Toronto buyers resort to sub-prime loans as prices soar

Garry Marr – Financial Post

Vancouver has already passed this high water mark, but now it’s Toronto’s turn to experience the $1 million home as the new norm – a property that comes with so much debt even the federal government seems scared of it.

Comment: Says who? Don’t put words in the mouths of others.

New statistics from the Toronto Real Estate Board released Wednesday show the average price of a detached home in the city reached $1,040,018 in February, the first time prices have crossed over the seven-figure threshold in any housing category.

Those buyers face a three-year-old rule that Ottawa imposed to cool the market, which bans any sort of government backing on homes worth more than $1 million.

Comment: Wrong. CMHC said they would not insure mortgages on houses over $1-million. So buyers can put down 20% and avoid the CMHC insurance, as with any other purchase. Not much changes, really.

As prices rise, some wonder whether insurers like Canada Mortgage and Housing Corp., the Crown corporation that backs bank loans, may have to revisit that threshold.

Comment: They might. But I don’t think there is a need to rush to change rule that is only 3 years old.

“Will it encourage insurers to benchmark or index their maximum home price?” asks Rob McLister, the founder of ratespy.com. “Now, a $1 million is an average house so you are basically saying [the government] is not going to insure an average house.”

Comment: The government does not insure the loan. A Crown Corporation insures it, with premiums paid by buyers. Not a cent of taxpayer money goes to the CMHC or to provide mortgage insurance.

Mr. McLister says once you get into $1 million plus, your choices of who you can borrow from change dramatically.

“A lot of people think ‘I’ve got a $1 million mortgage. I’m the man, give me the best rate.’ But that’s not necessarily the case,” he says.

Comment: But if you come to a bank asking for a $750,000 mortgage on a $1.05-million house, I don’t think they will be shy about it. Especially if you have income to back it up.

In fact, those people are paying even higher rates than those from the banks because their loans have no government backing. If they can’t come up with the minimum down payment of 20% required by law to borrow from a major bank, they must seek a loan in the sub-prime market.

Comment: Prove it. Get someone from one of the big banks to go on record discussing the rates offered to buyers spending more than $1-million. Some guy who made a website, his opinion is moot. As it is only his opinion. And the opinion of only one single person.

Just as in Vancouver, Toronto buyers are now scrambling to come up with the 20% down payment or $200,000 on a $1 million home, if they want to borrow from a major bank. And, just as happened on the West Coast, Toronto buyers are turning to sub-prime lenders to get them over the hump, facing interest rates of close to 13%.

Comment: Are they? Prove it. Get some buyers on record to state that they had no choice but to go to a second or third-tier lender. Is it because of the purchase price or the buyer’s income and credit? This smells of innuendo and assumption.

Yana Papanyan, vice-president of credit and underwriting at First Swiss Mortgage Corp., which is a major player when it come to helping this sub-prime segment of the market, says in a typical situation, a client might buy a property worth $1 million but only have $100,000 down payment. First Swiss Mortgage will provide the other $100,000 under a second mortgage starting at 12.99%.

Comment: Which is exactly NOT the case you illustrated above. That is not a buyer with 20% down, as you indicated. That is someone who does not meet the criteria to borrow from a big bank.

“Clients have to top up to 20% to get a bank to approve. We are filling that gap between what the client has as a down payment and what the bank will accept,” said Ms. Papanyan. “About 80% of [First Swiss’ mortgages] in Vancouver are high-priced properties.”

First Swiss is not regulated by the federal government; that interest rate is considered competitive based on risk factors including the fact it is a second mortgage behind the bank’s debt.

One positive for these people is they do not end up paying mortgage default insurance, which can be as much as 3.15% of the value of a mortgage, based on current CMHC guidelines.

Comment: But those with 20-25% down avoid all CMHC fees and can go to a proper bank. And with good income and credit, they will get interest rates in the 2.79% range, or even 0.5% less with a variable rate. Talking about how people who shouldn’t qualify are managing to borrow money they shouldn’t get, that is not a story about normal people buying $1-million homes. This is a story of what some people will do to buy something they cannot afford.

Benjamin Tal, deputy chief economist with CIBC, says rising prices and the $1 million government threshold is sending more consumers into the sub-prime market to borrow money. He estimates alternative lenders, who are major beneficiaries of that sub-prime market, now underwrite 2.2% of all mortgage loans, with the market having grown by 25% over the past year.

“When you say $1 million, people think ‘that’s extremely high expensive properties.’ They are not. This [restriction on loans for homes worth $1 million or more] is leading to less regulated entities entering the market,” said Mr. Tal, adding his data for Ontario shows that people are borrowing just to get the down payment.

Comment: The government is trying to make sure that people spending a large amount on a home – whether $1-million is average or not, it is still a lot of money – have a decent downpayment and are in a good financial situation. They want to reduce or eliminate high-ratio mortgages on high-priced properties. And I think it is a good idea. There have always been a number of lesser lenders serving various niches of the market. Heck, I had to go to a lower-level lender myself, years ago, as there was only one company that would give a variable rate mortgage to a self-employed person such as myself (real estate agents are technically independent contractors, not employees, so we get treated badly by lenders). Big banks are better now with people like me, but they weren’t in the past.

Mr. Tal also wonders whether Ottawa is going to have revisit the rules on whether it is willing to insure homes worth than $1 million.

“It’s a legitimate question. Why was $1 million chosen anyway?,” said Mr. Tal. “This is probably not consistent with the spirit of what they want to do, because the spirit of CMHC is to make housing affordable for young people.”

Comment: And young people should not be buying $1-million houses with only 5% down.

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto real estate agent with Century 21 Regal Realty.
He did not write these articles, he just reproduces them here for people who
are interested in Toronto real estate. He does not work for any builders.
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