Mortgages in 2017 – The Only Constant is Change

General Victor Anasimiv 23 Mar

The process of qualifying for a mortgage is not as it was 12 months ago.  There have been a lot of important changes to guidelines that have been imposed in the last few months.  As a result, Canadians must adjust their plans for homeownership accordingly.

First, in October, came the introduction of the ‘stress test’.  Previously, when opting for a 5-yr fixed mortgage, the most commonly chosen option, borrowers could qualify at their contract rate. With this ‘stress test’, unless borrowers have at least 20% saved for a down-payment, they are now required to qualify at the Bank of Canada benchmark rate, which is currently 4.64% (much higher than the current typical contract rate of 2.69%).  The government’s intention was to ensure that borrowers could handle sharp interest rate increases.  However, their approach is a little too heavy-handed, as this rule essentially decreases one’s purchasing power by about 20%.  If you could qualify for a mortgage of $300,000 before this change, your new maximum is about $240,000.

Then, at the end of November, came the changes to portfolio (‘back-end’) mortgage default insurance.  In Canada, there are 3 mortgage insurers – CMHC, Genworth & Canada Guaranty.  When purchasing a home with less than 20% down-payment, the client is required to pay an additional premium for mortgage default insurance.  With more than 20% down, this premium is still payable, but the cost is typically covered by the lender (ie. ‘back-end’ insured).  With the November changes, the government now requires banks to carry more of the cost of lending with respect to how they utilize mortgage insurance and amount of capital they must have on reserve. This means it is more costly for banks to lend so they are passing some of this cost on to borrowers.  In most cases, they’ve done this by introducing a tiered rate structure when the mortgage loan is under 80% of the property value (80% loan-to-value or LTV).  The loan is ‘insurable’ if it is for a purchase or transfer, the borrower qualifies at the benchmark rate and amortization is 25 years or less.  If contract rate or extended amortization is required to qualify, if the borrower is self-employed and can’t meet traditional income qualification requirements, or if the purpose of the loan is a refinance, this loan is now considered ‘uninsurable’ and carries a rate premium anywhere between 0.10-0.30%, based on the exact LTV.

This change has drastically altered the type of files many monoline lenders can handle.  Monolines are simply banks that deal exclusively with mortgages.  This pushes more business towards the bigger banks and essentially decreases competition in the mortgage marketplace.  As options for borrowers decrease, this will have an added slight upward effect on interest rates.

One final change with very relevant consequences just came into effect last week.  CMHC, followed by the other 2 insurers, raised the default insurance premiums, effective March 17th.  The premiums are calculated as a percentage of loan amount, with the exact percentage varying based on LTV.  For example, at 95% LTV (5% down payment), the insurance premium has increased from 3.6% to 4.0%.

What does this all mean? Overall it is now more costly and more confusing to get a mortgage than in the past. With the complexity of the new mortgage market, now more than ever buyers need someone with extensive knowledge to help them sort through their options.  As your local Dominion Lending Centres mortgage professional, it’s my job to help you understand how these changes apply to you.  And the best part is that this advice doesn’t cost you a dime.  It’s definitely worth the call.

If I can be of assistance to you or someone you know, please do not hesitate to contact me – 250-338-3740 or anasimiv@gmail.com

Purchase Plus Improvements

Mortgage Tips Victor Anasimiv 16 Mar

If you’re currently on the hunt for a new home but can’t find exactly what you are looking for, you’re not alone. While ideally, you’re looking for your dream home, what you find might not match what you have in mind.  Why not think about buying a fixer-upper? With a few minor renovations, you might be able to turn a potential property into a dream.

There is a mortgage product available called Purchase Plus Improvements (PPI). Under a PPI the lender is able to provide additional financing to improve the subject property. This type of mortgage is available to assist buyers with making simple upgrades such as paint, flooring, windows, hot-water tanks, new furnaces, new roof, or basement finishing.  This product would not be suitable for major renovations where structural modifications are made.

The program has a few requirements:

  • There is a maximum limit to amount of funds that can be borrowed.  It varies lender to lender but it’s typically between 10%-20% of the ‘as-complete’ value
  • Minimum down-payment is still 5%, but is now calculated based on this ‘as-complete’ value
  • Quotes for work to be completed must be provided at the time of application for mortgage approval.
  • Portion of funds for the improvement are held back.  You will have to cover the cost or have your contractor/builder put it on account until work is completed
  • Renovation are to be completed within 90-120 days (varies by lender)
  • A third party (appraiser) must verify completion
  • Once the renovation is complete and verified, the lender will instruct the solicitor to release the improvement funds

A PPI Example:

  • Purchase price: $400,000
  • Value of renovations as per prepared quotes: $30,000
  • As-improved value: $430,000 (the new purchase price)
  • Minimum down payment: $21,500 (5% of the new purchase price)
  • Net mortgage amount: $408,500
  • Mortgage default insurance premium (with a 5% down payment, premium is 4% of loan amount): $16,340
  • Total mortgage amount: $424,840
  • Monthly mortgage payment: $1,944 (assuming an interest rate of 2.69%)

Many would typically consider accessing a line of credit for these renovations.  But it can be a daunting task to seek a mortgage plus a second type of financing to complete renovations, so why not opt for the PPI option?  Assuming the interest rate on the line of credit is 7.5%, your interest-only payments on $30,000 would be $185/month.  Why not roll that amount into your mortgage principal.  Doing so will save you about $50/month in interest costs alone.

This type of product is also available with refinances, with certain limitations.  With all the different types of mortgages out there, be sure to contact your local Dominion Lending Centres mortgage professional – that’s me! – so I can explain how “we’ve got a mortgage for that”!

Thinking Outside a Smaller Box with the New Mortgage Rules

First Time Home Buyers Victor Anasimiv 9 Mar

Not all mortgages are created equal.  That has always been true, but is even more so after the government changes made to mortgage default insurance guidelines in late 2016.  As we approach the end of the first quarter of 2017, Mortgage Brokers and lenders are still adjusting to the new risk-based mortgage rate pricing that came into play as a result of these changes.

On a high-ratio purchase (less than 20% down-payment), borrowers are required to pay a premium for mortgage default insurance.  Even if more than 20% is used as a down-payment, lenders still often choose to pay for the insurance themselves. Doing so protects a lender’s book of business against credit loss, helps them package more secured mortgages together to sell to investors and reduces the amount of capital they are required to maintain. In the mortgage industry, this practice is called back-end insuring.

The changes announced in October & November of last year have greatly limited the mortgages that lenders are allowed to insure using government-backed insurers. Essentially the government is passing the perceived risk on to lenders by implementing far more stringent guidelines for qualifying for this insurance and limiting mortgages that can be insured to what they consider lower risk “inside the box” mortgages.

I used the phrase ‘perceived risk’ because it should be pointed out that default rates on mortgages in Canada are incredibly low. As of January 2016, only 13,216, or 0.28% of Canadian mortgages, were in arrears.  Less than half of 1%! In any case, the onus has been placed on the lender to absorb more costs if a borrower defaults. In the end, these costs are passed on to borrowers by lenders applying higher rates to less secured mortgages.  The effect this is having an the Canadian public is two-fold.  First, it increases interest rates, merely based on speculation with no supporting data.  And furthermore, it prices smaller lenders out of certain subsections of the mortgage market.  This decreases consumer choices and competition, which can only serve to increase rates further.

These days, if you’re looking for a mortgage, your circumstances may not fit “inside the Box” as this box seems to be shrinking more and more. The following is a list of guidelines that must be satisfied for a mortgage to be considered an insurable mortgage (by no means an exhaustive list and is subject to change):

  • Maximum amortization of 25 years
  • Must qualify by using a stress test. Even though your mortgage contract rate may be 2.69%, you will have to qualify at 4.64%, the Bank of Canada benchmark rate.  This stress test decreases your purchasing power by about 20%
  • Maximum Gross Debt Service Ratio of 39% (shelter expenses as a percentage of gross income)
  • Maximum Total Debt Service Ratio of 44% (all liabilities – shelter plus other debts – as a percentage of gross income)
  • No refinances
  • No single unit rentals
  • Purchase price must be less than $1 Million

As you can imagine, this severely limits the type and number of mortgages that would be considered insurable and eligible for better mortgage interest rates. All mortgages are definitely not created equal in 2017 and it’s more important than ever to have a chat with me, a licensed and thoroughly educated mortgage broker.  As my client, I will help educate you on all the recent changes and come up with a mortgage solution to what could now be an “outside the box” uninsurable mortgage. Whether you’re refinancing, you need an amortization over 25 years, or you want to buy a single-unit rental, we have a mortgage for that!

Contact me today to get started on your mortgage approval! 250-338-3740 or anasimiv@gmail.com