Aug 2012 10

How Credit Unions Escape New Mortgage Rules

Posted by Jay Banks
Money by Sharon Drummond Money by Sharon Drummond

Despite Canada being at the other side of the ocean, the financial problems of the European Union touch us closely. Our biggest trading partner is the United States, whose business links with Europe are rather strong. We are therefore affected by all the turmoil on the old continent as well.

There has been despair that the EU crisis can toss us back to where we were after the crush of the Lehman Brothers in 2008. This is very unlikely, let me say at the very beginning. According to leading economists and bank analysts, we have already recovered from the post-crisis syndrome and built a strong country in the meantime. Our economy is one of the strongest and most reliable. There has been a massive increase in foreign investors’ interest in buying our government bonds. They are now seeking a stable, well functioning country where they can invest their money without being afraid they will lose in the long run.

Same Action, Different Result

I’d like to share one interesting thought with you. We all know that the same action can have two very different consequences when undertaken by different individuals. You and your colleague can have the same suit, but still one of you might look stunning and the other, well, less so. A similar thing happened in the U.S. and Canada four years ago. The U.S. economy crashed because of the fast-growing housing market while this action saved us. What Canada needed was an acceleration in home business. Developers and executives were able to target a hole in the market and fill it. The housing market boom was therefore the trigger that started our recovery and it has served us well until now. Canadians were able to build a strong economy and functioning country in just four years, and now another phase has to come: the cool-down. You can’t sprint for a long time and it’s proven that marathon runners are more successful in the end.

Finance Minister Jim Flaherty has been doing an amazing job. He tends to leave the market on its own until he and his team of economists start to see an emerging problem. Many journalists have been joking about him and how frequently he has changed the numbers in financial regulations. However, I believe that this is what a Finance Minister should do in these extremely volatile times.

Just a couple of days ago, new mortgage rules came into action. There was a rising worry about the overheated real estate market and the change in rules should cool it down. It is still very early to tell how much have the changes improved the current situation. I’m going to summarize the main changes and their consequences in the lines below.

Amortization Period Reduction

Reducing the amortization period from 30 to 25 years was probably the smartest step. The amount you pay every month will slightly increase and therefore you need to put more money on the side each month. On the other hand, you will still pay the same interest rate so by shortening the mortgage span, you can save more. Overall, I think this step will promote saving and help Canadian household to better manage their own finances.

Refinancing

Private Property by Phil Gilbert Private Property by Phil Gilbert

Have you been considering refinancing through HELOCs? Pay close attention to the second change done by Mr Flaherty. So far you could borrow as much money as 85 per cent of the value of your property. This limit will change and from now on, only 80 per cent will be available to you. I sure you know someone who borrowed money though HELOC that were intended for home reparations and reconstructions and used it to buy something else. The number of cases in which people refinanced their homes and used the money for some consumer good has been rising. Therefore further adjustment needed to be made to prevent more of those cases.

Household Debt Levels

Aiming for insurance from CMHC? Read carefully. Finance Minister Jim Flaherty decided to lower the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio to 44 per cent. Simply speaking, if you wish to have your home insured by CMHC, you should only spend a maximum of 39 per cent of your gross household income on mortgage payments, taxes, and heating. Similarly you should spend no more than 44 per cent of your household income in housing expenses and other debts you might have. Mr. Flaherty believes this adjustment will help households to bare unexpected shocks and possibly increased interest rates.

Insurance Ceiling

I will describe the last step shortly since it touches only 1 per cent of homeowners. Government-backed mortgage insurance will only be available to those whose property’s value is less than $1 million.

We are all equal — but some of us might be more equal than the others

The most natural place we go to consult our finances is a bank. In many countries. it’s actually the only place where money can be deposited, traded, or borrowed. In Canada, Credit Unions should be taken into account as well. They function similarly to banks when it comes to handling money. However, internally their structure differs and sometimes it might be beneficial to be a member of a credit union instead of a client at a commercial bank.

Credit unions operate on a membership basis. If you want to become a member, you need to have an account in the union with some money in it. Each member has one vote and it doesn’t matter how much money you have deposited. The president and board then vote. Credit Unions offer similar services as banks: loans, mortgages, investment guides, and so on. These services are offered to members only and are subject to validation.

Mortgages by 12th St David Mortgages by 12th St David

The recent mortgage rule changes introduced by Mr. Jim Flaherty might apply to banks and other Federally Regulated Financial Institutions (FRFI). The reason for this is that banks are federal institutions and while Credit Unions are managed locally or provincially. Since Credit Unions operate with the money of their members only, they should create the rules for themselves. This is true to some extent; however some guidelines are released to monitor and adjust the functioning of the union. Some of the mortgage rule changes might apply to Credit Unions and some might not. Credit Unions are provincially managed and therefore it is the provinces that have the final word.

If you are seeking a mortgage and new rules made it impossible for you to get one, you might still be successful at a Credit Union because not all of them will need to comply with the recent adjustments.

Refinancing

It won’t take long until OSFI limits HELOCs at banks and other federal institutions to 65 per cent loan to value. However, some provinces might come out as exceptions, such as Ontario, and you will be allowed to refinance up to 80 per cent if you are a qualified borrower.

Income reasonability Test

OSFI guidelines encourage Federally Regulated Financial Institutions to demand official income documents to satisfy income reasonability tests for self-employed individuals. Some Credit Unions might be willing to lend to you at less strict conditions.

Lower Qualification Rates

Federally Regulated Financial Institutions will have to use the five-year Bank of Canada rate to qualify borrowers who wish to take loan with amortization period lower than five years at fixed or variable rates. However, members of Credit Unions in some provinces like Ontario who proved to be qualified borrowers can be assessed at a more lenient three-year discount rate instead.

High Hopes

I know how constant changes can be tiring and confusing. I work in real estate and every minor change has a huge impact on my life and work. Despite this, I’m glad we as a country are one of the world leaders and are seen as having a responsible and reliable economy. Therefore I’m open to all changes and adjustments as long as they keep us on track. The recent months have been extremely challenging and tough; each step needed to be carefully planned and they have made and our government successful. I believe Canada is well on track and will continue to grow steadily despite the unfortunate events in the world.

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