New CMHC Policy for Self-Employed Borrowers

General Victor Anasimiv 9 Aug

As a self-employed person myself, I was happy to hear that CMHC is willing to make some changes that will make it easier for us to qualify for a mortgage.

In an announcement on July 19, 2018, the CMHC has said “Self-employed Canadians represent a significant part of the Canadian workforce. These policy changes respond to that reality by making it easier for self-employed borrowers to obtain CMHC mortgage loan insurance and benefit from competitive interest rates.” — Romy Bowers, Chief Commercial Officer, Canada Mortgage and Housing
Corporation.

These policy changes are to take effect Oct. 1, 2018.

Traditionally self-employed borrowers will write as many expenses as they can to minimize the income tax they pay each year. While this is a good tax-saving technique it means that often a realistic annual income can not be established high enough to meet mortgage qualification guidelines. Plainly speaking, we don’t look good on paper.

Normally CMHC wants to see two years established business history to be able to determine an average income.  But the agency said it will now make allowances for people who acquire existing businesses, can demonstrate sufficient cash reserves, who will be expecting predictable earnings and have previous training and education.

Take for example a borrower that has been an interior designer with a firm for the past eight years and in the same industry for the past 30 years, but just struck out on his own last year. His main work contract is with the firm he used to work for, but now he has the ability to pick up additional contracts from the industry in which he has vast connections.

Where previously he would have had to entertain a mortgage with an interest rate at least 1% higher than the best on the market and have to pay a fee, now he would be able to meet insurance requirements and get preferred rates. The other change that CMHC has made is to allow for more flexible documentation of income and the ability to look at Statements of Business Professional Activity from a sole-proprietor’s income tax submission to support addbacks of certain write-offs to support a grossing-up of income. Basically, recognizing that many write-offs are simply for tax-saving purposes and are not a reduction of actual income. This could mean a significant increase in income and buying power.

It is refreshing after years of government claw-backs and conservative policy changes to finally see the swing back in the other direction. Self-employed Canadians have taken on the burden of an often-fluctuating income and responsible income tax management all for the ability to work for themselves. These measures will help them with the reward of being able to own their own home as well.

Click here to read the actual press release from CMHC’s website.

An “Engineered Slowdown” of the Canadian Housing Market

General Victor Anasimiv 17 Oct

Think back to the beginning of July.  Vacations were just getting started.  Summer weather was in full swing, at least here in BC.  Seems pleasant, but mortgage brokers across Canada were quietly dealing a new round of frustration.  On July 8th, the Office of the Superintendent of Financial Institutions (OSFI), the big banks’ supervisor & regulator, published draft revisions to the guidelines for residential mortgage qualification, specially for uninsured mortgages.  You may recall that in the fall of 2016, sweeping changes were made that included a new stress test for insured borrowers.  After that change, a borrower with less than 20% down-payment would now have to qualify at the Bank of Canada benchmark rate (currently 4.89%).  Prior to the stress test, the same borrower could qualify at contract rate if they chose a 5yr fixed rate (currently about 3.09%).  This “stress test” effectively decreased one’s purchasing power by about 20%.

Fast forward to now.  As of today, OSFI has made their summer draft revisions a reality.  There are a couple changes being made, but directly from their website, here is the change that will be most felt by the general publicare the changes:

OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages. Guideline B-20 now requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%.

OK, so what does this mean exactly?  If you had 20% available for a down-payment, you could avoid the “stress test” and still qualify at the contract rate.  As of January 1, 2018, this will no longer be the case.  As of that date, the minimum qualifying rate for uninsured mortgages will be “the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%”.

Perhaps this is best explained with an example. Let’s assume the purchaser (or purchasers) has a total qualifiable annual income of $75,000, no other debts and a decent credit history, and has access to the required 20% down payment (own resources or gifted).  Under the current rules as they are, if you chose a 5-yr fixed rate term (currently about 3.39%), this income would likely qualify for a purchase of about $565,000.

After January 1, 2018, the qualifying rate for this mortgage will now be 5.39% (the greater of the benchmark rate 4.89%; or the contract rate +2% = 5.39%).  At this higher rate, and all other variables being equal, the maximum purchase price drops to about $450,000.   Purchasing power has dropped by about 20%.

So why is this happening?  OSFI’s official explanation is that “these revisions reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada”.   These changes are part of an “engineered slowdown” of the Canadian housing market.  The general consensus from mortgage brokers and real estate agents across the country is that this approach is a bit too heavy-handed.  Perhaps it would be more prudent to leave sufficient time to gauge the previous changes before making new ones.  As with the fall 2016 changes, there are a lot of unanswered questions, and as brokers, we fully expect further clarifications and explanations in the coming days and we will do our best to keep you, our clients as informed as possible.

However, regardless of the motives behind these changes and any consequences, anticipated or not, they are happening.  If you’ve been toying with the idea of purchasing or refinancing, now is a very good time to thoroughly examine all options as your goal will be pushed a little further out of reach in the new year.  I’m more than happy to discuss these new changes with you and to help figure out your best course of action moving forward.  Contact me today!

 

Is it Time to Lock in a Variable Rate Mortgage?

General Victor Anasimiv 10 Oct

Approximately 32% of Canadians are in a variable rate mortgage.   Up until very recently, rates have been declining steadily for the better part of the last ten years, so this has worked well.

Recent increases in mortgage interest rates understandably trigger questions and concerns, which are best handled by a discussion with me, an independent mortgage expert, not the lender. There are details & conditions you might not be aware of, and there is no guarantee that a lender will cover all the bases.

Over the last several years, there have been headlines warning us of impending doom with both house price implosion, and interest rate explosion.  Other than a couple very localized & brief instances, very little of this doom & gloom has come to pass.

Before accepting what a lender may offer as a lock-in rate, I highly recommend having a quick discussion with me to review all of your options. Especially if you are considering freeing up cash in the future for such things as renovations or travel or investing towards your children’s education.  Even if you just want to lock in the outstanding balance, having a conversation about pre-payment penalties is crucial because they will change when you switch from a variable to a fixed rate.

In the vast majority of variable rate mortgages, the usual pre-payment penalty is 3 months interest.  There are exceptions to every rule – if you opted for a low-rate no-frills type of mortgage, it may come with a larger penalty.  But 3 months interest is usually the standard.  On the other hand, the pre-payment penalty for fixed rate mortgages can be quite substantial, even if you’re early on in the term of the mortgage.  It’s known as the interest rate differential (IRD) and is based on factors such as your current rate, the posted rate for a comparable mortgage and the amount of time left in your term.  It’s a fairly complex calculation and is typically many times higher than the standard 3 months interest penalty.

These massive penalties are designed for banks to recuperate any losses incurred by clients (you) breaking and renegotiating the mortgage at a lower rate. And so locking into a fixed rate product without careful planning can translate into a significant financial downside for the client.

Another common misconception involves the lock-in rate.  “Locking in” your mortgage doesn’t freeze the current rate on your mortgage.  Rather, you will lock into a rate offered by your lender, which could be based on the length of time left in your term.  Or you could be forced to start a new 5-yr term, and there is no guarantee that the rates offered will be current best rates.

On the other hand, there is something to be said for the peace of mind that comes with having a fixed rate mortgage.  You know what your payments will be for the full term and never have to worry about them increasing.  If it helps you sleep at night and alleviate any concerns, maybe locking in is the better option.  Generally speaking, there is no ‘correct’ answer that applies to everyone because everyone’s situation is unique.  There is only a ‘specific-to-you’ answer, and the best way to come up with that answer is having a conversation with me, your mortgage broker.

Life is variable, perhaps your mortgage should be too.

As always, if you have questions about locking in your variable mortgage, breaking your mortgage to secure a lower rate, or any general mortgage questions at all, I’m here to help!  Contact me today at 250-338-3740

(with info taken from the monthly DLC newsletter)

Adjustable vs Variable Rate Mortgages

Latest News Victor Anasimiv 17 Jul

Last week the Bank of Canada finally did what prognosticators in the media have, for years, been unsuccessfully predicting.  They raised interest rates.  More specifically, they raised their ‘overnight’ rate by 25bps – 0.25% or a 1/4 point. The ‘overnight rate’ is the interest rate at which major financial institutions borrow and lend one-day (or “overnight”) funds among themselves. As expected, all banks, credit unions and monoline lenders have raised their prime lending rates by 0.25% to 2.95%.  TD is the outlier here – their prime rate now sits at 3.10%, although they do offer slightly deeper discounts off their prime rate.

Interest rates have been at historically low levels for many years now with nowhere to go but up, so this slight increase shouldn’t be much of a shock.  The key word here though is “slight”.  If one were to base their views on media stories alone, one would probably think the sky is falling and that they are in serious risk of defaulting on their mortgage.  That could not be further from the truth.  While it is true that keeping one’s indebtedness as low as possible is a good thing, it’s important to understand exactly what this recent change means for your mortgage.

If you have a fixed rate mortgage, this change in prime rate means nothing to you.  Your interest rate remains the same until the end of your term.

If you have a variable rate mortgage, what happens depends on whether your mortgage is a true variable rate, or an adjustable rate.  Lenders can use these terms interchangeably, which can create some confusion, as there is a difference.

If you have a true variable rate mortgage, your payment will actually stay the same.  What does change is the proportion of each payment going towards principal vs. interest.  With this 25bps increase, on average, for every $100,000 you owe on your mortgage, about $20/month more of your payments will be going towards interest.  This will slow the rate at which your amortization decreases.  TD & most local credit unions generally follow this rule.

If your mortgage is what is known as an adjustable rate mortgage, your payment will increase as the lender’s prime rate increases.  With this 25bps increase, on average, for every $100,000 you owe on your mortgage, your payments will increase about $13/month.  Examples of lenders who follow this rule include First National, RMG, Scotiabank & Street Capital.

If your mortgage is of the former variety and you would like to keep your amortization decreasing as per usual, consider using your pre-payment privileges (standard with most mortgages) and increasing your payments by that magic number of $13/month for every $100K owed.  Or better yet, bump your payments up as high as you can afford – this will give you a bit of a buffer for any future rate increases, and you’ll be paying your mortgage down faster.

The important take away from all of this?  DON’T PANIC.  It’s always a good idea to keep a tight handle on your finances and make sure you’re on the right track.  But now is not the time to abandon your variable rate and lock into a fixed.  While it’s impossible to accurately predict what the banks will do in the future, the appetite for another rate increase is minimal.  The variable rate option is still a desirable one.

For more information on how this change affects an existing mortgage, your first step should be to check your online banking if you have it set up or contact your lender’s customer service department.  We would be happy to help track down the necessary info for you, crunch some numbers more specific to your current or anticipated mortgage situation or answer any other questions you might have.  Please let us know how we can help

250-338-3740

 

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

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