Here is an unedited conversation with Daryl Marsden from Canada Mortgage Direct about recent changes to mortgage rules in Canada...
Mortgage Q&A Blog Transcription
Hey There! Rob Reynar here, checking in. Just wanted to go over the recent mortgage changes that the Federal Government has announced. I think these are good changes. I think they make a very conservative banking system. A little more conservative which is not such a bad thing after all it was our banking system that really saved our bacon in the light of the global economic crisis that hit us last year but if you look at what's happened in the US because of lack of regulation intheir banking system, it really was a free for all and now they're paying the penalty for that. In Canada things were a lot different and we got away with a lot of stuff that the Americans didn't. So the reason changes I think are along those lines, I don't really think it's gonna affect the overall real estate market that much. I think the Mom and Pop investors who wanna maybe put five or ten thousand down and go buy duplexes or rental or that really changes things for them with the change in 20% down for investment. But other than that I don't think there's a really significant change for people and I don't think the real estate market's really going to miss a beat. I really sat down with Daryl Marsden of Canda Mortgage Direct and I had a little Q and A with him about these mortgage changes and the effect of the markets. It's about 9 minutes long, it's an interesting question and answer, I encourage you to watch and learn a little bit about the recent mortgage changes. Will talk to you soon.
Rob: If you are able to say to a client, "you know what Mr. and Mrs. Buyer, we couldn't get you approved in the 5-year but we got you approved on the 3-year, let's proceed." What percentage of the population that you see coming to get mortgages will now be affected by that not being able to happen anymore?
Daryl Marsden: I think that's gonna be a small percentage to be honest with you. Most of my pre-qualifications always been done in the 5-year rate because I deal with some of the bigger broker only divisions of the banks and it's always been a situation that we've always used the 5-year fully discounted 5-year rate as our qualification. Very few clients have I done a 3-year rate. A lot of clients will choose to with the 3-year or short term or very low rate mortgage but we're still qualifying on the higher rate and I did that for a safety precaution for clients not jut, even though the clients may or may not have known that they could get qualified on a 3-year, I did it on the 5-year. Makes the bank more comfortable, makes me more comfortable and it definitely is gonna make them look a lot more comfortable.
Rob: So when we look at the banking industry across Canada, that I would predict the only reason they did is 'cause a lot of people were getting approved on the lower terms and sort of getting around a proper true qualification. I mean that would be only the reason they would go down this road.
Daryl Marsden: Yeah, I think it was a case that there were some people that were getting, first time home buyers that were getting qualified on the 3-year rate and the banks were squeaking those tight deals in and the reality is Flaherty doesn't want to have a situation down in the United States happen where there wont be any equity left in these house or the people are really tight on their budget and they shouldn't be buying the house in the first place and He's trying to avoid that whether or not He's methods are correct, it's up in the air for people to judge. I believe that you're probably better to be safe and more conservative when it comes down to taking care of your clients' need 'cause you'll never know what's gonna happen in the future.
Rob: I would think this would make even a conservative banking system even more conservative.
Daryl Marsden: Absolutely, Yup.
Rob: I mean you really have to have your ducks in a row to get a mortgage now.
Daryl Marsden: Yeah, you gotta, you gotta be able to qualify on that 5-year rate. I believe that's a good thing, that the government's come out and done something good.
Rob: So qualifying on the 5-year coming up but they didn't touch down payments.
Daryl Marsden: No.
Rob: So you can still do a 5% down
Daryl Marsden: Yes
Rob: On a 5-year fixed
Daryl Marsden: Yes
Rob: When this all unfolds.
Daryl Marsden: Yeah there has been no change to down payment regulations nor have they changed the amortization situation. You're still allowed up to as high as a 35-year amortization.
Daryl Marsden: So that still allows that as first time home buyers in today's market a chance to get into the market.
Rob: So how do you think the, how will the bank, how will the banks adapt to this change? Because we see historically when there's changes in mortgage, products we went "okay no more zero down, no more 40-year AM, no more 100% financing, the banks come up with products that are innovative that still allow those people to be approved that might have traditionally gone for those discount products. With this change, it seems to be more bank-driven, so will there be innovative products that come to replace this or is it just something that you can't get around now?
Daryl Marsden: I don't think you're gonna be able to get around this, this isn't one of those ones where you can create a product that's going to able to do that because basically, the rules are gonna say you must use a 5-year fixed rate to qualify clients from this day forth and that's you know this isn't a brand new thing with the banks. See there are a lot of the bank already adapt or adopted this process and then they've said we are going to use the 5-year fixed rate for qualification anyway. There's only a few out there that were actually doing the 3-year. You could choose whatever product you wanted but they were still qualifying you, whether you do it or not they were qualifying you on the 5-year.
Rob: Okay, the second change that was the...
Daryl Marsden: 90% refinancing
Rob: 90% refinancing, refinancing has become very popular in the last few years, there's lots of radio ads, "Hey if you've got equity in your house, we'll give you a mortgage". That does change that product a little bit.
Daryl Marsden: That's probably one of the bigger features of the budget that came out, of these new rules. That's the more painful ones that the Canadian consumer is gonna deal with. Simply because a lot of consumers have been going all the way to 95% and in some case it was 100% refinancing and that was one of the main reasons they've put this rule in place is because they didn't want people to go up to 95% and then if the markets goes down, then they would suffer to having no left equity on the house. So that's a rule that have put in place and have been talked about for many months since last November when we were back in our conference. It was a situation that the 90% refinancing rule was probably gonna be a good one and even the brokerage community and the banking community think that's a good idea. To keep some sort of equity position in a house is a good things. So the 90% rule may not work for well people that have you know gone out and spent all their money on credit cards and now wanna pay them all off, you still have ta little time to do that up until April 19th but even the banks. Usually when these rules are announced the banks quickly adopt them before the deadline. So you'll probably see the banks are gonna start adopting to all of these new changes immediately.
They'll put them in place and send out announcements over the next few days.
Rob: So, in a way it's a little bit of a preventative, I don't think the Government nor the banks feel our economy is bad or the real estate market is going in the tank, they're in my mind a little bit of preventative medicine in case there's some storm clouds ahead.
Daryl Marsden: Yeah I think they have been doing that since last October when they initiated the 40-year amortization no more 100% financing. I mean, don't forget the Canadian Banking System is probably the best banking system in the world. Many of the, during this last recession many of the countries around the world have started adopting some of the rules and even the United States came out that they're Finance Department came out just of last month and stated that they believe that we that the United States should adopt some of the same rules and regulations that the Canadian System has. So we've always been known to be conservative and now this just makes us a little bit safer so that there's no chance that we can ever get into a situation like the United States.
Rob: Right, investors, investors were in my mind from a real estate agent perspective, investors were one of the big reasons '07 happened. The summer, that craziness because there was a lot of speculation going on, zero down, 40-year AMs, lots of speculation. The true revenue property investor is maybe gonna be a little more rare coming up.
Daryl Marsden: Yes, I mean the other issue that back in 2007, people were allowed to put down you know $5,000 as a deposit, wait 2 years for the building to be built and then all of a sudden they would come up with the rest of the down payment. In hopes, many of these people were hoping that they would never take possession of the property. The were putting down a $5000-deposit or $10000, hold the unit it came up time for sale, they would take possession of the unit and then sell if off to somebody else and in some cases they would sign over their rights to that unit even thought a lot of the builders didn't like that. Now, that's not gonna be the case anymore. Now it's a case that there's no more low down payments, there's no more - you have to have 20% of the value of the property in order to buy a revenue property now.
Rob: I think that's gonna be significant for our market here in Calgary and area because with the median price as high as we have, we already know that revenue properties are not a $100,00, they're probably three almost four hundred thousand for a decent revenue property. That really changes the game for revenue real estate.
Daryl Marsden: I think it's gonna, I think you're gonna see that's gonna a big situation with the revenue properties is that a lot of these little speculators that were refinancing their house to get five and ten percent down payments together are no longer gonna be able to do that and in some ways that's gonna be a good thing for the market. It's gonna cut out some of that speculation that's been taking place and some of the - there's some very nasty stories out there of people that have been part of these condo organizations where they put down a 5%, waited a couple of years to three years for the apartment to be built then suddenly it's time for possession and the value of the apartment is down a hundred and fifty thousand dollars and they have to come up with that money and they've lost their down payment, they've lost their deposits and now they're being sued for the fact that they didn't complete the contract. So this is gonna take that type of group out of the market.
Rob: Yeah, I think the Mom and Pop investors are probably gonna be a pretty rare breed right now
Daryl Marsden: I agree.
Rob: Which is porbably not a bad thing.
Daryl Marsden: No.
Rob: So out o the three changes, that have happened I'm getting the sense that you feel all three of those changes are pretty positive not just for the mortgage industry but for the real estate industry.
Daryl Marsden: I believe so, I believe it's a lot less dramatic that what we've been expecting and some of the bad rumors have been that they're gonna be reducing the amortization, they were gonna up the down payments. Those things never appeared so it's a situation that we believe, what's happening with the rules that have been brought in, none of them are going to be dramatically changing the market place that for sure. The only ones that kinda hurt are the last two, that's the 90% refinancing rule and the higher down payment when if you're buying an investment property.
Rob: Those are the nice to haves not the need to haves.
Daryl Marsden: Exactly, yup I think it's a good system and I think it's gonna help the economy as well so.
Rob: Very good! Okay. Thank you Daryl.
Daryl Marsden: No Problem.
This is a transcription of the latest Video Blog from MorrisReynar.com . If for any reason there is a discrepancy between this text and the Video Blog, the Blog is deemed accurate.