YVR REMO Show EP. 10 - The Oil Crisis and Mortgages.
Episode 10 is here!
It's been about 4 weeks since quarantine has started so partners Alex, Dean, and, Deryk had to get together for a podcast. We recap the state of events from the beginning of the coronavirus lockdown until today.
Lets start off with some interesting news. The price of oil is dropping! At a time where the COVID Crisis starts to level off, we see what is perceived to be the oil crisis. Oil is at -$37/barrel. Oil and energy is a huge sector in Canada, especially in Alberta. On the mortgage side, it could eventually influence the Bank of Canada to drop by another quarter percent which will affect the variable rates and line of credit. Like we said this will hit harder in Alberta. With oil going free, jobs may be in jeopardy. This is the lowest oil has ever been in our history. There is nothing to compare it to so impact is hard to gauge. If prime comes down, there could be more mortgage applications meaning more risk for lenders.
Mortgage lending has changed. One of the biggest changes we've seen has been in the verification process with an employee. Verbal verification is typically standard, however, we've found that process to be more in-depth. We've noticed lenders are looking for proof over 3 months of bank statements to verify if tenants are making payments, whether they have taxes filed, and other forms of verification. We used to get certain exceptions but we've seen a more thorough evaluation to make sure the buyer can afford the mortgage. If you're trying to get into the market, be prepared for a more strict process.
At the beginning of the year, well into March, the market was busy. When COVID came about it proved to be a mental shock and slowed things down. The loan to value for our self-employed clients has seen a downpayment from 20-25%. Private lenders have been making a big comeback and then withing a few weeks we saw our maximum loan to value as high as 80%. We saw that dip down to 60%. There's a number of reasons for that such as people pulling their money out from investments. There has been concern over property values. It's inevitable that property values will drop. If someone can't afford their house, they may access they're equity or sell below market value. Once one home sells below market value, the rest of the house nearby becomes affected. Unless you have a plan in the next few years to sell your house, do it now, It is a good time because property value is still fairly high. Everything will come back, so there's no need to worry if you are not planning to sell for another 3-5 years.
In the beginning, for about 5 business days, we saw rates drop fairly low. This creates an influx of mortgage applications. Credit unions needed to slow things down because they are not funded like the banks are. They also needed to access risk because of what's happening in the markets. Taking these big steps is about security for institutions.
We saw the variable rate discount go from prime -1 and even greater at some points. We've seen some of the banks come back since. Why did it go down and up so suddenly? Mostly, it was a shock to the system. The amount of refinances people were trying to do was huge for that 5 day period. We had a very busy spring market so a lot of those offers from February and March have needed to get fulfilled. The banks adjusted rates upwards to stop the business for a period of time. Cost of funds for lenders has also increased quite a bit. The way that banks and credit unions lend out money is partially based on the number of funds that they have on deposit. They lend against this money. When the stock markets fell down, people started to pull cash out. The banks have less liquidity and pay more for money on deposit. Some of the bank's stock prices have also fallen by 40%. Risk also plays a factor since default and unemployment are huge right now.
Where we're at today is most lenders have figured out a solution in deferrals. What if you don't want to defer and pay more interest? We got a little creative here at Thrive Mortgage. We're offering something called the 'Equity Relief Plan'. We take all of your payments and itemize that in a list or budget. We provide that as a way of understanding where you stand and whether you need to defer your payment and how it will affect you. Making smart decisions is key at this time. Deferrals are there for a reason but there is a cost to it. It is definitely better than missing a mortgage payment.
To summarize, a lot of things have changed but everything is the same. Now is the time to focus on your finances and figure out where you are and how to proceed.
We are here to help with that so reach out and we can help you understand what your next steps should be!
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