Mortgage Blog

UPDATE - Follow-up on Changes to Federal Government Rules & Regulations

February 2, 2017 | Posted by: Kelleway Mortgage Architects

Is your down payment less than 20% of the financing value of your home? If so, your mortgage falls into the “default insured mortgage” category and must be insured by one of the Canadian default mortgage insurers - namely, CMHC, Genworth or Canada Guaranty.

To qualify for a default insured mortgage, the Government of Canada requires borrowers to pass a financial “stress test” indicating that borrowers are likely to continue paying their mortgage using the Benchmark rate. At the time of this writing (2017-01-26) that rate is 4.64% at a repayment pace (i.e., amortization) of 25 years. Some lenders refer to this as the 5 year posted rate. This rate is higher than the face rate which is the interest rate appearing on the mortgage contract. The stress test determines if the borrower can manage payments on a “what if” scenario. To qualify for default insured mortgages, borrowers debt ratios for shelter (GDS)and All shelter costs (TDS) must be less than 39% and 44% respectively.

The good news is that now borrowers who qualify under the new default insured rules (25 yr amortization and Benchmark rate) will have the choice of 1 to 5+ year mortgage terms. And, they can choose a variable or fixed rate mortgage if they pass the stress test criteria.

Much of lending is based on ratios. Loan to value (LTV) ratios apply to down payments and default insurance premiums. Debt service ratios apply to lending criteria. Ratio for Shelter (GDS) and All Costs (TDS) use the gross taxable income as the foundation for calculating these ratios. Gross Debt service (GDS) is best kept in the 32 - 35% range and the total debt service (TDS) is best kept in the range of 40 - 42%. However, with a credit score higher than 680 it is possible to stretch the Shelter (GDS) ratio to 39% and the All costs (TDS) to 44% using the new stress test criteria.

Change #1 – October 17, 2016 – All High Ratio Buyers need to Qualify at New Benchmark Rate for all Terms

Buyers who have from 5% to 19.9% of their purchase price for down payment are required to apply for default mortgage insurance through CMHC, Genworth or Canada Guaranty. For that insurance privilege, the borrowers pay an insurance premium that is often wrapped into their total mortgage amount.

Change #2 – November 30, 2106 – Default Insurance Criteria re Eligibility

There is NO need for default insurance if the borrowers have 20% equity in the property or have 20% down payment to purchase a property.

In the past, lenders could use default (bulk) insurance to offer lower cost mortgages to borrowers. Without getting into high level bank-speak it WAS cheaper for some lenders to do that. With the new Federal Rule, however, lenders no longer have that option to offset their risk by default (bulk) insuring mortgages that have 20% or more in equity or down payment.

Mainly affected by this change are borrowers who will need to renew or refinance mortgages provided by lenders who were previously allowed to bulk-default-insure mortgages that had 20% or more down payment. When their current mortgage term is up, these borrowers will need to re-qualify for mortgages that abide by the newer and tighter rules.

For example, the government wants to limit its exposure for covering mortgages that default on properties worth $1-million or more. That type of insured mortgage now needs to have a 25 year or less amortization period. And, buyers who owner-occupy the property must have credit scores of 600 or greater to qualify for this type of mortgage financing.

Change #3 – Tax Year 2016 – All Home Sales must be Reported to the Canada Revenue Agency.


What’s Next?

The federal government may be seeking more ways to shift the financial risk derived from mortgage defaults to the lenders, rather than shoulder 100% of that load through the government-backed default mortgage insurance companies (e.g., CMHC).

I would not be surprised if there is an increase in default insurance premiums by March 2017.

How will these changes affect your mortgage choices?

If the above sounds complicated, it is. Mortgage brokers will need to consult three different types of rates sheets per lender to consider mortgage choices that fall into different buckets of lending, such as:

1) Default Insured Lending – high ratio mortgages are subject to new and tighter qualification rules for borrowers

2) Insurable Lending – lenders may find other means to insure their book of mortgages (e.g., pay the default insurance themselves) and pass on lower mortgage interest rates to eligible borrowers

3) Uninsurable Lending - lenders are no longer allowed to bulk default insure rental properties and some other property types, even if the equity is higher than 20%


How will these changes affect you as a mortgage borrower?


Without help from other sources (such as the BC HOME Partnership Program) or prudent advice, borrowers may decide to:

1) postpone their purchase of a home,
2) buy a less expensive home, or
3) make larger down payments and larger mortgage payments.


In the more expensive housing markets such as Vancouver and Toronto, potential buyers may shift their expectations to a more European housing model. In European countries it is more common for urban-dwellers to remain renting longer rather than become home owners – if ever.

 What's the Next Step for You?

1)    Keep us in mind and on hand in case anyone you know runs into the same sort of situaltion.
2)    Share this post with your friends and family because you never know when the info could come in handy.
3)    Call or Email Us just to connect and get started talking about your plans. (see below)
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Glen Kelleway, BSc, AMP, Senior Mortgage Planner & Owner
 

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