New housing mortgage policies are coming into effect (again) and leaving many Canadians unclear about how their finances have been affected. The Government of Canada is introducing these new rules in two phases. This article is a quick summation of how you may have been affected. First, however, to understand the new rules it is important to understand the classification of mortgages and the previous rules.
First, there are two rule books: the first is for mortgages with less than 20% equity or down payment, otherwise called "high-ratio" mortgages. 'High ratio' refers to the loan amount relative to to the property value. In Canada, all high-ratio mortgages *must* be insured against borrower default. CMHC is the Canadian Mortgage and Housing Corporation, an extension of the Government of Canada, and the primary insurer of high-ratio loans. Therefore, through insurance premiums collected and added to the mortgage balance, CMHC - and by extension the Canadian Government - is backing a portion of the housing market.
The second rule book is for mortgages with 20% or more equity or down payment, otherwise called "low-ratio" or "conventional" mortgages. Low-ratio mortgages do *not* have to be insured against borrower default as there is enough of the borrower's equity or 'skin-in-the-game' to protect the lender against default. HOWEVER, some lenders purchase low-ratio "bulk" or "portfolio" insurance from CMHC regardless, as it allows them to better manage the capital requirements of their mortgage lending operation.
REGULATIONS PRIOR TO OCTOBER 17, 2016
an *insured* mortgage borrower (high- or low-ratio) could qualify for a larger loan by opting for a 5-year fixed rate mortgage because the monthly payment calculation could use the lower 5-year contract rate (currently 2.44%) in the affordability calculation, whereas the qualification rules for a 4 year or less fixed-rate term or variable rate mortgage required a payment "stress test" using the much higher Bank of Canada "Benchmark-Rate" (currently 4.64%) in the affordability calculation. As a higher qualification rate equated to a lower mortgage approval amount, borrowers trying to get into or move up in the housing market gravitated to the 5-year fixed rate as they could borrow more money.
POST OCTOBER 17th - HOW DO THE CHANGES AFFECT YOU?
For home buyers with less than 20% down payment, mortgage qualification is now based on the Bank of Canada Benchmark Rate for (essentially) ALL terms including the popular 5-year-fixed. Effectively, this rule change reduces the maximum high-ratio loan anyone can get by about 25%, which is enough to prevent some buyers getting into the market and will likely serve to reduce what people can offer to pay for a home.
For low-ratio borrowers (20%+ equity), SOME lenders (those that bulk insure their portfolios) must now apply the new stress-test to ALL terms and the maximum loan amortizations are further reduced to 25 years. This will impact your maximum loan amount with that lender. Further CMHC is proposing (phase #2 - Nov30) to deny/nix portfolio bulk insurance eligibility for refinances, rental properties, self-employed, and property values more than $1mil, which could leave you vulnerable at your next renewal if your mortgage is currently bulk-insured.
For OTHER low-ratio lenders (those that do not back-end insure the mortgage) the old easier-to-qualify rules *might* still apply but that will depend on lender policy as these rule changes unfold – stay tuned.
If you are still reading, phase #2 as proposed is particularly worrisome as it could reduce mortgage competition substantially across Canada and very likely increase the cost of borrowing. CMHC has provided stability that domestic and foreign investors (money suppliers) have come to rely upon, and if CMHC steps out of a large part of the bulk-insurance market, that stability could get stressed. (As they say, when the cat is away, the mice will play.)
There are a number of smaller nuances within the technical requirements of these new mortgage policies impacting bulk insured conventional mortgage loans and there are two other private mortgage insurers yet to weigh in. While your lender might not tell you, a mortgage broker should have a pretty good idea if you will be impacted and your options.