Who wants a mortgage anyway?
Feb 4th, 2014 | By Paul Miron
Well the answer seems to be everyone. Mortgages are an ideal creation for both borrowers and lenders. They are the vehicle that drives the dream of home ownership into a reality. They enable home renovations. They can often provide capital for important life needs and wants like higher education for our children, acquisition of vacation property or the provision of funds for important investment opportunities.
For lenders, mortgages are extremely stable assets with predictable returns and modest levels of default. They match up with savings vehicles of similar terms, allowing lenders to lock in spreads without significant interest rate risk. And, since they are such a significant product in terms of dollar amount, they form a great anchor product around which lenders can cross-sell a myriad of banking solutions. The outstanding question facing the mortgage market is – will the supply continue to endure and grow?
One of the largest drivers of mortgage volume is, of course, the real estate market and the velocity of home sales. That seems to have held up quite well with most major markets in Canada exhibiting more ‘staying power’ than many predicted. Perhaps the affordability of mortgage debt supported that until now. But, there is concern that Canadians may be carrying too much debt these days – record levels of debt to household income have taken hold. In a recent survey, many Canadians have reported that they intend to tighten their belts this year and get their debt levels under control. Affordability is of course fundamental and if it comes under pressure, it is likely that mortgage volumes, both purchase and refinance, will decline. In that event, we can be sure lenders will be exploring other ways to grow demand. Some thoughts spring to mind – here’s one (more to follow in future posts).
One of the biggest challenges for those who are well employed and have home ownership on their hit-list is that pesky down payment. Saving the 20% required for an uninsured mortgage can be difficult, with the myriad of other demands on disposable income. Other than paying for mortgage insurance for your lender, how can you bridge that gap?
One of Toronto’s major condo developers has handled that with a rent-to-own program. Basically, it allows a buyer to buy a condo, even when the down payment is not fully in place. Then, upon closing, the buyer enters into a rental arrangement for a year or so in which the normal mortgage payments are made, but the proceeds are split between some rent for the developer and accumulation of savings to complete the down payment. At that point, the rental ends and the buyer becomes the owner. If this works in the condo world, why couldn’t we imagine permutations that would work for resale housing? Who would win? The vendor would have something to make his home more competitive; the bank would have interesting product opportunities to tie the whole financial package together; the real estate company could add a few more differentiating arrows to their quiver; and aspiring buyers could move into ownership sooner. Win/Wins usually provide a solid foundation for opportunity.