Optimizing your mortgage renewal in the post B-20 era
Note: I’ve invited Mike Grace to write this guest post to clarify the issue of insurability of a mortgage and how it affects mortgage rates that you can get. Last year we renewed our mortgage with our bank, but I realized later that I could have saved some money by shopping around. This article and the associated calculator is designed to help you understand what goes into your rate offer and whether your bank’s renewal offer is fair.
Mike is a mortage broker and HHV advertiser. No compensation was exchanged for this post but I did do the programming for the renewal calculator on his site.
Introduction
The implementation of insurer stress testing and B20 mortgage rules have created a complex mortgage landscape. This is no truer than in the renewal market, where your potential to receive the cheapest interest rate and most favourable qualification criteria is based on how your current mortgage fits into pre and post B20 insurer requirements.
B20 mortgage rules were implemented by the OSFI (federal banking regulator) on October 17, 2016 and changed the mortgage world substantially. The well known stress test was implemented for all new mortgages but most people don’t know that grandfathering allowances were included in B20 to offer stability for existing borrowers (and the market on the whole). These grandfathering rules are mostly unheard of in public and still poorly understood – even in in mortgage finance world.
So yes, the rumours of borrowers not having to re-qualify at the stress test are true, and this article will explain the mechanics.
The Challenge of Accurately Understanding your Options
For average borrowers at renewal, the time/energy-investment required to accurately assess the potential for saving by switching lenders is a significant hurdle. Most borrowers are happy to choose convenience and simply sign their existing lender’s renewal notice no questions asked. Most of the time, this convenience will come with a substantial (and unnecessary) cost.
I’ve set forth in this article to provide HHV followers the background knowledge and web-tools to perform a ‘minimum effort’ analysis to:
- Understand how your mortgage fits within the B20 landscape and what opportunities this may yield, and
- Quickly assess what potential savings a lender switch at renewal would yield.
The Big 3
Your existing mortgage can fall within 3 categories: Insured, Insurable, and Un-Insurable with insured mortgages generally priced lowest and rates going up from there.
Insured
An insured mortgage is one in which one of the three Canadian Mortgage Insurers currently holds an active policy for. Insured mortgages will always receive the best market rates because the borrower paid the insurance premium and the bank benefits from the security of insurer guaranteeing the loan.
If you purchased your home with a down payment of less than 20%, paid a mortgage insurance premium AND you have never refinanced, your mortgage is insured.
If you can’t quite remember how you structured your purchase, you can always pick up the phone and call the 3 mortgage insurers in Canada to find out for sure. The phone numbers below are each insurer’s underwriting centres. Hard to believe, but the service is excellent with a real, and often very qualified human answering the phone nearly immediately.
CMHC: 1-888-463-6454
Genworth Canada: 1-800-511-888
Canada Guaranty: 1-877-244-8422
Having an insured mortgage will enable you to receive the most competitive market pricing. In addition, if you originally arranged your mortgage before B20 was implemented, you’ll benefit from a number of grandfathering allowances.
- You will be able to re-qualify using the contract rate – NO STRESS TESTING REQUIRED.
- Your current amortization can be matched (and re-qualified) up to a maximum 30 years.
- If the property is currently a rental, you may still be able to access insured rates.
The core benefit of these grandfathering allowances is to allow a borrower who originally qualified for their mortgage under the old rules to continue to do so, and not be hamstrung by the tougher B20 requirements.
Insurable
An insurable mortgage will enable borrowers access to highly competitive rates upon renewal, second only to pricing available for Insured Mortgages. A new insurable mortgage begins when a borrower has purchased a property with a down-payment of 20% or greater, while at the same time meeting a number of insurer requirements.
The borrower is not charged a mortgage insurance premium, however their bank or lender may have chosen to “back insure” the mortgage (at their expense) to get it off their books. Just like CMHC premiums, the premiums the lender pays to insure a mortgage increases for higher loan to value ratios. Correspondingly, interest rate pricing on insurable mortgages follows the same trend (see table below).
| Loan to Value Ratio | Insurance Premium (Paid by banks on Insurable Mortgages) | Insurable Mortgage Pricing |
|---|---|---|
| Up to 65% | 0.60% | Best |
| Up to 75% | 1.7% | Second best |
| Up to 80% | 2.4% | Third best |
Under current B20 rules, a new insurable mortgage must abide by the following rules:
- Stress tested qualification
- Property must be owner occupied or a second home (no rentals)
- Property purchase price under $1M
- Maximum 25 year amortization
- Must be a purchase or transfer (no refinances)
If your existing mortgage was arranged prior to B20 implementation, you will qualify for some combination of additional grandfathering allowances when switching lenders at renewal:
- Stress testing may not be required (lender dependent)
- Amortization can be matched to your existing amortization up to a maximum of 30 years.
- Property value and original purchase price may exceed $1M.
- If you have an existing mortgage + HELOC, you can combine both balances into one insurable mortgage, and re-amortize/qualify up to a 25 year amortization. This allows a borrower to effectively refinance at insurable rates – a sizeable advantage.
- If your existing mortgage was originally arranged as a refinance, but was arranged prior to October 2016, insurable rates and extended amortizations can still apply.
Again, the core benefit of these grandfathering allowances is that a borrower is no longer forced to simply accept their existing bank’s un-competitive renewal rate out of fear of not being able to qualify.
Un-Insurable Mortgages
New Un-Insurable mortgages have characteristics that fall outside of current B20 Insurer Requirements. Since insurer backing reduces lender risk substantially, un-insurable mortgages generally maintain the highest market pricing due to the perception of increased risk.
A new mortgage is un-insurable if any of the following items apply:
- Property is purchased for over $1M
- Amortization is longer than 25 years
- Property is not owner occupied (rental)
- Refinance
Interestingly, there are instances where an existing un-insurable mortgage arranged after B20 implementation can be converted to an insurable mortgage. In these cases, the current B20 standard insurer requirements would need to be met (including stress testing).
Quickly Assessing Your Potential for Savings
If you’re still reading this, by now you’ve gathered the mortgage renewal landscape is a complex place. Normally if you want to assess the potential to save money by switching lenders you would need to engage with either a mortgage broker or another bank – which in and of itself is a bit of a tedious task.
Given the complexity of the renewal market, it’s also not guaranteed that your broker or bank will have the knowledge or understanding to maximize your savings. To make it simple, I’ve worked hard with Leo to build the following tool. The logic calculator below will ask you various details about your property and mortgage. It will determine which category (insured, insurable, un-insurable) your mortgage falls in, and if you will qualify for grandfathering allowances.
For the tool to be most effective, you should try to enter the most accurate information possible. It would be a good idea to work off either your most recent Annual Mortgage Statement or Mortgage Renewal Notice and your current assessed value (Look up on eValueBC).
I hope this article has been useful and I will do my best to answer any questions in the comments portion of the site.
Hi, my question is how does having a collateral mortgage (TD-unknown to me until now) affect my being able to change lenders but also keep my grandfathered status. I started this mortgage in 2015 – my concern is I will be transitioning to a low fixed income in 3 years and the calculation does not count investments. Thanks for having a great site!
Monday numbers: https://househuntvictoria.ca/2019/03/18/mar-18-market-update/
Canadian dollar could sink to record low of 62 cents as economy slides closer to recession
The Canadian dollar may sink back to its record low of 62 U.S. cents as the country retrenches from a consumer-spending boom into the face of a slowing global economy, said David Wolf at Fidelity Investments.
“The big problem for Canada is that a household deleveraging appears to be starting just as the global economy is slowing,” said David Wolf at Fidelity Investments.
“You’ve never had debt levels as high, relative to incomes in Canada,” said David Tulk, an institutional portfolio manager who works with Wolf. Even if the Bank of Canada has stopped raising rates, “there’s still kind of a big bulge in the python, so to speak, in terms of prior increases in interest rates and prior actions.”
https://business.financialpost.com/news/economy/fidelity-sees-loonie-testing-62-cent-low-amid-slowing-economy
“But yeah, often it’s a bit like student politics where everyone’s favourite slogan is “lower tuition!”
Which is ironic really because for years that meant keeping the tuition frozen but annually decreasing the amount of domestic students, increasing the international component which pays 4x-5x more.
Lesson: you can get what you wish for, but your wish probably isn’t specific enough.
I’m hoping for federal electric vehicle incentives
Well at least council has sway over the culture around and speed of development approvals.
But yeah, often it’s a bit like student politics where everyone’s favourite slogan is “lower tuition!”
What uncle Bill does on Tuesday won’t make any meaningful difference.
The issue isn’t government policy and he has extremely limited practical ability to guide the trajectory of the market. It’s like when Saanich council had that election recently, and many of them campaigned on a platform of better housing affordability. Totally silly, but the general public eats it up because they don’t know any better.
Of course, it’s not about whether it makes a difference. When we’re talking about politics, it’s optics. Got to be seen to be doing something…
Tuesday should be interesting
The budget will respond to issues in the housing-related areas of supply, demand and regulation, says a government source, who was not authorized to speak publicly about the plan ahead of its release. They declined to provide specifics on the measures.
The government, however, faces a delicate task of introducing changes that avoid destabilizing housing markets, driving up prices or enabling already overstretched households to pile on more debt.
Internal briefing documents show Morneau was warned in November that Canadians’ heavy debt loads are a key risk that have made abrupt shocks to incomes, house prices or interest rates a “significant concern.” The memo was obtained by The Canadian Press through access-to-information law.
https://vancouversun.com/pmn/news-pmn/canada-news-pmn/budget-to-focus-on-affordable-housing-changes-on-supply-demand-regulation/wcm/5e9abf48-6527-4295-a95d-fed6b940f4a5
Re 2557 Wentwich. Thank you very much for all the inputs.
16000 sqft lot
I agree that the deals are in what the masses pas over. Kinda needs to be for fixable reasons though.
Does this house have no backyard?
Re: 2557 Wentwich
I’m not sure about offering 440 having not seen the place, but for us both times we bought were places that other people overlooked. Our first place had been on the market for over 2 months. In both cases we were able to get a good price because of this. Often times people are scared off by even small things – like needing new paint/flooring, which creates an opportunity for others.
Can’t advise on price but I wouldn’t assume there is something catastrophically wrong with it just because it was listed several times before. It started out last year at $585,000 so not really comparable to current list price.
As already advised, definitely do a careful inspection but if you’re not afraid of a project the sellers are clearly interested in selling.
Re: 2557 Wentwich Road
It caught my eye back when it was 535k, I did a drive by and the front entrance looked rotten and was slumping. It immediately made me think ‘if they haven’t maintained this, what else haven’t they maintained?’. I’d be interested to hear from anyone who’s been inside. I did not think it was worth the 489k it was last listed at with a lot of work needed. I also wonder about the space behind it, it’s not developed but it’s not a park so maybe could be developed?
Any crowds at the open houses today?
Replying to FangieZ re 2557 Wentwich Road
It looks like the house needs a new roof and a bit of paint to the exterior and the driveway is just gravel. Also the furnace is probably original, as there are no pictures or mention of it in the write up.
I would guess most people in the under $500K price range are first time buyers and don’t have extra money to put into the house, or are scared off by having to put work into it. That’s probably why it has taken so long to sell.
$440K does not seem to bad to me, but definitely put in a house inspection clause in your offer.
I found three kitchens, not including the room with the fridge, microwave, and toaster.
I wouldn’t be quite so sure about that.
Bill Morneau: “We wanted to make sure that the market was stable, we wanted to make sure that prices were not escalating in some markets at a pace that was unsustainable,”
Seems like controlling prices was at least part of their motivation https://ca.finance.yahoo.com/news/trudeau-government-posted-300m-surplus-160124977.html
I must say, my opinion of him as a sexy realtor-pseudoeconomist is still quite high.
But the total net debt of the world is zero, since we don’t owe anything to other planets. That table doesn’t take into account the money that is owed to countries. Thus, China and Japan are large net creditors even though they have some external debt.
As for Lichtenstein, it’s the legal headquarters of many European companies, particularly banks, so their debt shows up in that country’s figures. Means nothing to the local population.
Hm. I wonder if the calls to scrap the stress test are coming from a rather vocal and perhaps, tiny minority.
“A Zoocasa poll found on the issue of B-20, only 57% of respondents are even aware of it, while half of all respondents feel it hurts affordability. Fifteen percent of respondents who are aware of the stress test believe it should be reduced below 200 basis points…”
https://www.mortgagebrokernews.ca/news/overwhelming-majority-of-canadians-concerned-by-housing-affordability-poll-255512.aspx
2557 Wentwich Road
My agent says “440k would be a good offer based on what we saw but it has been re-listed four times through 2018-2019 for a total of 325 days on-the-market and has not sold which is unusual. Either there is something wrong with the house which has failed a building inspection or the mortgage companies have refused to finance it due to some condition.” Any body knows why the property is still active (not sold)? Thank you very much.
Re: # 57634
Reminds me of The Money Pit – they did alright in the end!
https://www.youtube.com/watch?v=TLLQquBdU8M
Hey Grant.
I think you’re a misreading it a bit? OSFI exists to manage risk in the Canadian financial system. The risk here was the banks’ willingness to let consumers gorge on debt. OSFI themselves have said repeatedly their interest is not focused on housing, you and I both know that.
I don’t think Steve meant that it was implemented to induce a deleveraging, or will be maintained for that purpose. Steve has actually debunked that myth more than once (that they are driven by housing market dynamics). In fact the bulk of his comments to date on B20 have been on exactly this; it seems unlikely he’d be confusing these things now.
Regardless, people aren’t perfect. They can misspeak, misremember and have biases. But I think of most of the commentators out there, he manages to keep his better tamed than most and has done more for the positive image of Vancouver realtors than anyone else there these days. My 2 cents, anyways. 🙂
This is exactly what they tried in the US after the Great Recession. Debt has decreased, abet not massively, but incomes never really went up for the vast majority.
You’re reading it wrong.
He’s not saying they introduced the stress test to induce deleveraging. He’s saying that it’s gonna happen so better plan for it, and make sure the loans you’re giving out are actually good ones, so that the banks don’t go under.
Therefore: you agree with him completely, and you can think of him more highly than before.
No more so than Michael’s by the way.
Liechtenstein
My goodness, I never really had much of an opinion of Saretsky because he isn’t someone I follow, but after seeing the tweet that LF posted my opinion of him has nosedived considerably. Saretsky says (paraphrasing):
Umm, how the heck did he end up tying these things together? It’s true that deleveraging is necessary in the long term debt cycle, but saying that’s why the stress test was introduced is not based on anything factual. He’s twisting things to support his narrative. Shame, shame, shame!
Let’s circle back to facts and definitions.
Here’s why the stress test was introduced. TD Bank economist Brian DePratto
That’s it. The stress test was a tacit acknowledgement that rates are so low for so long now that people may be putting themselves into an untenable position should rates rise significantly. In other words, it’s an attempt to help prevent excessive borrowing at low rates, leading to systemic risks if rates go up significantly. So Saretsky would do well to understand that preventing excessive borrowing is not what a deleveraging is. By its very definition, a deleveraging is a REDUCTION in total debt. It’s true that at the macro level the introduction of a stress test likely reduces the velocity of the INCREASE in total overall debt, but when Joe Blow takes on MORE debt, say via a new stress-tested mortgage, this isn’t deleveraging in any sense of the word. It’s leveraging! Here is the definition:
And, as Ray Dalio says, a deleveraging can be beautiful. It all depends on how policy makers approach the deleveraging. The right balance has slow growth but debt burdens go down – “that’s a beautiful deleveraging”. Of course whether we’ll get that remains to be seen.
Here’s a great excerpt of a beautiful deleveraging from Dalio’s “How the Economic Machine Works”. The link starts on his definition of beautiful deleveraging but the entire video is very informative. Can someone send this video link to Saretsky? LOL
https://youtu.be/PHe0bXAIuk0?t=1580
@leif
Man that is a ghastly place….I can’t imagine how much work it would take to fix it up now, but I agree it must have been a pretty cool place in the…(70’s? large bowl for key chains at the entrance for the inevitable swinger swap….ABBA blaring in the background).
Wow… this place must have been amazing at one point but has now gone to crap.
Anyone know much about this massive mansion that is out in North Saanich?
There is a 3d map the of the inside of the house… looks like they didnt do any clean up before sending in the crew to record it.
https://www.realtor.ca/real-estate/20424887/11-bedroom-single-family-house-405-nootka-rd-north-saanich-deep-cove
Took me 15 minutes on the 3d map to find the kitchen… wow so much stuff in this house. I’m assuming maybe just an older couple after all their kids moved on and just cant maintain the place.
Quite a few condo sales this week. Not so much on the single family side.
It’s all about pricing, not value. Make it cheap and it sells.
So I find this flip crazy interesting. Not sure how they will end up but seems if they can sell for $900k or over, they will do ok. I wouldnt have the gonads to try a flip at that price but i guess thats how you make, or lose, money. Take some risk.
3989 Birchwood
MLS 406546
$821,000 assessed
$780,000 sold (28 June 2018)
$1,150,000 current sale price
I figure they put in min $80k for renos (that’s a complete guess). Rough back of napkin calculations suggest would have to sell for about $880k to break even.
Question is…. will they get it? If they get ask price, assuming a 38% marginal tax rate, they will walk away with $200k net. Not bad for a years work.
That being said, they are competing with:
1509 San Juan
MLS 406 738
$1,041,000 Assessed
I cant see paying that price for what seems to be a superficial reno. Not sure what comps are going for but i cant see that price point.
But then again, if i could predict peoples mentality and the future, i would be much richer than i am now.
Thanks Michael!
It shows the power of data manipulation. Just change the window and pow! A whole different picture! #Skeptical
Every country in the world is in debt, so I never worry about debt on a macro scale.
https://en.wikipedia.org/wiki/List_of_countries_by_external_debt
I actually found that very useful. Thanks.
Thanks. Interesting. I thought it was odd that the prices weren’t terribly far apart but the graph gives you the impression it might be. I’m not too familiar with indexes either so I’m not exactly sure why it’s almost always nonsensical. Is there a time where it does make sense then?
In any case, I’m pretty sure affordability is much worse in Vancouver. San Fran has one of the highest incomes in NA, Vancouver doesn’t – certainly not in the tech industry which is where the former gets much of its income.
Yes, I agree that chart is nonsense. I expect that many reasonable people here agree, except the original poster who describes it as “terrifying”.
Just checking in . Local has the market crashed yet? Here`s a fun stat for ya . 240 trillion in debt world wide. That’s only 35k per person. We can get that up to 50 or 60k before the Ponzi scheme collapses . Ha Ha
Common problem is people comparing two things that are indexed to a certain value. Can completely distort the picture. You need to relate it back to some kind of actual basis. Prices, price to income ratio, affordability, whatever. But comparing 2 normalized indexes that represent totally different values at the same level is almost always nonsensical.
I mean, it still doesn’t make any sense that Vancouver is anywhere near what San Fran is. There just so much more money sloshing around there that actually gets paid to people who live there. I don’t know how you can afford to live in Vancouver unless you’re a realtor.
James has a good point. Much different picture when you start from 1996 (when SF & Van’s index were both at 70).
Based on that chart, in January 2002, it was double what it was 6 years previous.
I’m just saying be careful with start dates.
OK, I’ll try it out. I do like not talking to people.
Be advised that Coast Capital recently changed that rule. Now you can make a 20% lump sum payment anytime during the calendar year.
In fact, we’ve recently been very fortunate to receive a couple of early partial inheritances, so we made a lump sum payment on the anniversary (November) and another one in February.
Hey Introvert,
It’s never a bad idea to consider self-negotiating. I will say that by comparing with VanCity on variable rates, you’re not doing yourself any favours. The full version of the calculator over on my site would actually be pretty useful to you. It would let you see what rates are out there across the entire lender spectrum… not just VanCity.
You could use this to help you self negotiate, or at least understand how much money you’re leaving on the table for convenience sakes.
Try it out – I don’t include rates for any low basic rate/limiting products – all are full featured mortgages. The best thing is you don’t even have to talk to me!!!
https://www.mikegrace.ca/mortgage-renewal-rates-savings-calculator/
Something else to consider, (and I’m not trying to slam Coast Capital here, because I really like sending clients their way), but their pre-payment privileges are amongst the least flexible in the industry. 20% lump sum per year on “anniversary date only” is pretty stingy.
The concept of inflating currency to escape debt and allow the “economy to grow into it” isn’t a new concept, in fact, it’s an ancient one. All the way back to the Roman empire it was tried (adding cheaper metals into their silver coins). That ended up being one of their principal undoings – effectively trading one set of problems for even bigger problems.
https://www.visualcapitalist.com/currency-and-the-collapse-of-the-roman-empire/
One of the things I wonder, is whether there is a genuine example in history where devaluing the currency successfully resolved excessive debt among a population. If you devalue it, sure, you make the debt worth less but that devaluation doesn’t just apply to debts – it applies to everything, and you need more and more of it to pay for the same goods and services.
The dollars you earn to buy those houses are worth less, which means the nominal prices rise accordingly. Existing savings are eroded or destroyed, and people on fixed incomes would probably be hit worst of all. With Boomers being among the largest retirement cohort ever seen, that doesn’t sound like a good plan.
I just don’t see it somehow working, when the simpler option is for asset prices to fall.
I guess we’ll see what they end up doing. For now the US Fed is actually continuing to tighten.
OR, the stress test allows for more money printing with a barrier against inflating house prices. This is from a 2012 Forbes article: (the first option is LF’s nightmare, or dream)
The second option for deleveraging is inflating away the debt through currency devaluation. Instead of letting the amassed credit be reduced through explicit defaults, central banks have opted to print more currency in order to help repay the debt over time. In reality, this path simply represents just another form of default, as creditors will ultimately be paid back in currencies that are worth less in terms of real purchasing power. Currency devaluation largely avoids dealing with the short-term negative consequences of debt deflation in favor of prolonging the period time that the bad debts remain embedded in the system. This method of deleveraging is essentially a means of buying time, and comes along with its own set of long-term risks. Global central bankers have determined that the currency devaluation path is the least bad choice in order to deleverage the unsustainable debts in the system. How do we know that they have made this choice? One has to look no further than the recent massive expansion of central banks’ balance sheets (see chart above). Their commitment to this option has continued to strengthen over time.
Steve is correct, IMO.
While deleveraging is often painful and always destroys wealth, history shows that under the right conditions, deleveraging of households leads to renewed opportunities for economic growth, rebalancing of monetary distribution towards more productive investments, enhancing the ability of people to save money and overall, allows the cycle to begin again.
Right now due to our malinvestment in the housing market, we have extraordinary levels of debt saturation among the population with interest rate levels that are still negative in real terms. This means that without deleveraging, one of the only ways left to spur economic growth is through rapid wage gains.
That will be difficult, given the money we’ve been spending hasn’t gone into fundamentally wealth generating activities – it’s gone into buying houses. Now that the greater fools are drying up, I believe we have a housing led recession beginning which will eventually force that deleaveraging to occur. Indeed, money is bleeding badly from the Canadian housing market, and nowhere is worse than in BC, ground zero of our epic credit binge. And that bleed isn’t getting better, it’s actually accelerating.
For those of you who chose to ignore the mania of the crowds over the last 2 years, saved diligently and lived within your means, you will probably have opportunities awaiting you sooner than you think. Doubly so if you’re an insolvency trustee. 🙂
Sorry to interrupt your “terrifying” dreams about “unmitigated hell”, but want to point out that “we” are Victoria (not Vancouver) and Victoria housing is actually much cheaper that San Francisco by every metric (price/income, mortgage/income, price, price/sq meter etc)
https://www.numbeo.com/property-investment/compare_cities.jsp?country1=Canada&country2=United+States&city1=Victoria&city2=San+Francisco%2C+CA
San Fran median home is $1.7m cad https://www.zillow.com/san-francisco-ca/home-values/. About 2X Victoria prices.
If Victoria house prices do ride up to San Fran Prices, the “unmitigated hell” would be felt by someone renting and watching from the sidelines.
There was a run up during the late 90’s but prices actually declined during the early 90’s so 2000 was not far off trend for SF. Over the whole decade prices were up about 33%.
https://fred.stlouisfed.org/series/SFXRSA
Not on purpose. Sometimes some CSS leaks out when I add a react app (the calculator). Will look into it
I’d be careful on comparing to San Fran which had just had a huge ridiculous run up in the 90s because of this thing called dot com?
That Wolf Street chart is terrifying. If we ever go back to the long term trend, the ride there is going to be unmitigated hell.
The Most Splendid Housing Bubbles in Canada Deflate
How do they stack up against the most splendid housing bubble in America? Holy cow!
Canadian housing markets are in a category of their own. No housing market in the US – no matter how crazy Housing Bubble 1 was, which began to implode in 2006, or how crazy Housing Bubble 2 is or was – can hold a candle to the most splendid housing bubbles in Canada.
Vancouver house prices soared 316% since January 2002 through the peak (July 2018); San Francisco Bay Area house prices soared 121% through the peak (November 2018). And what we get is a chart that shows how the majestically splendid housing bubble in Vancouver (black) totally crushes, annihilates, and ridicules the crazy insane mind-blowing house price increases in San Francisco (red):
These home prices in Canada are no miracle. The index measures how the price of the same house changes over time. This house didn’t get bigger or better or more opulent. It just got older.
What has changed in a major way is the purchasing power of the Canadian dollar with regards to assets, particularly with regards to homes: This purchasing power has plunged. And what you’re seeing here are the effects of asset price inflation, or more precisely home price inflation.
https://wolfstreet.com/2019/03/14/the-most-splendid-housing-bubbles-in-canada-deflate/
Vancouver RE board stats for you …
they say sown 6.1%. Teranet says sown 3.9% but teranet is based on closings and 3 month average. Still they are close.
http://creastats.crea.ca/vanc/
“The MLS® Home Price Index composite benchmark price for all residential properties in Metro Vancouver is currently $1,016,600. This represents a 6.1 per cent decrease over February 2018, a 6.2 per cent decrease over the past six months, and a 0.3 per cent decrease compared to January 2019.”
btw, CMHC says the B20 stress test has lowered Vancouver prices 7.9%, which is about the whole drop in prices. https://www.thestar.com/opinion/contributors/thebigdebate/2019/03/05/are-current-mortgage-rules-too-strict-no.html “CMHC:Houses are something like $40,000 (5.3 per cent) cheaper in Toronto because of the stress test — and double that (over $80,000 or 7.9 per cent) in Vancouver”
Little do they know the Teranet for “Vancouver down only 3.9% from the July 2018 peak, not the crash numbers some of you bears are hoping for.” One day the BCREA will figure it out.
@ Patrick
Quickest way to get yourself evicted is to illegally short term rent your place if you’re a tenant – Good landords check AirBNB, VRBO etc and have this stipulation re: no short term rentals in their rental contracts.
Leo did you change the site font?
https://biv.com/article/2019/03/average-bc-home-price-has-slid-nearly-10-past-year-bcrea
HODL forever. Never sell. Never lose.
Lots of info to digest from this article but one eye popper was the increase and anticipated continued increase in rate of delinquencies.
or a cadborosaurus
My mortgage is up for renewal in the fall. I’m leaning towards a variable rate, after going with a fixed the first two times and never giving the fixed/variable consideration any thought (which wasn’t smart).
I do all my banking at Coast Capital Savings and really don’t want to switch lenders due to factors of hassle and the unknown. Double payment privileges are a necessity for me, as is the annual 20% lump sum ability.
If CC’s variable rate isn’t quite as good as VanCity’s (or a similar competitor) at renewal, I will probably do what I did last time which is to ask CC to match a competitor’s lower rate (which they did).
3.32% doesn’t seem that bad, Leo. Currently, the best variable rates in B.C. (that also offer double payment privileges) are right around 3.2%.
If you don’t care about extra payments, then the best variable seems to be 2.54%.
Are you lamenting your 3.32% as compared to the latter, Leo?
Fascinating……
No. I suspect that banks are fighting hard to keep good loans on their books – regardless of stress test. Poor quality loans can be encouraged off the books by only offering terrible rates at renewal.
Riiigght. And the liberals rallied so hard against the GST. Until they got into power. New taxes tend to be sticky…. plus this one has the added bonus of linking your SIN to your property or properties.
CMHC reports non-residents own 5.2 per cent of Greater Victoria homes
Non-residents tend to own newer and more expensive homes in Greater Victoria
https://www.saanichnews.com/news/cmhc-reports-non-residents-own-5-2-per-cent-of-greater-victoria-homes/
Household debt grew faster than income in fourth-quarter: StatCan
https://www.ctvnews.ca/business/household-debt-grew-faster-than-income-in-fourth-quarter-statcan-1.4335865
Gotta agree with that. Spec tax will probably survive at most until the next government change. Possibly replaced with other anti speculation measures
LeoS : I would be very reluctant to assume or read intent into this taxing statue.
Take a simple situation where you have been renting out a condo for the last few years to someone who uses it only on weekends but clearly lives in Vancouver. The old lease has converted to a month to month. You cannot evict them because they are only using it as a part time residence. You cannot raise their rent to couver the extra costs but you are pretty clearly responsible to pay the speculation tax.
I am pretty confidant that “I am getting screwed by the government” is not grounds for appeal. Your only remedy seems to be to sell the unit.
I doubt it. Time will tell.
Libs and Greens want it scrapped now. If there is a housing downturn , with rising vacancy, job losses and fall in construction, public and NDP may want it scrapped too
“I’m guessing you don’t own a business operating in multiple cities, and want a secondary personal residence while you’re in the other city, and you can’t believe that anyone does.”
Of course I can – I just happen to think that is a small subset of the population. As a rule, you wouldn’t throw policy out that’s going to negatively impact .1% of the population.
Right. Your life isn’t “complicated like that”, therefore nobody’s life is complicated.
I’m guessing you don’t own a business operating in multiple cities, and want a secondary personal residence while you’re in the other city, and you can’t believe that anyone does. Or you live in Vancouver but have custody of your kids on weekends in Victoria so you want a place there- that must never happen!. Etc. etc.
Anyway, good news is you can still have a secondary residence, and no one pays spec tax …. just rent!
If the money is right people will break the law. This is just the way it is. The overt ones will be publicly stoned to keep the majority in line. Or, in the case of AirBnB, it will be organized enough to pay off those with the stones. IS there really a need to pontificate all the possible ways to circumvent this tax? Spec tax is here to stay. Even though I don’t like it (see previous posts) I can support the concept behind barriers to speculation in residential realestate.
“tenants occupying a secondary residence”
I know back when I was a tenant, I was always renting out two or three apartments at the same time. It’s a real problem.
The basic problem with the spec tax implementation matching the intent, is that renters are able to do most of the activities that owners aren’t allowed to do. Namely:
1.- tenants occupying a secondary residence (depriving someone else of “shelter”)
2. – tenants renting the place out as STVR when they want to
3. – tenants being a “satellite family” , non-residents, tax cheats or casino money launderers and not get audited
All these items are not rare events, they were touted here as the main reasons for the spec tax. So we’ve stopped some of that, but allowed all of it to continue for renters.
So a big bunch of loopholes, and easy ways out for the evil secondary residencers, airbnbers, and satellite families. I’m expecting most of you agree with that. Since I’m opposed to the whole spec tax anyway, I also agree with it.
Just don’t expect most Airbnb, people living in multiple homes or satellite families to disappear.
Leo
that scenario should work. LOL
If there are loopholes people will find them.
Here you go Patrick – you can read all about the legislative intent:
https://www.leg.bc.ca/documents-data/debate-transcripts/41st-parliament/3rd-session/20181120am-Hansard-n186
No. Your kid has to live there at least 6 months out of the year to qualify for an exemption. See: https://www2.gov.bc.ca/gov/content/taxes/property-taxes/speculation-and-vacancy-tax/exemptions-speculation-and-vacancy-tax/individuals/tenancy-requirements
But what about this: You own two condos in Saanich and have one kid. Kid spends 6 months in one, and 6 months in the other. Airbnb rest of the time. Spec tax or no spec tax?
Thanks James. I think this is a reasonable question.
I know they have force majeure provisions for this in Arizona and Nevada, but those pertain to Graboids, not water dwelling predators such as the Ogopogo.
Personally, I wouldn’t think there’s a prima facie case for distinguishing between the two, although the former is well known for inhibiting most forms of loud and disruptive behavior upon terra firma. So, I say stock up Langford Lake and stick it to ’em.
https://aliens.fandom.com/wiki/Graboid
So let me get this straight. I own a condo in Victoria that is used for Airbnb. I now pay the spec tax. I rent it to my kid and I still manage the Airbnb. So no spec tax. Got that right?
Leo, that all sounds reasonable, but what if the owner was eaten by Ogopogo, but still alive in it’s belly, and able to pay his mortgage because of automatic withdrawl and dividend paying investments. How can you be sure that they would get a reprieve from paying this tax and that when they eventually escaped that they would still have a house to come home to? I need at least 7 documented pieces of evidence in the next 20 minutes.
You’re on the clock.
They’re not on title, how could they possibly pay spec tax?
I think it depends on intent. Did the landlord know about it and tolerate it? Then I bet he’s on the hook. Did he not know but should have known? Also probably on the hook. Did he know and take immediate action to resolve it? Probably not on the hook.
Don’t worry though. If there’s one case of this in the province I’m sure it will be published in the paper.
Awesome. So tenants who run an unapproved Airbnb on the side won’t result in any spec tax from the govt in your opinion. There may be hassles with the landlord, but you’re saying noone pays spec tax.
Do you suspect that some lenders are exploiting the stress test to offer less competitive rates on renewal for borrowers that they suspect can’t pass it (and thus have limited options for switching?). In other words they are increasing rates not because of a valid actuarial reason, but because they can get away with it?
I realize you might not be able to answer this one 🙂
Every legislation is open to interpretation. In this case there are many exemptions that are all crafted to allow for reasonable uses of the property. Empty land is subject to spec tax, but not if reasonable measures are being taken to develop it. Empty properties are subject to spec tax, but not if you had to move out of town temporarily for work purposes, or need the place to be closer to hospital for treatment, or just bought the place, or can’t rent it, or if you’re going into residential care, etc etc etc.
What’s the pattern? All those exemptions are attempts to cover reasonable reasons why you might not be meeting the basic standards of the tax. That tells me they are not going after situations that are outside of the control of the owner as long as the owner is taking reasonable steps to address them.
So yes, I am confident that if you are engaged in a residential tenancy dispute with a tenant that is Airbnbing your rental you will be successful in not paying spec tax*
*not advice, consult a lawyer.
@guest_57546
Hey Patrick –
Interesting question…
There are various mechanisms for your existing bank to verify the integrity of your financial situation prior to issuing a renewal notice. I’ve seen a few cases where the original lender issues a renewal notice with really terrible rates.
In one case the borrower had experienced a recent credit event, and while not missing any mortgage payments, had taken on substantial new debts with a history of missed payments on these.
The renewal notice in this case was still offered, but on the bank’s terms and at higher rates. Given their situation, borrower could only have moved their mortgage to a B-Lender, so it made more sense to stay with the higher rates the bank was offering.
I’ve never seen a bank simply deny anyone with a strong payment history at renewal.
LeoS,
Everything sounds reasonable in your post. It just doesn’t match what has been said clearly by the govt.
For example, you add a leap-of-faith in your post “I’m sure they [landlord] wouldn’t have a issue with the spec tax if they were currently engaged in resolving it [airbnb use by tenant].“ No kind of exemption exists like that, yet you are “sure” that the landlord would be exempted.
Put it another way, do you think these questions about the spec tax are clearly answered already by the govt, and if not, are you in favour or opposed to the govt clarifying them? Uncertainty in laws is very bad for all concerned.
Thanks Barrister! I appreciate your kind words!!
Hey Leo –
It took a little while, and while not required to, most (if not all) provincially regulated credit unions have adopted similar measures to the stress test. An interesting addition to some is the addition of ‘insurable’ product line up.
Depending on the credit union, and how they’ve implemented the their version of B20 alongside pre-existing policies – the net result (in most cases, but not all) seems to be that a borrower has increased borrowing power at a normal bank.
Yes as it happens being a landlord comes with some responsibilities. You can’t just blindly rent out whatever and then claim to be innocently ignorant.
So what happens in this case? Landlord has the responsibility not to allow extensive subleasing as a STVR if that is not allowed. If their tenant does it anyway they take action and drag them in front of the residential tenancy board. I’m sure they wouldn’t have a issue with the spec tax if they were currently engaged in resolving it. Looking at the exemptions they are all about reasonable situations.
That wasn’t a call for an 18% drop, that was a statement saying 18% less sales per day than last year month to date. Poor wording on my part.
Tomato: Good point, I should have said that I am not sure if one can write a lease clause that provides for a penalty if the tenant fails to actually maintain residency in the unit as their primary home.Do we have an expert on residential tenancy leases out here?
Mike,
Good article. Thanks.
Q. Are there any scenarios where someone could be denied a mortgage renewal because of B20? It appears if they flunk the stress test, their home bank will still renew, and can’t refuse to renew because they didn’t pass the stress test.
Barrister,
Good points.
The govt should clarify if spec tax is due by a landlord if his tenant is using the property as a second home (or using it both as a second home and an Airbnb). If we are expecting landlords and tenants to add clauses to the lease about this, they can’t do it if the law isn’t clear.
@Barrister
Why?
This would clearly have a material impact on the landlord’s financial obligations. There would be no reason that you couldn’t specify that if your tenant incurs additional tax liability due to their use that the tenant cover the additional taxes incurred.
@Mike
Who knew that there is much to mortgages! Kudos to you and anyone thinking of looking to borrow to purchase a home should at least have a coffee with you first!
Forget AirBB for a moment, what if the tenant decides to use the condo as a secondary home (maybe as an alternative to buying and getting hit by the spec tax). I doubt you can have a lease that mandates that he has to use it as a primary home.
The other question that has come up what happens if you have a tenant that is on a month to month basis for the last year (never had a lease) and refuses to sign a lease now.
I am also wondering how they are planning on enforcing this law when it comes to discovering the use made by a tenant of his condo?
Being a small landlord has its challenges these days and personally I would rather do something easier like climb Everest.
“The issue under discussion is should the landlord be spec tax liable if the tenant does run an Airbnb.”
Good point. I guess that’s why there’s an appeal process.
Most standard tenancy agreements have clauses already prohibiting that. This doesn’t effectively stop the tenant from doing it. The issue under discussion is should the landlord be spec tax liable if the tenant does run an Airbnb.
Marko how are things out there right now??
Lower end of the market is still ridiculously competitive. I have a young couple looking for an older 2 bed 2 bath condo in the core under 400k and they’ve been outbid on 5 places in a row….and then once you get into 550k-800k condos it is much much slower even if they are solid value. It would seem like the mortgage restrictions are actually increasing prices of less desirable stock as everyone is tapped out and fighting over the same bottom end of the market.
Same story for SFHs in the core….if it is under 750k and liveable it tends to go.
I think we will see a bounce back this month. Based on what I am seeing on the ground I wouldn’t be surprised if we matched last years numbers despite Leo’s analysis calling for a 18% drop.
Great post!
“How is a landlord supposed to know what his tenant is doing, and even if he does, he has limited abilities to control what his tenant is doing.”
Well I guess the landlord could start by including a no airbnb clause in the tenancy agreement.
I really would like to applaud this post in that it provides some very useful information in a clear yet precise manner. It is a shame the local newspaper and media dont do the same.
Admin,
Good post.
This is an illustration of what a complex mess the spec tax can become. Here we have a theoretical example of third party landlord who rents out his suite to someone, expecting that person will make it their home. But it turns out they don’t make it their home and now the opinion on this forum is “yes, no loophole, spec tax is due”. But this tax is payable by the innocent landlord. How is a landlord supposed to know what his tenant is doing, and even if he does, he has limited abilities to control what his tenant is doing.
At some point (like now) the govt should clarify when a third party landlord is liable for paying spec tax because his tenant didn’t make it their home. Otherwise it’s just going to be another disencenitve to be a landlord, and there’ll be less and more expensive rentals as a result.
Mike:
If you qualify pre B20 and buy after Oct 17 2016 (ie, get approved prior to B20 but close say early 2017) would the mortgage be grandfathered? Would it be insurable if the down payment was 50% at time of purchase? Regular 25 year mortgage, no HELOC, house under $1M, rented.
Thanks Mike. I guess that’s what was going on. Perhaps I was confused by her calling it an “exemption”, since it really sounds like a standard practice for those loans originating pre-B20.
Good to get the word out, as I suspect there are plenty of people worrying about renewing when there may not be a basis for it. Thanks again!
Oh you’re right. It’s not enough for it to be rented out, it must be rented out and occupied by the tenant.
“For owners to be eligible for a tenancy exemption, tenants must occupy the residence for at least six months of the year “
My mistake, no loophole there
https://www2.gov.bc.ca/gov/content/taxes/property-taxes/speculation-and-vacancy-tax/exemptions-speculation-and-vacancy-tax/individuals/tenancy-requirements
“It is an interesting loophole though. Owner rents it out to a long term tenant and allows subleases. Tenant rents on Airbnb.”
But the tenant isn’t making it their home, and the guests aren’t renting it under a tenancy agreement via Airbnb.
Oh that reminds me of a question. Given this is about B20 rules, how does that affect non-federally regulated credit unions? Do you find that they are generally going along with B20 too even though they don’t have to? Or did the provincial regulators adopt something close to B20?
Before the stress test one theory was that there would be little impact because people would just move to credit unions instead. Seems that didn’t happen en masse. Is that just because the credit unions have limited liquidity or…?
Hey Local Fool –
I’m going to agree with Leo and think that the person you were speaking to was referring to the grandfathering rules, but likely had a limited understanding of what they were talking about.
I can’t understate how mis-understood these rules are in the industry. In preparation for this article, when canvassing the lenders I have access to in the broker channel, I was very surprised at how many lenders had no idea what I was even referring to.
It is an interesting loophole though. Owner rents it out to a long term tenant and allows subleases. Tenant rents on Airbnb. No spec tax right?
Funny I am currently in this situation. I sub lease from a renter who used to rent this apartment out on airbnb. The landlord took legal action and won. They did allow the lease holder to sub lease for six months (this is where I came in). Running an airbnb from a leased apartment, where the landlord does not permit this kind of rental is apparently a no no.
“Your long term rental would get the owner out of the spec tax but you would still run afoul of Victoria’s effective ban on STVRs. Maybe it would work in other munis though.”
Maybe I’m missing something, but to get an exemption by renting to a tenant, doesn’t the tenant have to make the rental unit their home?
LeoS,
If there’s no other way it could occur, then she must have been talking about that. I’m not sure, I felt she could have been clearer. She said it was contingent on payment history, but didn’t say anything about whether it mattered if the loan originated pre or post B20.
Your long term rental would get the owner out of the spec tax but you would still run afoul of Victoria’s effective ban on STVRs. Maybe it would work in other munis though.
@guest_57540 I wonder if they were talking about the grandfathering? I had no idea that some grandfathered mortgages could bypass the stress test on renewal until this article
Mike,
Actually I do have a question for you, somewhat related to your article. A little while ago I posted about an encounter I had with someone who deals with mortgages. This is what I said:
“The other curious thing she said is that if you go to renew your mortgage and switch between 2 institutions both governed under the Bank Act, that they can actually exempt you from B20 if you show a good record of payments.”
Is this true? My understanding is B20 applies whenever you switch chartered institutions, regardless of anything else…?
Cynic,
That’s old news. You can read my earlier post about feb. Teranet . Victoria Teranet is now only down 2.5% from the Sep 2018 peak. Vancouver down only 3.9% from the July 2018 peak, not the crash numbers some of you bears are hoping for. https://househuntvictoria.ca/2019/03/11/mar-11-market-update-sales-cycles/#comment-57526
I had an interesting experience with airbnb a short time ago. Basically it was a rental apartment being subleases out via airbnb. Thinking about it, it’d be the perfect setup in Victoria too. You could easily rent a few apartments and turn them into airbnbs. No spec tax and no way to every introduce one.
Everyone relax. Nothing to see here.
Patrick, quick…. we need something to counter this to show how all will be well here.
https://business.financialpost.com/real-estate/canada-home-prices-drop-in-feb-for-5th-straight-month-teranet/amp?__twitter_impression=true
It might feel that way, but about 3 years ago there were about 2.5x the listings at Mount Wash. I don’t think a lot of the units for sale are compelling investment value at current prices. They might still be a good “investment” in family fun times.
Buying up there has not been great from the capital appreciation perspective. Things that sold 25-30 years ago for 150K are probably selling for 250K now. Depending exactly what and when you bought in the range of 50-75% capital appreciation over 25 years. Makes some sense. The land isn’t super valuable and the structures depreciate.
Interesting, Thanks Mike
Barrister, the BC Ferries staff at the atrium are in roles that are not directly related to ferry operations. The atrium staff houses employees in departments such as finance, IT, marketing, customer service call center, engineering and various executives. I think a central downtown location probably helps them attract employees.
I think a lot of people will find this super useful, thanks for drafting it!
Hi all,
I’ll do my best to clarify any questions you may have on the article above. Hope you find this to be useful/interesting information.
Mike
As mentioned, we renewed last year from fixed 2.79% to variable at Prime – 0.63% which in retrospect was kind of a bad deal (3.32% currently). Punching my numbers in to the calculator now I think we might want to switch. Another advantage of variable mortgages: usually cheaper to break them. I think it’s 3 months interest.