New Mortgage Market Landscape – effective immediately
On October 3, 2016, the Canadian Government, Department of Finance, sprung new rules on the mortgage industry, without notice or industry consultation. The Government maintains the changes will help keep the housing market stable and healthy. There are 3 key elements to the new rules.
- New Mortgage Qualifying “Stress Test” – for all CMHC-insured (high-ratio, >80% Loan-to-Value) loans, a borrower must prove they can afford to make the loan payments using a benchmark interest rate prescribed by the Government of Canada. Currently, that rate is 4.64%, over 2% higher than current mortgage interest rates. Previously the stress test applied only to terms of 4 years or less and to variable rate mortgages. This previous rule had the effect of forcing buyers into the easier-to-qualify-for 5-year fixed rate mortgage. By making the stress test apply to all terms, the effect will be a 20%-25% reduction in the maximum loan approval vs. the old rules. Some prospective borrowers (including first time home buyers) will remain on the sidelines until either their incomes go up, their consumer debts are reduced, or housing prices fall in their area (as the new rule may serve to reduce what people are able to offer for homes). [Generally, we have seen this tightening before over the years as maximum insured loan amortizations were reduced from 40 years down to the current 25 years and “zero-down” mortgages were eliminated, thereby making it more difficult for marginal borrowers to enter the housing market. ]
- Discontinuance of CMHC Bulk-Insurance (low ratio, <=80%LTV) for Many Loan Categories - includes rentals, refinances, self-employed stated-income, second homes, and any home over $1mil. To date, Canada has a healthy selection of mortgage lenders including banks, trust companies, credit unions, and other mortgage/financial services corporations (“mono-lines”). Whereas banks often re-lend money held on deposit in savings and chequing accounts, the mono-lines (mortgage/financial service corporations) are funded by private investors, such as pension funds, mutual funds, other Canadian banks, foreign banks, even other countries. The mono-lines (and many banks, too) arrange the mortgages, bundle them together in “like” categories, them bulk-insure them against default. This process is called “securitization” and makes the bundle an asset that can be bought and sold in financial markets. Because the bundles must meet strict CMHC guidelines in order to be bulk-insurable, investors are easy to attract, including foreign investment. If any of the mortgages within the bundle default, the loss is covered by CMHC not the investor. For this service, lenders pay insurance premiums to CMHC (Canadian Gov’t) and certainly those premiums should be appropriate. [It is worth noting that the US mortgage crisis that precipitated the Great Recession was brought on by a similar process of securitization BUT the bundled loans did not have to meet any strict or consistent criteria (as they did in Canada) and when bundles where cracked open, they were rot. In my opinion, if the Gov’t of Canada pushes forward with this rule change, the mono-lines / competition will either dwindle or the quality of Canada’s mortgage market will turn negative and interest rates will most certainly go up to account for the un-insured (unchecked) content of the mortgage bundles. As a mortgage consumer, you will have much less choice if this rule is implemented. As of writing this article, I detect this rule change may be rethought by the Government as there has been significant industry back lash.]
- Capital Gains Exemption on Principal Residence for NON-Canadians has been eliminated. Apparently non-Canadians could buy and sell their only Canadian property tax free. Sounds like a loop hole just got sewn shut.
If you have any questions on how these rules might impact you, please call.
Chris Richards, licensed mortgage broker with Quantus Mortgage Solutions 403.909.7160
