Household Lending Tightened Due to New Mortgage Rules

New mortgage rules made household lending a bit trickier for the first quarter of 2018, shared Bank of Canada. This development regarding the OSFI mortgage stress test that started in January led to more Canadians going to loan sharks and to private lenders because they can’t qualify for a bank mortgage.

Survey Results

A survey by the Bank of Canada’s financial institutions showed that the tighter household lending conditions for the first quarter of 2018 is linked to the new mortgage rules. The survey usually just report on business loans but have recently included household lending.

The Bank of Canada added that the tightening in mortgage lending resulted from changes to Guideline B-20 (about the underwriting standards) which primarily affected non-price conditions for HELOCs (home equity lines of credit) and low-ratio mortgages. The tightening also affected price conditions for mortgages because the spreads charged to borrowers increased together with mortgage rates.

These developments may be a preview of what other changes will take place. Canada’s biggest lenders are saying that it is still too early to tell what other impacts are in store, a sentiment shared by Dave McKay, president and chief executive officer of the Royal Bank of Canada.

HELOC on the Rise?

The Bank of Canada’s survey shared that the demand for low-ratio mortgages and HELOCs experienced an increase during the survey period. It should be noted that the new B-20 rules regarding having a stress test for uninsured mortgages may also affect low-ratio mortgages because they fit the criteria for uninsured loans.

The survey also shared that there are increases and decreased in demand affected by regulatory changes that were reported by institutions. The figures could have been due to expectations of higher interest rates as well as borrowers having placed an application prior to the implementation of the B-20 changes. These are about the same findings reported in March in connection with the Bank of Canada’s rate-setting decision wherein people pushed to pull forward before the implementation of new mortgage guidelines and other related policies.

The BOC said that the survey respondents also expect that the current quarter will reflect a decreased demand for HELOCs and low-ratio mortgages. It noted that the demand for such tailed off after regulatory changes were introduced late 2016.

Business Lending Developments

The survey found that overall business lending conditions eased slightly during the surveyed period. This was driven by increasingly intense competition for corporate borrowers as the demand for business credit increased in the survey period.

The questions used for the business lending and the household lending portions of the survey reflect each other and the respondents were 18 financial institutions. They were asked about their lending practices, demand for credit, as well as changes noted from the prior quarter.

Not sure about how the developments shared will affect your existing mortgage or plan to apply for a new one? Contact us at Mortgage Central Canada and our professional mortgage brokers would be happy to assist you with your mortgage concerns regarding the latest mortgage news.

 

What is Home Equity? And How You Can Use It!

Home equity is a great asset to have. It is computed as the difference between the home’s market value and the sum the homeowner still owes. A large home equity is built over time as the homeowner is able to pay mortgage. It is largest when the homeowner is totally debt-free.

Understanding Home Equity

With the above said, home equity is the percentage of the property that the homeowner truly owns. It is the value of the property asset that the homeowner can use because any mortgage left unpaid is ‘owned’ by the lender.

Say you bought a $500,000 home and placed a $100,000 down payment on it with the remaining $400,000 in mortgage. This means that you ‘truly’ own 20% of your home’s value at this point. As you pay your mortgage, the percentage that you ‘truly’ own increases, more so when property values go up.

Does  this mean that the lender owns 80% of your home in the beginning? It would look like that but technically you own your home all along only that the house is your collateral for the loan that you take to buy it.

What does the lender gain in this set-up? Well, you pay for interest rate. The lender may also end up owning your home if you fail to pay according to terms set up and agreed by both your parties.

How to Build Home Equity

You can build equity by paying off your loan and improving your property so that it gets a higher market value.

Your equity will increase as you pay off the balance in your loan. You have to ensure that you’re paying more than just the interest and that you’re paying towards the principal. This way, you build equity over time.

Your equity will also increase during surges in the real estate market or when you take on home improvement projects that has a positive effect on home value.

How to Use Home Equity

Like any other asset, you can tap your home equity when in need. You can do this by getting a home equity loan or a HELOC. You can also use the equity you’ve built when you sell your current home to buy another one that’s better suited to your needs.

Another possibility is to use your home equity to fund your retirement by getting a reverse mortgage. This will allow you to use your home equity like a savings fund. You get to stay in your home and not have to sell it to enjoy the equity.

The most popular ways to use home equity is by applying for a HELOC or applying for a lump-sum home equity loan. Both have pros and cons and are good solutions for needing a large sum of accessible cash. What’s best for you will depend on several factors such as how much cash you need, your ability to pay, and for what purpose you’re taking the home equity loan for.

Do you want to use your home equity but still unsure whether you want to apply for a HELOC or apply for a second mortgage? Speak with our professional mortgage brokers so they can help you determine which one would be a better way of using your home equity for you! Contact us today!