

Rocco: Yeah.

Glenn: It really depends on what your criteria is. Do you have a lot of equity in your home? Can you stomach a big huge rate increase? We never know. When I started in this business, we were just coming off of really high rates in 1989. Most of our business we were writing at that time was at a 15.9% mortgage rate, and almost every house that we sold had a condition where the seller would agree to pay $10,000 to the bank upfront to buy the interest rate from 15.9% down to 9.9% so people would qualify. So low rates don’t last forever. But listen, Rocco, I just wanted to say thank you so much. I really appreciate your time and your expertise. Thanks a million for joining me today.

Rocco: It was an absolute pleasure. Thank you so much for having me.

Glenn: Alright. Take care, Rocco.

Rocco: Bye.

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