Darrell Majdell is regional vice-president of mortgage specialist sales force at BMO.
How has the economic downturn of the last few years in Alberta affected mortgage business?
Majdell: The Alberta economy has slowed over the past few years, and the real estate sector and mortgage market have felt the effects of this overall – earlier in the year, our economics team pointed to benchmark prices falling over five per cent from peak levels.
For any lending institution, the mortgage business hinges on a number of factors with employment, income, household formation, immigration and interest rates being amongst the key factors. Within my team, we have been able to maintain and even slightly grow our market share over the last few years.
Looking outside of Alberta, we have also grown our mortgage teams across Canada. Purchasing a home is one of the marquee moments in a person’s life. We have the teams in place to help Canadians navigate their homeownership journey.
What has been the impact of the mortgage stress test on the number of mortgages being taken out and the number of homes being sold?
Majdell: With the Alberta economy softening, that’s certainly had an impact on the number of Albertans purchasing homes (and looking for mortgages). On our side, we have seen growth over the last few years but consumers, generally, are more cautious. This has been a major factor that has influenced the housing market.
We are very fortunate in Canada to have one of the best mortgage regulatory environments globally. Housing demand and housing markets evolve over time based on a number of factors – employment, income and interest rates, for example.
The mortgage stress test provides a cushion for homebuyers to make sure that they’re financially ready in all scenarios. Even prior to the stress test being introduced, I’d always encourage buyers to personally stress test their mortgages. It’s a good practice for homebuyers to check and make sure that they will still be able to pay off a mortgage if interest rates rise.
Can you in simple terms describe how the mortgage stress test works?
Majdell: With the mortgage stress test, consumers are now required to qualify for their mortgage based on an interest rate that’s two per cent higher than the customer’s actual interest rate. For example, a homebuyer may be looking to buy a $500,000 home and the interest rate quoted by their bank is 3.24 per cent for a five-year term. In this scenario, they would only be approved if they can support payments on a mortgage at 5.24 per cent – the actual interest rate plus two per cent.
If you have a long-term mortgage that’s up for renewal, where and how does the mortgage stress test fit into this?
Majdell: Today, consumers who want to switch their mortgage to another financial institution when up for renewal must re-qualify with the institution they’re looking to switch to. The challenge in switching institutions when the mortgage is up for renewal can be that the homeowner may not qualify again. The household financial situation can change over the term of a mortgage, so it’s important to keep in mind that, if you’re looking to switch, you will have re-qualify with the stress test. This is especially important for homeowners who qualified for their mortgage before the stress test was introduced.
There are numerous mortgage options for consumers. What are the key things they should look at when deciding which financial institution or lender to choose?
Majdell: The important thing for prospective homebuyers is that they look at the full picture when it comes to purchasing a home – oftentimes consumers are mostly interested in their interest rate, but there are a number of other factors to consider. One of the more important things to keep in mind is the payment schedule. The schedule for payments can be weekly, bi-weekly or monthly, and this can impact the amount of interest that will be paid over the period of the mortgage. It’s also important to consider prepayment options. Some consumers want to pay more than is required – the typical 20 per cent – in order to reduce interest costs and the length of the mortgage.
Two other important considerations are the type of mortgage – fixed or variable – and the length. This will also impact how much interest is paid over the term.
I highly recommend using one of the online calculators provided by the major banks. The calculators can provide a comparative review using different rates and terms to compare monthly affordability. They also can help homebuyers see just how much can be saved with shorter amortizations, accelerated payments or prepayments.
In looking at the full picture when purchasing a home, the key for me is choosing a financial institution that’s focused on the homebuyer. Everyone’s financial situation is different, so it’s important to find an institution that is going to take the time to come up with a comprehensive mortgage and financial plan that suits their needs.
If, as a prospective homebuyer, you don’t immediately qualify for a mortgage, that’s not the end of the road. We will work alongside homebuyers to come up with a game plan to help them qualify – looking at how much they can save and how much debt they can reduce over a specific period. We want to work with Canadians to help get them in a position to buy a home.