Mortgage 101 – Risks and Rewards in the Mortgage World | Jan. 30, 2023

It’s a stressful time for consumers. Especially for those who are on variable rates or are due for renewal. In this episode, Clinton Wilkins and Todd Veinotte chat about how consumers can protect their finances with the stress test and the flexibility of a variable rate.

Recorded LIVE for  CityNews 95.7 with Clinton Wilkins and Todd Veinotte.

What is the stress test?

Todd Veinotte 00:04
Welcome back to Mortgage 101, your guide to homeownership. With Clinton Wilkins and myself, Todd vino. So we talked in our opening segment, a little I don’t want to doom and gloom, but it –

Clinton Wilkins 00:17
Wasn’t rah rah rah like we normally go is it? I don’t know, normally we are very positive people

Todd Veinotte 00:21
That’s right, so, but that all said though, we knew we do need to talk about solutions, because we discussed assessments going up. And we can dovetail interest rates into all of this, but the stress test, talk about the stress test, because I think that that, like what’s going on right now. Well, no, but why the stress test was applicable? For goodness sakes, right?

Clinton Wilkins 00:39
I mean, any mortgage that was done since, you know, obviously changed everything and the stress test came into play. B20. B21.

Todd Veinotte 00:48
And what is the stress test for those who don’t know what the stress test is?

Clinton Wilkins 00:50
So the stress test currently, and at the end of the year, they decided that they were going to keep the qualifying rate the same at 5.25 or 2% above your contract? Obviously, with where the rates are right now, the rates are typically above 5.25% or 3, whatever. So everyone is qualifying at a rate of contract plus 2%.

Todd Veinotte 01:15
Right, and the purpose, and the point of that is, is that inflation can set in and things can happen, right? and you need to have that buffer zone in your income.

Clinton Wilkins 01:24
Exactly. Yeah. And it’s for everyone, it doesn’t matter if you’re in a variable rate or a fixed rate, you’re all qualifying with the stress test rate, and currently are qualifying at prime plus 2%. What’s interesting, a lot of industry people like myself, we thought that maybe the minimum qualifying rate might be increased above 5.25. It wasn’t last year. So that means that typically we’ll go the whole year until the end of next year. And they’re going to decide, does that minimum qualifying rate need to be changed? I don’t know. You know, a lot of economists think that by the end of this year, we may be in a recession type situation. And if we’re in a recession type situation, that means that the rates really could go down. And, you know, obviously, that’s going to impact what happens with the Bank of Canada, it may impact the bond market. We’ll see what happens with rates. We don’t have a crystal ball. I think that the rates still may be high for at least another year. So I think that’s what we need to bank on. 2023 high rates.

The stress test protects the consumer

Todd Veinotte 02:21
but the stress test is there to protect the consumer, right?

Clinton Wilkins 02:24
It is and consumers are protected. The CEOs of the Big 5 actually, you know, met, it was in the news this week. And they were really talking about mortgages, obviously, it’s obviously on the front of everyone’s mind. Obviously, they were all talking and, are there some mortgage arrears? Not really just yet. But they’re projecting that as much as maybe 2, 2.5% of consumers may get into some mortgage arrears later this year, depending on what happens with rates. Typically, I will say that Canadians make their mortgage payments. Yeah, that’s the very last thing that they are unable or are not willing to pay. So Canadians typically will make their mortgage payments. And I will venture to say, these bank lenders are not going to see a bunch of foreclosures. You want to know why? People that are able to qualify for a prime mortgage typically have cash or credit, they are able to weather the storm for a longer time than someone that’s in an alternative mortgage maybe, or someone that’s in a private mortgage. Those are the ones that I’m really most concerned about. I think the most vulnerable are the clients with the highest interest rates.

Rate increases will soften with time

Todd Veinotte 03:31
Yeah. And listen, I have people sometimes they’ll call the show or I’ll get emails from them saying look, we’re in a we’re in and the sky is falling scenario. And they’ll look at what happened in the United States in 2008. And I said, look, it’s not there’s zero comparables to what happened. Not even close. So let everybody know, just a couple of reasons why it’s not even close for those who are saying, oh, we’re heading towards what happened in the United States?

Clinton Wilkins 03:54
Well, I think at that point, there was, the access to credit was really –

Todd Veinotte 03:57
Yeah, they were giving everybody a mortgage.

Clinton Wilkins 03:58
Yeah, exactly. So if you had a heartbeat, you can get a mortgage. In Canada, we are definitely more conservative. It comes back to this point about the stress test, you have to qualify on a higher interest rate. Because when you qualify, the bank and the federal government wants to know that if the rates go up, you can still afford your home. Right? And that’s what’s happening right now. You know, did we think inflation was going to be a runaway train, we talked about inflation, basically, all year last year. We should have known. And the rates only really started increasing the back half of the year. But now we’ve had 6 months, 12 months of higher rates, and now we think the sky is falling. No, it might be another 6 months or 12 months and things will soften. It’s like consumers that are in a variable rate. It’s not gonna be high forever. It’s not gonna be low forever. It’s variable. Right? Historically, it’s better and obviously some people that are in a variable right now are paying more money and are they pay more money than if they were in a fixed? In some cases, yes.

Todd Veinotte 04:58
But that said, I’m in a variable. So I’m still paying hundreds more for my mortgage. That all said I would almost rather do that than being something extremely low and have to renew in a year and be shocked. Right. At least you grow into the increase right?

Clinton Wilkins 05:14
I’m seeing that right now. I think those are the hardest conversations. It’s the clients that are coming up for renewal that are like the sub 3%.

Todd Veinotte 05:21
So people who are at 2.5% 2.9.

Clinton Wilkins 05:24
They are shocked. They are shocked.

Todd Veinotte 05:26
How much is it going up for them?

Clinton Wilkins 05:27
In some cases, their interest rate is doubling.

Todd Veinotte 05:29
So on a typical payment, bi weekly payment –

Clinton Wilkins 05:33
Well the payment is not going to double Todd.

Todd Veinotte 05:34
No, I know, that’s what I’m saying is –

Clinton Wilkins 05:36
The payment might be 50% more though.

Todd Veinotte 05:38
Right, so we’re talking that’s significant. Yeah, we’re talking hundreds and hundreds of dollars a month more.

Mortgage solutions and amortization

Clinton Wilkins 05:43
And I’ll tell you what we’re doing. And this is a really good time to talk a little bit about solutions. I’m talking to a lot of clients that are not originally, we didn’t do the mortgage, these are clients that are coming to us from another financial institution, and maybe a mortgage broker did it or they went directly to the bank. And they are coming to us for advice about what should they do to make their situation better. In many cases, a bank lender, they don’t want to rework your mortgage to extend your amortization only. If you’re going to rework your mortgage, they want to lend you more money. So they want to pay off some debt or something like that. So I have clients that are coming from some of the big 5 that we don’t even do business with. And these clients want us to do the transaction and not borrow any more money, Todd, but what they want to do is they want to extend their amortization 25 or 30 years. I have clients that are, they have 10 years left or 15 year left or 20 years left, but they need a longer period of time to pay that principal, because they need to have a lower mortgage payment.
So we’re certainly having those conversations.

We’re certainly having a lot of conversations for clients that bought a home prior to 2020. Because they still have a lot of equity in their homes. And are the values as high as they were at the peak? I don’t think so. But I don’t think the property values have gone down. There’s just not as many transactions happening right now. And are things going for as much above asking as they were? No. But I think that, certainly there’s a lot of borrowers that have a lot of equity in their properties and those are the ones that we’re doing a lot of these transactions for. And sometimes they’re pulling out equity, to maybe pay off unsecured debts. I mean, it’s January, it’s merry debtmas. We’re starting to open our credit card statements. Maybe we spent too much money last year, maybe we spent too much money during the holidays. And some of these consumers are doing a refinance and pulling some equity out of the property. And that’s putting them in a better financial position. But I would say even more than that, we’re talking to people a lot about amortizations. And people are definitely taking longer amortizations now than they were before.

Todd Veinotte 07:44
Yeah. And that’s for some people, I think the concept years ago was pay the mortgage down, never do that. That’s paid off, off mortgage charge from your right. But I think people now are even into their senior years or looking at their homes as in a different way. Right? Is that safe to say?

A mortgage can protect you from fraud

Clinton Wilkins 08:01
Let me tell you, I see so many people before they retire. If they don’t have a mortgage on their property, they’re putting a home equity line of credit on there because they can qualify, they have the income. And it’s really prudent to have a mortgage charge on your property. Because things like mortgage fraud, it doesn’t happen that much in Nova Scotia, but let me tell you in other areas of the country, it happens a lot. And when you own your property free and clear, and there’s no charge on there, you’re basically opening yourself – your’re a target. You’re a target. And there was a news story coming out of, I think of Ontario, in the last couple of weeks. A couple was on vacation. They were away for a couple of weeks. So fraudsters made their IDs, sold their property. The buyer, the legitimate buyer for these fraudsters was living in the property. It’s a terrible situation. But when you own your house free and clear, you’re opening yourselves up. So I’d say at least have a HELOC on your property, a home equity line of credit. I would say that is going to protect you. And then at least you have a lien on there. You don’t need to owe anything on it. But it’s a great way to protect yourself from potential title fraud.

Variable rates offer flexibility for consumers

Todd Veinotte 09:14
Alright, so when it comes to mortgage, to variable versus fixed, you’ve been a strong, strong, ardent supporter of a variable rate and you still are?

Clinton Wilkins 09:23
I still am.

Todd Veinotte 09:24
Okay, tell us why.

Clinton Wilkins 09:26
I can tell you, there’s more clients today taking a variable rate than there are a fixed. And in many cases, variable today is more expensive than fixed.

Todd Veinotte 09:34
Variable is more expensive than fixed? Today and yet, you’re still advising that they do that.

Clinton Wilkins 09:39
And clients are still wanting to do it.

Tom Vienotte 09:41
Okay. Well, state your case.

Clinton Wilkins 09:44
One, they think there’s going to be a recession. And they think that if there’s a recession, the Bank of Canada is going to lower the key overnight rate, which will obviously impact –

Tom Vienotte 09:51
What’s the time horizon for that? a year?

Clinton Wilkins 09:55
We’ll say a year. Secondly, if you break your mortgage early, in a variable, you’re only going to pay a penalty of three months interest to get out. So, Canadians, we’d like to break our mortgages. Sometimes we break our terms early. If you’re in a variable, three months interest. Thirdly, that variable is always convertible into a fixed rate with your existing lender. So imagine the fixed rates go down. Yeah. And you’re like, hey, fixed rates are now half of where they are now. And you really want a fixed rate, you can convert with no penalty. The downsides on the fixed are, are quite high right now. And if you break it, you’re going to pay a massive penalty to get out, especially when the rates go down. Because you’re gonna pay something – .

Todd Veinotte 10:39
Well somebody says, yeah, we’re not gonna break it. I know we’re set. We’re not moving. We’re not going. What do you say to that?

Clinton Wilkins 10:44
What happens if you have health issues? What happens if you have matrimonial breakdown?

Todd Veinotte 10:48
People have matrimonial breakdown?

Clinton Wilkins 10:50
Believe it or not, it happens, like 50% of the time.

Todd Veinotte 10:54
I think it’s more than that.

Clinton Wilkins 10:57
Could be more than 50. And I’m not against fixed rates. Don’t get me wrong. Don’t get me wrong. Fixed rates are for some people, I think if you’re at the top of your budget, you’re borrowing the maximum you can afford. And you need to know what you’re going to pay every month, you’re gonna lose sleep at night, a fixed rate is viable, even at today’s rates. It’s not for everyone. And I think you need to understand the risks of both. There’s risks and reward, no matter which choice you make.

Todd Veinotte 11:25
But it must be, I don’t want to say an annoying day, but when when rates go up, and the phones are ringing from people who are panicking, you must be talking a lot of people kind of down off the ledge, right?

Clinton Wilkins 11:37
You know what we have these conversations all the time, but what I think is really powerful, we really try to get ahead of it. We’re all about communication. You have a variable rate mortgage, I have a variable rate mortgage, we’d like to pump the communication out. We sometimes will send the communication out before the Bank of Canada even meet. When the Bank of Canada does meet, we’ll send an SMS, we’ll send an email, I’m live on Facebook. I’m on CityNews. You know, we’re trying to pump out as much communication as possible. So then borrowers are really comfortable. And they, you know, they know what’s going on, I can give the advice. And in some cases, clients have chosen to lock in. They might not have locked it with their existing lender. Sometimes we’ll do a transfer to another lender. And on the show, I think in the last couple months, I said, you know a 3 year fixed is very popular right now. I will kind of change what I’m saying. I would say mostly it’s 5 year fixed and 5 year variable. And we’re doing more transactions in a variable rate right now than we are in a fixed.

Todd Veinotte 12:35
Yeah, okay. So we’ve got one more segment left. I do want to ask you about new Canadians, and getting new Canadian because this must be a big part of your business I’m assuming.

Clinton Wilkins 12:43
Yeah, certainly. It certainly has been and there’s been obviously some real changes with the Federal Government.

Todd Veinotte 12:47
That and a lot else coming up in the next segment. Mortgage 101, your guide to homeownership. We’ll be right back.

Clinton Wilkins 13:01
If you’ve liked what you’ve heard, and you want to learn more, feel free to visit us online at teamclinton.ca