The changes to the Canadian mortgage finance market in the last 60 days have caught many by surprise and the future is blurry at the moment. Even the mortgage lenders/banks are confused with round two of the new CMHC rules, effective Nov 30, 2016. Some lenders have already left or restructured their role in the mortgage market, impaled by the combination of events and their inability to respond. My biggest concern as a mortgage broker is loss of borrower options. Our industry has sent delegations to Ottawa, and we have written our MPs and their eyes glaze over.
I know a number of readers of this Realtor blog are from rural communities, and I wanted to touch on one of the changes that is going to rock owners in rural communities and no-one sees it yet.
Stick with me. To get a residential mortgage approved in rural areas (typically anywhere more than 50km outside of a population centre larger than 50,000) lenders have traditionally insured the mortgage with CMHC (or Genworth) regardless of down payment. If the down payment is less than 20%, the insurance is called "high-ratio" and the premium is added to the mortgage balance. If the down payment is 20% or more, the insurance is called "low ratio" or "bulk" insurance and is paid by the lender instead. This second part went on behind the scenes.
So here is the kicker. Most rural loans are insured and CMHC will no longer permit mortgage lenders to refinance an insured (high or low ratio) mortgage. That means a borrower can still buy a rural house no problem and renew it every few years until it is paid off. BUT don't come back to the lender and say, "hey I need to refinance my house to pay off some debts, renovate, send my kid to school, etc." because CMHC will say to the lenders, refinance them if you like but go it alone - the loan is now uninsurable.
Uninsurable means a lot more risk for lenders, especially in rural areas where employment is not as diversified and the market can sometimes be fickle. Many lenders will not finance rural homes without CMHC insurance, so they have bowed out of refinance lending in those markets as of Nov 30th, 2016. The lenders that do remain (likely local banks and credit unions) will now need to charge an interest rate PREMIUM if the borrower wants to tap into the piggy-bank of home equity. Okay, maybe a premium is better than a no, BUT what if the borrower or the property has challenges? What if you or your property are square pegs that won't fit in the remaining lenders' round holes and dozens of lenders that would have lent you money yesterday have scattered because of the rule change? I fear some will simply have to sell and rent, or move to the city where there will be more lending options.... (seriously).
Markets and free economies are resilient beasts. When one door closes, another will surely open. Lenders will rejig their offerings and wherever there is an opportunity to make money with manageable lending risk, they will participate. At the same time, the Government of Canada is making it tougher and tougher on those who would choose to manage their consumer debts and spending by rolling it into their mortgage.
I guess my current takeaway for rural residential borrowers is to recognize that these new rules are a significant policy change and if you are the person thinking you will always have the future option to tap into the piggy bank of home equity to manage your finances, think again. Please be proactive. Naive borrowers will get hurt.
If you or your clients have questions, please feel free to contact me.
Chris Richards
Licensed Mortgage Broker
