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CHMC-insured mortgage arrears skyrocket in Alberta

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There are some parts of Canada where the prices of real estate have already shot up toward what is likely to be a peak for the time being. In some other areas, though, the markets are just heating up, and interest rates are still at rock-bottom levels. This makes this a terrific time to start investing in real estate. However, if your liquidity is on the low side, where do you get the funds?

Take out equity to buy second home

You can take out a mortgage, or you can sell some of your other investment assets, such as bonds or stocks, or you can raid your IRA, or you can take out equity to buy a second home.

What is home equity? It’s the difference between the market value of your home, as determined by an appraisal, and what you owe on the mortgage. If you bought a house for $750,000, and you’ve paid down the balance on the mortgage to $250,000, but the value of the home has gone up to $900,000 in the years since you bought it, you have $650,000 in equity on the house. You can take out a home equity loan, home equity line of credit (HELOC) or cash-out refinance in order to get the money out so that you can buy another house, provided you meet prime lender credit and affordability requirements.

If you want to take equity out of your house to buy another, there are some real benefits. You’re likely to get a better interest rate and lending term from the bank, because you have more at stake – two properties with collateral. If you take out a second mortgage to buy that second home, you represent a higher risk than someone who refinanced their primary residence to make that purchase. If you run into financial difficulties, you’re more likely to let a second home go into foreclosure if that loan doesn’t jeopardize the place where you live. You can save on this loan, because you won’t have to pay fees for title searches or many of the other costs that go with taking out a new mortgage, because you’re accessing the equity in a home you already own instead of asking for financing to purchase a separate one.

There are some drawbacks to this too, of course. You will now face a higher mortgage payment each month when you take equity out of your house to buy another property. If you plan to rent out the second property, that income can counteract the higher payment. However, if you run into financial trouble and can’t make the payments, your primary residence is the collateral – and it is what the bank will come after if you go into default.

If you are planning on investing in a second home to “flip” it – or make some improvements and then sell it at a profit, then you won’t have that larger mortgage payment for long, because you can take the profits and use it to pay down that larger mortgage or save some of the money and then reinvest the profits elsewhere.

If you are planning for this second home to be a vacation home, you could consider renting it out on the weeks when you don’t plan to use it. That secondary income can help you with that larger mortgage that you have now as well. There are many property management companies that can help you administer a rental property either in your own city or in a place on the other side of Canada.

Planning to use it as a rental property with a full-time tenant? You’ll still have money rolling in once the lease gets signed, which should help you with those mortgage payments. Once again, though, you don’t want to take on a mortgage payment that you can’t handle – even if you have zero income coming from the rental property. Don’t let your primary residence end up be the one facing foreclosure because you gambled the place where you and your family live – and you lost.

Do you have questions about taking out equity from your home? Contact Amansad Financial today. Your personal situation can be reviewed so that a recommendation can be made as the best course of action.

Low oil prices have brought yet another round of difficulties to Alberta, as CHMC reports a 52 percent increase in insured home loans in the province that have gone into arrears.

In the second quarter, 1,487 mortgages in Alberta were at least three months overdue as of June 30. In 2015, that number stood at 978.

Alberta is not the only province experiencing difficulty, as Saskatchewan’s total of CHMC-insured mortgages in arrears climbed from 392 to 529 over that same time period.

The economy is clearly better in Ontario, Quebec and BC, where the number of CHMC-insured mortgages in arrears dropped by hundreds between June 30, 2015 and June 30, 2016.

Ontario has the lowest arrearage rate in Canada (less than 0.2%). Alberta’s is 0.41%, and Saskatchewan’s is 0.69%. For the entire country, CHMC reports a slightly lower arrearage rate, but those mortgages still occupy about 0.33% of the insurer’s portfolio.

Overall, CHMC provided mortgage insurance to about 135,000 home purchasers in the second quarter of 2016, about an 11 percent increase from the second quarter of 2015.

Taken with other indicators, this could mean that mortgages could become more costly for consumers. OSFI instituted new rules in September that, effective January 1, 2017, will require insurers to boost the capital that they have on mortgages in certain parts of the country. According to Superintendent Jeremy Rudin, “When house prices are high relative to borrower incomes, the new framework will require that more capital be set aside.”

So where will that new capital come from? You guessed it – borrowers can expect higher interest rates, higher mortgage insurance premiums, and/or tougher underwriting requirements. This will particularly be true if borrowers come in with lower credit scores, longer amortization periods and higher LTV ratios on their applications.

According to some sources, this could lead to variations in premiums depending on where one lives. So someone in one part of the country could pay one premium while a borrower in another part could pay a different premium. OSFI has indicated that the institutions will have free reign to determine how they integrate the new requirements.

As of the second quarter, Calgary, Edmonton, Vancouver and Toronto would have gone over the valuation thresholds set by OSFI, and insurers would have had to put in more capital on those mortgages.

Several insurers, including Genworth Canada, have already announced that higher premiums are coming. CMHC goes through a yearly premium review, but don’t be surprised if they announce an increase of their own in the first months of 2017.

If you have a low-ratio mortgage, you could see premiums go up as well. Certain lenders buy transactional insurance in order to fund the loans, but costlier low-ratio premiums could give larger banks a competitive edge.

Some borrowers could find it harder to secure an insured mortgage, as insurers try to avoid losses with mortgages with higher capital costs – which could lead to fewer exceptions and more declines. In cases of borrowers with better credit, the capital requirements might go down, though. The proposed changes remain open for public comment through October 21.

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Daniel K. Akowuah | Mortgage Professional / DLG Underwriter
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