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Wanted: Elegant solutions for complex market challenges

If Canada has a “national dream,” it is this: Canadians want a home to call their own. Yet from the looks of it, governments are doing their best to make it much harder to achieve that goal.

But like everything we tend to rail against, it’s complicated. A recent study by Equifax found that housing and daycare costs are so unaffordable in Vancouver and Toronto that two-child families with average homes and household incomes of $100,000 (more than $25,000 higher than the median) must increase their debt-load each year to keep up. That’s true even before they add higher interest rates – or vacations and other non-essentials – to their budgets.

You’ve got to live somewhere, whether you’re renting or paying a mortgage. It’s all about that monthly payment.
— Paula Roberts Mortgage Broker

Recent regulatory changes are meant to open the steam release on that pressure cooker, but many homeowners and potential buyers are now suffering the intended and unintended consequences.

Looking back provides some important perspective and lessons. Ken Chouinard began his real estate career in 1975, when 20 per cent down payments were still required, there was no such thing as a variable mortgage and five-year rates were 10.5 per cent. They would reach 21.75 per cent in 1981, making it almost impossible to sell homes. In response, Mr. Chouinard became one of the country’s first independent mortgage brokers, drawn by the opportunity to develop creative solutions.

By working with second-mortgage lenders, Mr. Chouinard’s team created a win/win arrangement for buyers and sellers: the buyer assumed the seller’s existing mortgage and took an even higher-rate second mortgage to meet the purchase price; the seller paid a lump sum to the lender to discount the new mortgage rate to the degree that the combined rate was equivalent to the lower current rates – and both parties paid significantly less overall. The strategy was so effective it became an successful marketing tool.

Mr. Chouinard went back to real estate sales in 1986; regrettably, he doesn’t have a similarly elegant solution for today’s market challenges. One of his clients recently found the new rules had reduced her buying power by $60,000, and the modest condo she recently put an offer on received three others, likely all higher than the asking price. He’s also seen numerous accepted offers fall through because buyers who were preapproved three months before learned the hard way they no longer qualified for anything close to the same amount.

The new rules are undoubtedly locking some Canadians out of mortgages that would allow them to save money, build equity and pay off higher-interest credit debt, says veteran mortgage broker Paula Roberts. Since 1989, she says, her focus has always been on helping her clients focus on affordability rather than rates. “You’ve got to live somewhere, whether you’re renting or paying a mortgage. It’s all about that monthly payment.”

It’s also harder for homeowners to consolidate higher-interest unsecured debt and lower their overall interest costs, she says. “If you’ve had to put in new windows and want to consolidate that debt into your mortgage at renewal, the new rate will be much higher because it’s a refinance as opposed to a straight renewal.”

Her view is that, with credit card rates near 20 per cent in many cases, regulators should be clamping down on unsecured debt rather than secured debt.

Now more than ever, it’s critical to speak to a mortgage professional at least a few months before renewal or shopping for a home, she says. “Do the stress test. Find out where you stand and what your options are. If you’re buying, get pre-approved early – if rates go down, you can get the lower rate, but if they go up, you’ll get the rate at which you qualified.”

Prior to joining Mortgage Architects as its vice president for Western Canada, Meinhard Ickert spent 33 years with one of Canada’s “Big Six” banks. “We now have a full generation who have only experienced historically low rates – until fairly recently, there was an expectation that it should be possible to get a five-year mortgage rate that started with the number two,” he says. But “the five-year fixed mortgage, still the primary choice for Canadians, never fell below 10 per cent for 18 years, from 1973 to 1991.”

From this viewpoint, current five-year rates (in the area of 3.64 per cent) are “basically a gift,” he says. “Set realistic expectations as to what you can afford versus what you would like to have, but don’t be frightened off by uncertainty. If you step into the market at a level that allows you to have a comfortable living and lifestyle, chances are that your asset will, over time, increase in value to allow you to take the next steps.”

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