Most people don’t know the difference between banks and credit unions in Manitoba. Even fewer people know how that difference could be hurting their finances and futures.
The Dangerous Difference Between Banks and Credit Unions
The biggest difference between banks and credit unions is that banks are governed under the Federal Banking Act. Basically, this means that the new mortgage rules that came into effect in 2017 and 2018 don’t limit credit unions as much as they limit banks. Specifically, if a mortgage seeker has 20% or more as a down payment banks have to run that buyer through the financial stress test of qualifying at 4.99% interest. Even if the buyer has 90% down and two million dollars in the bank, they still must prove they can make the payments at a 4.99% interest rate. With a credit union, though, the buyer with 20% or more down does not need to qualify at that interest rate.
At first, this can look like an advantage to the buyer. Bring on the lower barrier to entry, right? But here’s the dangerous part. It’s exactly that kind of low-barrier, "let’s get them a mortgage any way we can thinking" that contributed to the US real estate crash of 2008, and it’s what’s led Canada to creep ever closer to such an event, too. We’ve got our own real estate bubble happening in some markets, and it’s been inflating for years. That’s why these rules have been introduced – to keep it from bursting.
How This Hurts Mortgage Holders
Here’s what the Office of the Superintendent of Financial Institutions knows: a balanced economy has a higher interest rate than we’ve seen for decades. We’ve ridden the wave of lower interest rates for years, and party time is over. Interest rates are climbing (the 2% reduction on the Prime Lending Rate to stimulate the economy is already starting to increase rates back to normal), and they want to get us ready and able to afford our debt even at 4.99% interest.
Before getting too excited about the opportunity to buy a house with credit unions when they can’t with banks, they need to remember: if you can’t qualify for the mortgage at 4.99%, it means you won’t be able to afford the mortgage when rates get to that point.
Sure, you can squeak through to securing a mortgage now, but the payments will creep up and finally become unaffordable. In other words, this will hurt you in the not-so-long run.
And it’s exactly that kind of problem the mortgage rule revisions are trying to avoid.
The bottom line is that credit unions may be able to lower the threshold for buyers, but it doesn’t actually change the buyers’ future debt service or ability to actually pay the thing, which means ultimately, they’re no further ahead.
PS: I made this for you.
Protect yourself from a bad buying
experience or financial fall-through
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and with the new legislation we're about
to see more...)
This Pre-Approval Checklist is my gift to you.