Weekend Reading: Tighter Mortgage Rules Edition

Canada Mortgage and Housing Corporation (CMHC) made headlines last week when its housing market outlook predicted that national housing prices would fall 9-18% over the coming months due to the coronavirus crisis. This week, Canada’s largest default insurer took significant steps to change its underwriting policies for insured mortgages. 

The following changes, which take effect July 1, will apply for new applications for homeowner transactional and portfolio mortgage insurance:

• Limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to our standard requirements of 35/42 (down from 39/44);
• Establish minimum credit score of 680 (up from 600) for at least one borrower; and
• Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes (no more borrowed down payments).

Rob McLister of RateSpy.com reports that CMHC’s new debt-ratio policy will cut homebuyers’ purchasing power by up to 11%.

“For example, someone earning $60,000 with no other debt and 5% down could afford approximately 10.9% less home under CMHC’s new rules.”

Despite crackdowns against zero-down mortgages and cash-back mortgage schemes, a Mortgage Professionals Canada survey reported that 20% of down payment funds from first-time buyers came from borrowed sources.

From CMHC:

“Starting July 1, 2020, borrowers must pay the down payment from their own resources. These eligible traditional sources of down payment may include savings, the sale of a property, non-repayable financial gift from a relative, funds borrowed against their liquid financial assets, funds borrowed against their real property, or a government grant.”

Not only is CMHC forecasting a major decline in house prices, it also sees the ratio of household debt to disposable income (already at record highs of 176%) climbing to more than 200% in 2021. In a statement, CMHC said these new measures are intended to curtail excess demand and household indebtedness.

The bleak housing outlook and tightened lending standards are all in response to the economic fallout from COVID-19 that saw Canadians lose more than 3 million jobs in March and April. Statistics Canada reported a bounce back in May, with Canada’s economy adding 290,000 jobs last month.

But University of Calgary associate professor Trevor Tombe says the effective unemployment rate, which includes the drop in hours and labour force participation, looks much worse than the official unemployment data suggests:

Effective unemployment rates in May. This captures the official unemployment + the drop in hours and labour force participation. Better measure of labour market slack post-COVID in #cdnecon pic.twitter.com/fw6MlabwPO

— Trevor Tombe (@trevortombe) June 5, 2020

The economy will recover. There’s no doubt about that. The question remains, what type of recovery will we see? An economy that rebounds as quickly as it crashed is known as a V shaped recovery and that would be considered an optimistic best-case scenario.

Other possibilities include a U shaped recovery, which includes a longer period of economic pain followed by a gradual improvement, or a W shaped recovery with starts and stops over many months as we struggle to contain the virus.

Finally, there’s the dreaded L shaped recovery that indicates a long and slow path back to normal. This path may be reserved for the hardest hit industries such as tourism and entertainment.

This Week’s Recap:

I wrote about tackling changes to your retirement income plan, using a real life case study from a Wealthsimple client.

Over on Young & Thrifty I answered the question: should I move my investments during the stock market turmoil?

In my debut writing for Greedy Rates I explained how to start investing for beginners.

I also wrote about how to start investing in oil. 

Promo of the Week:

Big banks pay next to nothing on their so-called high interest savings accounts. Savers looking to keep pace with inflation often turn to promo chasing – moving their savings around to various online banks and credit unions who offer short-term teaser rates.

If you’re like me, though, you’d prefer to leave your savings in one bank that pays a high everyday interest rate. For me, that has been EQ Bank’s Savings Plus Account, which currently pays 2% interest. 

EQ Bank recently reached $3 billion in deposits, and sign-ups for new accounts have tripled in the three months since the pandemic hit.

They’ve also introduced a refer-a-friend program where new customers will receive a $20 bonus when they set up and fund an account with $100 within 30 days. That’s like earning a full year’s interest on a $1,000 balance, just for signing up.

Open an EQ Bank Savings Plus Account with my referral link, get a $20 bonus, and start earning a higher everyday interest rate on your savings.

Weekend Reading:

Our friends at Credit Card Genius look at credit card trip cancellation insurance and how the author saved $1,282 by making a claim.

Five year fixed rate mortgages are the most popular mortgage term in Canada and, as one Ontario real estate agent learned, there are stiff penalties for breaking these mortgages – this one to the tune of $30,000.

The Globe and Mail’s Rob Carrick reintroduces his Real Life Ratio as a simple tool to help the next wave of home buyers from overspending. 

If you follow the mortgage market then you’ve likely noticed HSBC often leading the way with some of the lowest rates in Canada. They’ve just introduced the lowest advertised five-year fixed rate ever at 1.99%.

Of Dollars and Data blogger Nick Maggiulli tackles the racial wealth gap in this deep look into economic inequality in America.

Why does this wealth gap exist between black and white households? Systemic racism is at the heart of the problem. This video explains what systemic racism is, how it affects all aspects of life in America (and, let’s face it, here in Canada too) and what we can do to solve it:

From panic buying to hoarding, Preet Banerjee shows us how COVID impairs our financial decisions.

My Own Advisor Mark Seed explains why the 4% rule is actually still a decent rule of thumb for drawing down your portfolio.

Why distinguished finance professor Ken French uses a financial advisor:

“It’s just somebody who can act as a sounding board — clarifying the trade-offs we encounter in lots of areas of our lives. It saves us time and an enormous amount of anxiety. There are lots of questions we wouldn’t even know to ask without the help from our adviser.”

The S&P 500 fell 34% in just 23 trading days, reaching its low on March 23. Since then, the market has rallied by 40%. What gives? A Wealth of Common Sense blogger Ben Carlson shares why massive up and down moves in the same year are more common than you think.

Ben’s Animal Spirits partner in crime Michael Batnick explains why automating your purchases is the simplest and most effective way to invest for your future.

Finally, Erica Alini of Global News looks at why dividend stocks have stumbled amid the coronavirus crisis. Indeed, the dividend aristocrats index (represented by iShares’ CDZ) is down more than 18% YTD compared to the broad market (TSX) which is down just 7.10% on the year.

Have a great weekend, everyone!