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SEAS5 EP232 - Michele and Alex Discuss the Stress Test and It's Effect on Financing!
August 11, 2023 | Posted by: Michele Cummins
SEAS5 EP232 - Michele and Alex Discuss the Stress Test and It's Effect on Financing!Watch segment one here:
Watch segment two here:
For more information on Alex Kotai CLICK HERE
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Curtis Pope 0:00 She Unknown Speaker 0:07 She Curtis Pope 0:22 what's a Saturday morning? You know what that means? It's time for the Cummins real estate show and of course with me as always as Michelle Cummins. Good morning, Michelle. Michele Cummins - PREC 0:29 Good morning, Curtis, how are you? Curtis Pope 0:31 I'm doing excellent. Now we have a special guest today. So you probably want to get right into one of your world famous Michelle Cummins introductions Michele Cummins - PREC 0:39 I would love to introduce this amazing man who's right here locally in the Fraser Valley because this is Fraser Valley. Real Estate chat, Alex cote so many people may know who Alex is because he is famous in the mortgage industry. He is the president and senior advisor at your mortgage source, Abbotsford largest mortgage broker with over 40 brokers serving BC and across Canada. He has worked in the mortgage brokerage business for many years having been a broker since 2006. Through his company, Alex has access to many lenders across the country with a very expansive list of products. This means you have access to all of the resources available to draw upon for your mortgage and housing needs. Alex is truly committed to providing first class customer service and finding the right mortgage for his clients. He believes in providing great advice and will look at every means possible to get clients the mortgage they need. He truly enjoys working with people. And this is evident in the service he provides each and every day. And I can attest to that because he has helped me with mortgages personally, and many, many of my clients for years now. So Alex, thank you so much for joining us today. It's Unknown Speaker 1:56 been great to be here. Michele Cummins - PREC 1:57 This is great. And we're not too far away. You didn't have to drive too far. Speaker 3 2:00 No. Just local here right now. Yeah, right. In your own hometown. Michele Cummins - PREC 2:04 That's great. Right. So you and Curtis have a lot in common. You actually knew each other. Maybe even before I knew you. Curtis Pope 2:10 Well, years ago, our boys played hockey together. Differences. His son's really good. Maybe 10 years ago. Yeah. Probably. Close to it. Probably close to that. Yeah, it goes by fast. except his son's a really good hockey player and my son's more of a you know, he's while he's coding. Speaker 3 2:27 At that same level they it was a fun time. It was it was fun time. Michele Cummins - PREC 2:32 And I don't think I knew either of you. 10 years ago. No, no, no, no, you Curtis Pope 2:36 didn't know me 10 years ago. Michele Cummins - PREC 2:38 You know what hot talking about hockey reminds me of a new listing. I've coming up I might as well mention it now because it's amazing. Oh, well, you know, there is a sports court in this property. It is so private. It's over three acres. It's in mission it is not listed yet. You'll you're gonna have to wait for it. It's gonna be like a week away. It's gated. It's fully fenced. It's a gorgeous like over 6000 square foot house. It's amazing views but it's got this court this sports court you can actually the material on it. It's painted with the material where you can hockey on it and it won't damage the actual court itself. It's a tennis court. All that stuff. Yeah, it's got every pickleball as well. They got the pickleball lines on it. Yeah. And so you just put little boards up and you tarp or whatnot. And you can you can ice skate. Winter right. Oh, dream. Oh, yeah. And there's a detached huge workshop. You actually Alex, you might Unknown Speaker 3:33 or you sell me a property. Michele Cummins - PREC 3:36 Are you looking for a place? All right now? Show me the home. Maybe you will be now. Unknown Speaker 3:42 I'll definitely help you out with with a hockey arena on the property. Michele Cummins - PREC 3:45 Yeah, it's amazing. Yeah, yeah. And you can actually yeah, I can go on and on about this property. But I'll have more information in about a week. Next week. Yeah, it's gonna come out next week. I'm getting the videos, the floor plan. I'm gonna do a whole I'm gonna hire actors. Actually, I was gonna talk to you Curtis about actually getting Cody on to actually do hockey in on the court. Like there's he could do that. Yeah, I was gonna I'm hiring them to act in my little video for them. Yeah. Yeah. And there's all these different asset shots. Yeah, the video is gonna be fantastic. Three acres. That's a nice, yes. Over three acres. Yeah. Very private. So, Alex, I got a question for you. Yeah. The biggest topic right now is interest rates. Go figure. How are they? How are things looking? Speaker 3 4:31 Well, I guess the last year and a half, what have we seen? We've seen fixed rates go up about four to 5%. You know, from around the high ones to around middle fives. You know, they went up and they've been this but they've been the same for about a year. Okay. So, you know, you listen to the news and you think okay, rates are going up, up, up, up, up, right. But fixed rates have been where they are right now for about a year, around five and a half percent five to five and a half in this range. Michele Cummins - PREC 4:58 I heard that they're starting to change Is that true? Speaker 3 5:00 Fixed rates? Yeah, yeah, they've? Well, they went up a little bit in the last few weeks. Okay. But they were here in January already. So in January, we were lending rates at about 5.8 5.9. And we're just, you know, they dropped back down. And now we're heading back up again. Michele Cummins - PREC 5:16 If you were to advise the client right now, to lock in, what are you suggesting? And I know everyone's personal situation is different. But are you suggesting a two year lock in a three year or five year? Like, what are you suggesting? Speaker 3 5:30 It's about 5050. Right now, like some people buying their first home, or people that are tight on finances? You know, I would say they're mostly going for five years, because they don't they don't want to worry about two years from now, or three years from now. Oh, what do I do? Right? So some of those are going for five years, still give them a best five year rate, just hang on, and, you know, cut the five years out, and then hopefully, rates are lower at that time. And then people with some flexibility going two or three years, you know, and there's still a few people going variable. You know, believe it or not, there is still a few people that want variable because they think they're going to be coming down soon. And that's probably not gonna happen till next year. Michele Cummins - PREC 6:06 You know, I'm not a mortgage broker. But that's kind of what I was thinking as well. Yeah. I've been seeing some foreclosures hit the market. Now, you see that happening? More and more coming up? Speaker 3 6:16 Okay, so if you're thinking, like, you know, I got clients coming to me saying, Hey, I'm waiting for the market to tank here, right? Because they're thinking rates are going up. Everybody can't afford their mortgage payments now. But I'll give you this scenario. So people buying right now, like, if you bought a home right now, you know what your rate is, right? You know what your payment is? It's actually I Michele Cummins - PREC 6:35 kind of just keep it hidden every time I get it in the mail. I don't want to I'm a variable. Curtis Pope 6:40 Okay. So mine, but if you're buying Speaker 3 6:42 right now, and you're picking a fixed rate, let's say, you know what your rate is, you know what your payment is all likelihood you can afford that payment, otherwise, you're not taking a mortgage. Right. But let's say this, you were a 2018. You bought a home, right? And you're up for renewal this year. So what how much did your home appreciate? Since 2018 40 50%? Pretty good. Yeah. So you're up for renewal. And in 2018, you're paying arrayed around three and a half to four. Okay, so that was your rate three and a half to 4%, five years ago. So now your rate is going to be, let's say, five and a half. So you're not getting a 4% bump in your rate, you're getting about 2% Bump. So a little more manageable, right? It's all perspective. Yeah. So 2018, your rate was close to four. Now it's close to six. Okay, so your payment is going to go up. So if that straps you, you're thinking, what can you do? Right? Well, now I can go refinance my home if I need to. Right? Yeah. Like, I can refinance my home back to 30 years. If I'm nearly strapped, I can borrow more money. Like, let's say your payment goes up a grand a month. Okay. So now let's call it $36,000 Over the next three years, right? So what can you do you have a ton of equity now, you can borrow that extra $36,000 to help you make payments. Right? Exactly. Right. So if you want to stay in your home, yeah. So it's like, okay, let's refinance back to 30 years, if you need to bump your mortgage up, bump it up. It's a short term, it's a short term financial pain, but to keep your home that you know, has appreciated 40 50%, right. And last case scenario, you know, if if you just can't afford it, go to a realtor, you sell your house, you downsize, you still stay in the market, but you made a ton of money in the last five years. It's true. And you can downsize and drop your mortgage and keep your payments the same as they were five years ago. Michele Cummins - PREC 8:27 Where do you see things going? From here? Speaker 3 8:30 Rate wise? Yes. Okay. So Prime rates have gone up, you know, in the last year and a half, almost every single Bank of Canada meeting they've gone up, except for a couple. So essentially, I think we're at or close to the end of those increases. I mean, most people would agree. They've gone up substantially. Curtis and I were having chat about this before they've gone up substantially. It's like, okay, would you suspect that they're gonna go up another four or 5%? I would say no, yeah. Yeah. Yeah. Michele Cummins - PREC 9:00 I thought you were just talking about hockey earlier. Speaker 3 9:03 We're gonna, we're gonna I'm gonna variable to Yeah, Curtis Pope 9:06 it's just gonna ask variable deeper than variable. Speaker 3 9:10 So it's like, because because that's the long term, you know, long term. That's, that's the best way to go long term. But right now, it's causing short term pain for a lot of people. Michele Cummins - PREC 9:20 And I know like the masses, they, they, they, they let fear lead them. But these rates going up aren't going to last forever. And no, it will be a correction. Speaker 3 9:30 While they the rates were going up in 2008 2007 2008. They started to go up. Right. Then there was the financial crisis. And they were close to 6% at that time, and people have forgotten that that's where the rates were back when the financial crisis and then rates dropped. And since that time, so it's about 14 years, 15 years since the financial crisis of Oh, yeah. You know, they have not they weren't they weren't below 2% rates were 3% 4%. You know, there was a whole range. So we've been here before we've been here before. Yeah, but you forget every time because like, now you're going through it personally this time again and you forget the pain of last time. Are you winning in the market last time? Curtis Pope 10:07 We do. But it doesn't take us back to say that situation in the early 80s. When we got up to like, 23% kind of thing. Yeah, we're Speaker 3 10:14 way off that. Yeah, you know, way off that. I mean, if we goes there, I mean, we got a massive world of hurt for the whole population. Yeah. So you would think the powers that be would be smarter than that, to not let it go that far, you would hope? I would hope. So Michele Cummins - PREC 10:30 maybe last question before we go on break? Because I mean, hand in hand with Curtis being on variable, I'm on variable, you're on variable. What's the impact on clients with the rate increases? I mean, what have you been able to do to help your clients, Speaker 3 10:44 okay? So with a variable, some lenders have been changing the payment as it goes. So the payment, the rates go up, the payment changes, rates go down, the payment changes, other lenders, like TD Bank, for instance, they don't change your payments till you hit what's called a trigger point. So those people have not experienced payment increases yet, you know, until the point where it's like, okay, you're no longer covering principal, then you may have to increase your payment. So at that point, you got to look at okay, do I want to refinance right now? Am I am I stuck? You know, as my payment to high? Do I want to refinance my home, right? So you Michele Cummins - PREC 11:15 don't have to sell you don't have to feel like you. Because a lot of people don't know about, they can refinance exactly where Speaker 3 11:21 you can, as long as you re qualify, you can refinance. Yeah, yeah, we're a little more money and ride it through, right? Because you know, it's better to be into a home in the market than it is to sell and get out and then rent. And then you're out of the market. And then when the market recovers now, you're trying to get back in with millions of other people who are trying to buy in at the same time, right. Michele Cummins - PREC 11:39 It is so hard in this era. Yeah. The lower mainland to once you're out of the market. It's so hard to get back. Speaker 3 11:45 Yeah, extremely hard. Yeah. You sit there and rent and and your savings become dwindle and dwindle, as you know, as less of a percentage of the new price. That's higher rate. Michele Cummins - PREC 11:54 And would you suggest that if somebody can afford to do a lump sum before the end of the year, it's those that are on those, like TD rates, the ones that don't change the price, or don't change the payment, but but they've got all this built up interest and that they have to pay Do you Do you suggest doing a lump sum since we're allowed 20% A year depends Speaker 3 12:15 on okay, if you've got a lump sum sitting there, ready to go. But you're kind of strapped for payments, I would hold that back and use it to make my payments. Because once you make the lump sum, the banks, you're not getting the banks not going to lend you more money unless you qualify. So it's going to be like, Oh, you're you're strapping your cash or taking away your cash, right? Giving it to them, trying to lower your payment. But still, Amana might not be low enough for you. That makes sense. So I would I personally, you know if my payments jumped 1000 or $2,000 a month, and I'm like, Oh, this is tight. And I had 20 grand sitting in a bank, I would keep it there and use it to help me manage my cash flow short term, because I don't want the bank forcing me to do something. I want to be in control of my finances. I like Michele Cummins - PREC 12:55 the way you think. Curtis Pope 12:57 All right, well, with that we should probably take a quick break. Michelle, if people want more information about what you do as a realtor and things like that, where can they go Michelle cummins.ca We're back with more right after this. Bla back with the Cummins real estate show with Michelle Cummins and myself Curtis Pope. And of course, we have Alex here right now. Now, Alex, what is the stress test and its impact on borrowers ability to obtain financing. Speaker 3 14:18 Okay, so the stress test was put in place quite a few years ago, maybe four or five years ago, I'm guessing now I can't remember exactly. But it's essentially qualifying for your mortgage at a rate that's 2% higher than what you're paying. Okay. So right now, if you got a rate of five and a half, you gotta qualify seven and a half. Okay. So that's a significant rate, you know, and when they put it in place, many years ago, rates were around 2%, you know, and they said, We're going to qualify you at a stress as of 2% over your rate, or five and a quarter, whatever the grade are is, okay, so we were qualifying at five and a quarter for many years because people's stress test was below five and a quarter. But now we've blown past five and a quarter. So now we're qualifying at seven and a half a person So as a significant increase in the qualification rate, and it probably drops your ability to borrow by about 20%. So, let's say, a million dollar mortgage, you could have qualified for three years ago, you know, now you're, now you're down to about 800,000. Because the rate is so much higher. Michele Cummins - PREC 15:15 Do you see the government changing? are lowering the stress tests as the rates go up? Or do you think they're just blind to that and just won't? Speaker 3 15:24 There's some, like industry thought that they could get rid of it now? You know, because it served its purpose was like, Okay, we got past this five and a quarter rating, we got to this five and a quarter rate, which is essentially what everybody's kind of paying right now. It's the five to 6% range. So we're here now, you know, unless they feel like, Oh, we're going to 8% with rates, then we should keep this in place. Right. But if we're here now, where the stress test was, then, yeah, it's probably served its purpose. But you know, they're going to be slow to change that for sure. Michele Cummins - PREC 15:52 What do you think about this idea? I don't know if anybody else has thought of it. But I was thinking they should make the interest rates to the average price of a property in each municipality throughout Canada, rather than a blanket interest rate for all of Canada. What do you think? Have you ever thought of that? Is that something that possibly is a good idea? Speaker 3 16:14 I haven't thought about it. But what would you propose in certain communities, we get certain rates. So let's Michele Cummins - PREC 16:19 say there's an average price of 300,000, they could be possibly a little higher rate than the larger properties. Now only saying because the our area, the Fraser Valley, Greater Vancouver in Vancouver, is so as people say unaffordable, and they can't get into the market, once you get out, it's hard to ever get back in. So sort of for scenarios like that, where we, the people have no control over the prices, because we don't have enough homes for the roofs over our heads. And this is a concentrated area where the work is, you know, compared to other areas in Canada, so we have the worst population here are major cities, right? Yeah. And we can't control the prices as they go crazy. But maybe we can control the interest rate in certain areas. Speaker 3 17:06 Yeah. That's the way I guess the way banks lend money. Like, if you go to let's say RBC, or TD, or those kind of banks, right, or even a credit union, and you and you borrow money, half the time, they don't even lend you their own money. What they're doing is they're borrowing money from the market. So they go to investors like big investment funds, and say, Hey, give us money. So Investment Fund, AIG gives them five year rates, that gives them five your money at 4%. Right? Now, they got to lend that out at something higher than four to make money, right? So they got to lend it out at five and a half, you know, and so that's the problem. If you're like, hey, look, I want you to end lend out to this community at three and a half percent, they're gonna lose money, they won't be able to do that, because they're gonna take a loss on that. And then they're gonna have to offset that loss with much higher costs on the other side to the, to the smaller communities, it makes perfect sense. So yeah, so I think it's a cool idea. But I think it would be hard to fly by some big bankers. Curtis Pope 18:03 The math involved is just way out of my reach, Speaker 3 18:06 will you borrow, like, like I say, like, right now they're borrowing money at in the high threes, the banks are borrowing money in the high threes, they're lending it out in the mid to high fives. So they got a 2% spread, right? That's their spread, you think they're making five and a half, you're gonna make it five, and they're making a to one and a half to 2% spread less their cost. Now, they bought it at four. But they're paying, you know, all their staff, they're paying for their buildings and all that stuff. So that eats up, you know, everything people don't think of, yeah, there's a cost to all of it to their to their, they call it a spread, if their spreads, 2% Maybe it's actually 1.2. When you factor in other costs, Michele Cummins - PREC 18:38 are your clients actually still looking at purchasing like new homes, and like, how's that compared to the last two years? Speaker 3 18:47 You know, a lot of people were upgrading before, like, at the start at COVID, when, you know, the rates dropped, the government was pumping money into the economy. Everybody was upgrading, like, upgrading like crazy, because you're like, oh, I can get more money from my house. So I'm gonna upgrade now. But you know, a really good time to upgrade is in a down market. Because, you know, the example I give you is, let's say you got a million dollar home. And let's say you want to buy a million and a half dollar home, what happens if both homes dropped 10%. Right, your home drops about 100 grand, but your other home drops 150 grand, so it's actually a cash positive situation for you, right? Michele Cummins - PREC 19:20 It's a beautiful time to Speaker 3 19:22 move up. 100% You know, when there's the most fear in any investment is the time to get in. Michele Cummins - PREC 19:29 That's true. And that's where people get fearful. And they they hold back and they don't do the right thing. Speaker 3 19:34 Especially like, if you own a home already, you know, then you've already taken the appreciation of the market and now you can take that to next home. And you're gonna get a deeper discount on your next home, just where the market is, right. So I tell Michele Cummins - PREC 19:47 my clients all the time, yeah. Curtis Pope 19:49 Know what kind of lenders are there besides the big banks to help borrowers qualify? Speaker 3 19:54 So you know, you take your typical like, okay, there's your big five banks, we all know like, TD RBC. At BMO, all those guys and there's your credit, local credit unions, those are all provincial, right, like envision Coast Capital, those are all provincially regulated. And then there's a whole raft of other lenders out there. Like we call them monoline lenders. So there are lenders that don't have branches. So you've heard of like tangerine, for instance, that's a big one. It used to be called ing. That, for instance, is Scotia banks online division. So it's actually a bank, it's a full bank, but just no branches. So you have the no frills rates, you know, but you have the services all online. So there's all sorts of lenders like that we probably have 10 to 20 of those lenders, that all offer a rate mortgages. Okay. Their rates are usually the same or cheaper than the banks, because they don't have they don't have big buildings to pay for. Right? Oh, interesting. Oh, Lina mean, and then after that, so those are all your A lenders, then we go to be lenders, to get more creative with income calculations, the B lenders are about a percent higher than the bank's gain rates. So they're lending at about six and a half right now. But they'll get very creative with your income. And then of course, last but not least, is private lender. So if you just need money, just based on equity, there's private loans, and they'll start at eight or 9%. So it's a it's like a last resort alternative, to help you out if you need to, but it is there, you know, for some people that need it, you know, Michele Cummins - PREC 21:18 credit cards, you know, in the 18 to 20 something percent range, and people are, you know, buying things on credit cards, and then, you know, a larger portion you're borrowing is a lot less, but, you know, just the interest rates, where they were, where they go, we've been here before, up and down all around, and it's just riding through the times when they do go up. What are your thoughts on the future for rates? And do you think we'll ever get back down to that free money? Free bar, I don't think Speaker 3 21:50 we'll get that low. Unless there's serious problems. I mean, you have to have serious problems to get that low. But the norm in the last 15 years, you know, is like, I would say, three to 4%, you know, high twos, sometimes low fours, but three to four, you know, that was kind of that's kind of the norm for a long time, you know, so I would expect to get back, they're nice. And I would say that would be like, reasonable. And it would be like, Okay, we're not gonna go, you know, drive the market through the roof, again, with 1.5 or two percents, and then we're not going to kill the market with, you know, where we're at right now. So kind of a reasonable middle ground, right. And we just want you know, we all want like a stable real estate market, right? We don't want things like blowing up or, you know, in either direction too much. Right? Exactly. We've seen this for a lot of people. Curtis Pope 22:37 And we've seen how quick they were able to raise them how quick and they bring them back down and say in a year, year, year and a half from now. Speaker 3 22:43 Yeah, like the Bank of Canada. So the Bank of Canada is what controls the prime rate. And when they come down, they're gonna bring it down slowly. So for us in variables, don't be expecting like, oh, coming down a half point at a time we're getting down here quickly. No, I would say a quarter point and maybe three to four drops in a year is my guess. That's my guess. Michele Cummins - PREC 23:04 That's good. So yeah, that's good. But now your story about this is a great time to move up by up. Again, I have this amazing property hitting the market next week off Richards Avenue and mission completely private, gated, fully fence, long, beautiful driveway. It is such a nice home over 6000 square feet. And the sports court is amazing, the detached workshop garage so this would be a perfect time to move up into that the price is $3.3 million. And so if you have something out there and you'd like something better, call me and call Alex first for your pre approval and then call me three level. Yeah, no, it's a rancher with a fully walk out daylight basement. That is beautiful. It's got a bar down there. It's really set up to entertain their pool table is like straight out of Harry Potter. It's a really neat, neat property. Yeah. Another new listing coming up on my list will mention right now is a condo in garrison in Chilliwack. That Garrison crossing area so in the furniture is going to be included. So if you're looking for a condo in that area, you can you can find that or just call me that'll be on the market next week as well. And, you know, what do we have time for? Did you want to ask another question? Well, Curtis Pope 24:21 I was just gonna ask you I know you last weekend you were up in in all of her. What about that listing? Michele Cummins - PREC 24:26 Oh yeah, all of her that is such a beautiful area and you know what? I don't get out much you know, you know, I tend to be a workaholic. But I was like every opportunity I can Okay, so I have this listing all over I go out there and I am in love this view this property is brand new, it's being built right now you can still choose colors and options. And it's a rancher with a fully walk out daylight basement overviewing the fruit orchards and wineries of course and Mount Baldy is there to to ski and to snowboard and then all the lakes. And then there's the racetrack out there with the go kart track. It's amazing. Area 4057. I think it's called 27. Area 27 or Curtis Pope 25:11 27. racetrack. Yeah, Michele Cummins - PREC 25:12 it's such a neat place. So that is up for someone actually, it's been sold as five parts. So it's a holding company that owns it, you purchased the holding company, no property transfer tax. No GST, even though it's brand new, because you'd be purchasing the holding company, and each portion the five portion owners, or it's $250,000. So you can go in with family all by together, you can go in with friends, and it's all done. All well. You don't have to worry about creating a holding company or partnership or anything there it is an investment group, you can do $1,100 A day rental through VRBO. Airbnb now. One of the actual sellers, it runs a property management company, they're giving away two years of free property management to where they will place the tenants. If you want to do short term rentals, you're allowed to do that. And so yeah, so and there's a suite in it as well. So two living spaces. So that's that's true rental income. Yeah, yeah. Nice. I don't have a quote for today. I was wondering, Alex, you're a guest you do you have a quote you go to Curtis Pope 26:19 put you on. Speaker 3 26:22 In my office, I have a plaque. It says if you can imagine that you can achieve it. I've had that Sarah since 2006. I love that. Wow. Look at that. And like the mind is a powerful thing. It's true. So yeah, that's excellent. Curtis Pope 26:36 That's a good one. All right, Michelle, if people want more information about you and the services you provide, where can they go? Michelle commons.ca. And join us again next week when we will talk real estate in order to unlock your real estate potential on the show where real estate is maximized. Thanks for listening