Zero to Little-Down Mortgages Raising Some Concerns

Published August 3, 2021 by Real Estate Leads

As a real estate agent, you like to see your clients and prospective homebuyers being approved for the financing needed to get them into a new home that works for them. Most realtors will have a mortgage broker they trust that they are happy to refer clients too, and it is nice when you see they’ve been approved for their mortgage and their on the way to getting into that home before long. The issue is that the homes many people are getting mortgages for nowadays are very expensive, and if you live in some major metro areas of the country it’s not uncommon to be taking mortgages on homes priced at 800k or even much higher.

It’s no secret that low interest rates have been kept low by the Federal Government as a means of providing economic stimulus at a time when it’s very much needed. Having lenders of either zero-down or very little-down payments on homes when taking mortgages may be an associated part of that too, especially when you consider that real estate makes up a significant portion of Canada’s GDP. But minimal down payments or no required down payment at all may be leading to a lot of buyers biting off ‘more than they can chew’, as the expression goes.

In the immediate scenario this isn’t a bad thing, and especially for someone who works in real estate. More prospective homebuyers receiving financing means more homes sold and deals closed, but as always there’s going to be more realtors working for a slice of the pie than there is pie to go around. That’s why our online real estate lead generation service here at Real Estate Leads is as highly recommended as it is. It lets you get the jump on being in touch with people who are looking to sell or buy a home, and for someone who’s new to the real estate business it can be a massive benefit for building their business quickly.

There is concern that this down payment on a mortgage flexibility is going to be problematic, so let’s look at why that is.

Bull Market Continues

This is the 25th year for the great Canadian housing bull market, a pretty much uninterrupted straight line up that hasn’t really been seen elsewhere in the world. It’s true that real-estate prices are soaring all over the globe, but it’s only New Zealand that has a more frenzied housing market than Canada. Years of price gains have been the norm, and that includes a 21% surge since the pandemic began. The reality is that millions of middle-class Canadians don’t have the means of making that conventional down payment of 20%.

So this boom in riskier loans is chipping away at the most crucial of the three pillars that industry insiders are the foundations of good housing. Conventional, conservative lending practices, rising demand, and tight supply. Yes, there are regulations that prevent applicant risk, but many of those who are approved for loans today are assuming debt loads people would have thought were unthinkable in generations previous.

Having borrowers financing bigger chunks of their purchases is a legitimate concern. Often these massive loans are being taken out by borrowers with relatively low incomes. Mortgages considered to have a high loan-to-income ratio — when the principal is a minimum of 4.5x the borrower’s annual income – made up around 17% of new insured home loans in the fourth quarter. That’s up from 6.5% just two years ago, and it’s true that loan officers have loosened mortgage lending conditions in each of the past 3 quarters.

Benchmark Rate Must Rise

In Canada, most borrowers reset the rates on mortgages every five years or less. Traders now expect the bank to begin lifting its benchmark rate from 0.25% over the next 12 months, and to bump it up at least three more times before the close of 2024.

The concern is that the first of the rate hikes may come even sooner than markets are foreseeing, especially if the incoming inflation trend is worse than expected. This could result in housing prices being pushed down and that would mean many people defaulting on their mortgages.

However, products like zero-down mortgages are still only a small percentage of all mortgages, and insurance against default is required for any home purchased with less than 20% down. This is part of why major Canadian banks in recent years haven’t had much in the way of losses from bad mortgages.

It will be interesting to see how this plays out in the coming years, and especially if interest rates rise as many are saying they eventually must.

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