New housing policies are now in effect and they are leaving many Canadians unclear about how their finances have been affected.
This material will focus primarily on Low Ratio Mortgage Loans – mortgages with 20% or more equity or down payment. Outlined below is a very clear and concise summation of how you have been affected, but in order to understand the new rules it’s important to understand the previous rules.
Regulations Prior to November 30, 2016
A fixed rate mortgage loan with a 5 Year Term was not subject to the Benchmark Rate (also known as Mortgage Qualifying Rate). Mortgage loans with terms of 4 years or less, and/or variable rate mortgages, were subject to the Benchmark Rate as established by the Bank of Canada.
How Do These Changes Affect You?
High Ratio Mortgages – For home buyers with less than a 20% down payment, mortgage qualification will be based on the Mortgage Qualifying Rate to stress test borrowers.
Low Ratio Mortgages – Low ratio mortgages will be subject to the Benchmark Rate Qualification guidelines which means that you must now qualify at a rate that is 2% over your negotiated mortgage rate, or the prevailing Bank of Canada rate, whichever is greater.
This change to Low ratio mortgages equals about 20% less buying power for most Canadians!
If you switch your mortgage at renewal to another lender, you must now qualify at a rate that is 2% over the negotiated renewal rate, or the prevailing Bank of Canada rate, whichever is greater. If you renew your mortgage with your existing institution, you do not need to re-qualify.
What is the Deal with Bulk Insured Loans?
Bulk Insurance – Also known as Portfolio Insurance, essentially protects Lender portfolios from defaults, reducing their need for capital, and increasing their opportunity to securitize mortgages. Securitization describes the selling of mortgages as investment vehicles. Regulations for Lenders seeking Bulk Insurance on their loans are also changing.
Below I explain the main points:
A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan.
A maximum amortization length of 25 years
A property value below $1,000,000
If the property is a single unit, it will be owner-occupied.
No more refinances are available. Only mortgage loans for purchases and renewals can qualify for bulk insurance.
Loan payments will be based over a 25-year time frame
Maximum property value is capped at $1,000,000
Borrowers looking to mortgage properties deemed as single units (i.e. townhome, home, condominium, etc.) must be living in the property. Borrowers looking to mortgage rental properties may do so up to a maximum of 4 units within a single property, and the borrower must “occupy” one of these units. For greater clarity, the property must be 1 single entity that may contain up to 4 units (i.e. quadplex).
Talk to a Mortgage Broker (Hopefully Me)
There is also a number of smaller nuances within the technical requirements of these new mortgage policies impacting bulk insured conventional mortgage loans. As such, it is an arduous and daunting task for borrowers to determine which lenders are bulk insuring their loans from those that do not. However, mortgage brokers have this ability and are incredible resources for moving borrowers through a mortgage process comfortably and seamlessly.
The value of a mortgage broker is now even more important as you make the largest financial decision of your life! My goal is to walk you through the process from start to finish. Contact me anytime, I’d love to work with you!