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 email@example.com