Mortgage Deferrals and COVID 19

CoryVance • March 21, 2020

One week into “quasi” lockdown and it certainly has been an interesting one. It is hard to know where to start so I will start with a THANK YOU and a sincere appreciation for all health care professionals and first responders. We are all thankful for all that you do.

To sum up this week in the world of mortgages is probably tough to do in a weekly blog and I probably should be doing daily ones right now, but with everyone stuck at home social distancing, I’m working on keeping sane. The top requested item this week is mortgage deferrals.

The government and CMHC being proactive on behalf of all banks and lenders said there would be solutions for Canadians impacted by COVID-19. They would be offering up to 6 months of payment deferrals on insured mortgages. This announcement, made March 13, seemed to be without any consultation or coordination with any lenders, which I guess can be expected during times like this where things are evolving minute by minute. Here was the original announcement:

I certainly do not disagree with the intention, but the execution has become nothing short of a debacle which has led to further panic and some people waiting on hold for up to 3 hours to get through to their lenders. All Mortgage Lenders including the Big 6 banks quickly responded with a coordinated effort and made a joint declaration earlier this week to support these payment deferrals. I think all parties woefully underestimated the impact of this announcement and lenders have now been hit with call volumes that have in some cases gone from the 600 calls per day to 3200 calls per day and one major lender had received over 24,000 email requests requesting information on payment deferrals in one day. The sheer magnitude of requests is staggering and causing a drag on all financial services companies and mortgage lenders. This at a time when mortgage application volumes have risen quickly.

I will try to do my part and shed some light on things we should be thinking about prior to requesting these now-infamous payment deferrals. First, let me start with the fact that there should be an immediate need or impending need. The stories are beginning to mount and we all either know someone that has been laid off or directly impacted by COVID-19 or you have been impacted. This is becoming the true financial tragedy of this pandemic. For those people, there is a potential immediate need which was the intention of the programs. For those still working and have emergency funds set aside today this would not be considered the target of this program.

Understanding things can change, but from what I have heard from lenders they are now trying to triage requests into an immediate need which would be those who have been adversely impacted and have mortgage payments coming out now or next week. The next tier would be those who have payments in the coming weeks or months and who have lost jobs or been laid off or impacted by COVID 19.

The next point would be these are payment deferrals. This means lenders are putting your payments on hold, they are not waived or disappearing. So in extreme cases, there can be up to 6 months, but please be clear these mortgage payments are not disappearing, they are just being put on hold or deferred. The financial costs to delaying these payments and having interest compounded can be very expensive when looked at over the term of a mortgage or the life of a mortgage. I will not go into detail on the actual costs, suffice to say if you do not have income coming in and you have depleted your savings this is one of the ONLY options and should be considered to help bridge the gap and help maintain your credit history. Please reach out to me directly if you have a situation and I can offer some guidance or solutions prior to calling your lenders who have now become overrun with all inquires. I can be reached at cory@coryvance.ca.

Please also keep in mind the intent of this program is to help in cases of hardship and you may be asked some qualifying questions so the lender can assess or show need. It is also important to understand how the payment deferral will work. Will it be delayed until the end of your mortgage term and impact your ability to switch or move your mortgage at the renewal date? The other big thing to consider is for those who have switched or got new mortgages in the past year. There may not be equity built up in the property yet and each lender may have to take that into consideration when assessing if they can defer payments. Once again I know I am posing more questions than answers, but with many different lenders involved each will have their own way of assessing the request much the same as each lender assesses new mortgages differently. All lenders continue to stress things will be looked at on a case by case basis.

Once again I would encourage anyone who is impacted at any level or those that may be impacted to contact me so we can have a conversation to assess some of your options. I can be reached at cory@coryvance.ca and over the next little while this will be the best way to reach me and I can follow up to schedule a call to discuss further.

On another note in mortgages and this may take most by surprise, but mortgage rates are GOING UP. Now you are saying Cory what are you talking about, the Bank of Canada just lowered rates last week. Yes, but once again in my last post on Friday, March 13 we had started to see bond yields increasing which means fixed mortgage rates would trend higher. Well, that trend continued this week and bond yields were up almost .50% this week from the all-time lows. SEE CHART showing the 5 year Government of Canada bond yields from the Bank of Canada website.

Expect to see fixed mortgage rates in the higher 2.00% range and moving above 3.00% soon.

This is not surprising because we knew all-time low rates would be short-lived and they would come up even quicker than they have come down. However, the other factor which is impacting rates, even more, is the liquidity and risk pricing that has started to skyrocket. This is when banks do not want to lend to each other, to businesses or even consumers because of the increased risk of not being paid back. This is the same as what we saw in Fall 2008 and Spring 2009 during the financial meltdown. We have now started to see variable-rate mortgages remove their discounts. So there is no more prime – 1.00% discounts on variable mortgages. These discounts with some lenders have gone down to prime or prime + .10%. The prime rate is currently 2.95% after we saw decreases of 1.00% this month and we may see further decreases. So for those with current variable discounts prime – .50% or more you should be well-positioned as we look to whether the pending storm.

At this point, I am going to stop and once again encourage any past clients or new clients to reach out so we can discuss your situation. These are challenging times for all of us and I can assure you there is no judgment on situations that have spiralled beyond your control. However the sooner we can take action the better, instead of waiting until some of your options disappear.

This brings me to one final comment on additional measures introduced under the government’s $82 billion aid plan this week which can be found here

I would encourage any that have been impacted to start the search here because you may qualify for some additional funds directly from the government which could help to make those mortgage payments before you think about deferring payments.

Stay well.
Cory

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CORY VANCE

403-614-9211

cory@coryvance.ca

An Overview of the Home Buying Process

By Cory Vance • February 11, 2025

If you’re in the early stages of planning to buy either your first home or your next home, you’ve come to the right place! Even if you’ve been through it before, the home buying process can be daunting, but it doesn’t have to be when you have the right people on your side! The purpose of this article is to share a high-level view of the home buying process. Obviously, the finer details can be addressed once you’ve submitted an application for pre-approval. But for now, here are some of the answers to general questions you may have as you work through your early preparations. Are you credit-worthy? Having an established credit profile is essential when applying for a mortgage. For your credit to be considered established, you’ll want to have a minimum of two trade lines (credit cards, loans, or lines of credit) with a minimum limit of $2500, reporting for a period of at least two years. From there, you’ll want to make sure that your debt repayment is as close to flawless as possible. Think of it this way: Why would a lender want to lend you money if you don’t have a history of timely repayment on the loans you already have? Making your payments on time, as agreed, is crucial. We all know, however, that mistakes can happen and payments might get missed. If that's the case, it’s best to catch up as quickly as possible! Late payments only register on your credit report if you're past due by 30 days. How will you make your mortgage payments? When providing you with a mortgage, lenders are trusting you with a lot of money. They'll want to feel really good about your ability to pay that money back, over an agreed period of time, with interest. The more stable your employment, the better chances you have of securing mortgage financing. Typically, you’ll want to be employed in a permanent position or have your income averaged over a period of two years. If you’re self-employed, expect to provide a lot more documentation to substantiate your income. How much skin do you have in the game? If you're borrowing money to buy a home, you’re going to have to bring some money to the table. The best down payment comes from accumulating your own funds supported by documents proving a 90-day history in your bank account. Other down payment sources, such as a gift from a family member or proceeds from another property sale, are completely acceptable. In Canada, 5% down is the minimum requirement. However, depending on the purchase price, it might be more. Also, you need to be aware that you will likely have to prove access to at least 1.5% of the purchase price to be allocated for closing costs. How much can you afford? Here’s the thing. What you can afford on paper and what you can afford in real life are often very different amounts. Just because you feel you can afford the proposed mortgage payments, know that you will have to substantiate everything through documentation. The amount you actually qualify to borrow is based on many factors, certainly too many to list in an article designed to provide you with an overview of the home buying process. However, with that said, it’s never too early in the home buying process to seek professional advice. Our services come at no cost to you; it would be our pleasure to help. Working with an independent mortgage professional will allow you to assess your credit-worthiness, provide insight on how a lender will view your income, help you plan for a down payment, and nail down exactly how much you can afford to borrow. And if you need help putting together a plan to improve your financial situation, we can do that too. If you’d like to discuss your financial situation and put together a plan to secure mortgage financing, please get in touch!

GDS/TDS Ratios Explained

By Cory Vance • January 28, 2025

One of the major qualifiers lenders look at when considering your application for mortgage financing is your debt service ratios. Now, before we get started, if you prefer to have someone walk through these calculations with you, assess your financial situation, and let you know exactly where you stand, let’s connect. There is no use in dusting off the calculator and running the numbers yourself when we can do it for you! However, if you’re someone who likes to know the nitty-gritty of how things work instead of simply accepting that's just the way it is, this article is for you. But be warned, there are a lot of mortgage words and some math ahead; with that out of the way, let’s get started! “Debt servicing” is the measure of your ability to meet all of your financial obligations. There are two ratios that lenders examine to determine whether you can debt service a mortgage. The first is called the “gross debt service” ratio, or GDS, which is the percentage of your monthly household income that covers your housing costs. The second is called the “total debt service” ratio, or TDS, which is the percentage of your monthly household income covering your housing costs and all your other debts. GDS is your income compared to the cost of financing the mortgage, including your proposed mortgage payments (principal and interest), property taxes, and heat (PITH), plus a percentage of your condo fees (if applicable). Here’s how to calculate your GDS. Principal + Interest + Taxes + Heat / Gross Annual Income Your TDS is your income compared to your GDS plus the payments made to service any existing debts. Debts include car loans, line of credit, credit card payments, support payments, student loans, and anywhere else you’re contractually obligated to make payments. Here’s how to calculate your TDS. Principal + Interest + Taxes + Heat + Other Debts / Gross Annual Income With the calculations for those ratios in place, the next step is to understand that each lender has guidelines that outline a maximum GDS/TDS. Exceeding these guidelines will result in your mortgage application being declined, so the lower your GDS/TDS, the better. If you don’t have any outstanding debts, your GDS and TDS will be the same number. This is a good thing! The maximum ratios vary for conventional mortgage financing based on the lender and mortgage product being offered. However, if your mortgage is high ratio and mortgage default insurance is required, the maximum GDS is 39% with a maximum TDS of 44%. So how does this play out in real life? Well, let’s say you’re currently looking to purchase a property with a payment of $1700/mth (PITH), and your total annual household income is $90,000 ($7500/mth). The calculations would be $1700 divided by $7500, which equals 0.227, giving you a gross debt service ratio of 22.7%. A point of clarity here. When calculating the principal and interest portion of the payment, the Government of Canada has instituted a stress test. It requires you to qualify using the government's qualifying rate (which is higher), not the actual contract rate. This is true for both fixed and variable rate mortgages. Now let’s continue with the scenario. Let’s say that in addition to the payments required to service the property, you have a car payment of $300/mth, child support payments of $500/mth, and between your credit cards and line of credit, you’re responsible for another $700/mth. In total, you pay $1500/mth. So when you add in the $1700/mth PITH, you arrive at a total of $3200/mth for all of your financial obligations. $3200 divided by $7500 equals 0.427, giving you a total debt service ratio of 42.7%. Here’s where it gets interesting. Based on your GDS alone, you can easily afford the property. But when you factor in all your other expenses, the TDS exceeds the allowable limit of 42% (for an insured mortgage anyway). So why does this matter? Well, as it stands, you wouldn’t qualify for the mortgage, even though you are likely paying more than $1700/mth in rent. So then, to qualify, it might be as simple as shuffling some of your debt to lower payments. Or maybe you have 10% of the purchase price saved for a downpayment, changing the mortgage structure to 5% down and using the additional 5% to pay out a portion of your debt might be the difference you need to bring it all together. Here’s the thing, as your actual financial situation is most likely different than the one above, working with an independent mortgage professional is the best way to give yourself options. Don’t do this alone. Your best plan is to seek and rely on the advice provided by an experienced independent mortgage professional. While you might secure a handful of mortgages over your lifetime, we do this every day with people just like you. It’s never too early to start the conversation about mortgage qualification. Going over your application and assessing your debt service ratios in detail beforehand gives you the time needed to make the financial moves necessary to put yourself in the best financial position. So if you find yourself questioning what you can afford or if you want to discuss your GDS/TDS ratios to understand the mortgage process a little better, please get in touch. It would be a pleasure to work with you, we can get a preapproval started right away.