Canada's Mortgage Expert
MORTGAGE Changes MAY affect you - Find out why.
October 5, 2016 | Posted by: Jay Meakin
***If you are considering or in the process of buying real estate, consult a mortgage broker immediately ***
you need an expert to guide you during this transition or your home buying plans could be put on hold for YEARS.
Mortgage applications submitted after October 16, 2016 will be subject to these new rules.
THIS AFFECTS HIGH-RATIO AND LOW-RATIO MORTGAGES
OCTOBER 4th, 2016, the Government announced a change to the eligibility rules for new government-backed insured mortgages. Effective October 17, 2016, all insured homebuyers must qualify for mortgage insurance at an interest rate the greater of their contract mortgage rate or the Bank of Canada’s conventional five-year fixed posted rate. This requirement is already in place for high-ratio insured mortgages with variable interest rates or fixed interest rates with terms less than five years.
The Bank of Canada’s conventional five-year fixed posted mortgage rate is the mode (i.e., the most common occurring number) of the conventional five-year fixed mortgage rate advertised by Canada’s six largest banks. The rate is updated weekly and is available on the Bank of Canada’s website(CANSIM table 176-0043). The Bank of Canada’s posted rate is typically higher than the contract mortgage rate most buyers actually pay. As of September 28, 2016, the Bank of Canada posted rate was 4.64 per cent.
For borrowers to qualify for mortgage insurance, their debt-servicing ratios must be no higher than the maximum allowable levels when calculated using the greater of the contract rate and the Bank of Canada posted rate. Lenders and mortgage insurers assess two key debt-servicing ratios to determine if a homebuyer qualifies for an insured mortgage:
- Gross Debt Service (GDS) ratio—the carrying costs of the home, including the mortgage payment and taxes and heating costs, relative to the homebuyer’s income;
- Total Debt Service (TDS) ratio—the carrying costs of the home and all other debt payments relative to the homebuyer’s income.
To qualify for mortgage insurance, a homebuyer must have a GDS ratio no greater than 39 per cent and a TDS ratio no greater than 44 per cent. Qualifying for a mortgage by applying the typically higher Bank of Canada posted rate when calculating a borrower’s GDS and TDS ratios serves as a “stress test” for homebuyers, providing new homebuyers a buffer to be able to continue servicing their debts even in a higher interest rate environment, or if faced with a reduction in household income.
The announced measure will apply to new mortgage insurance applications received on October 17, 2016 or later. This measure will not apply to mortgage loans where, before October 3, 2016: a mortgage insurance application was received; the lender made a legally binding commitment to make the loan; or the borrower entered into a legally binding agreement of purchase and sale for the property against which the loan is secured. Mortgage loans for which mortgage insurance applications are received after October 2, 2016 and before October 17, 2016 are also not affected by the rule change, provided that the mortgage is funded by March 1, 2017. Homeowners with an existing insured mortgage or those renewing existing insured mortgages are not affected by this measure.
Changes to Low-Ratio Mortgage Insurance Eligibility Requirements
The Government also announced today changes to the eligibility rules for newly insured low-ratio government-backed insured mortgages. These new eligibility criteria will help target the funding support provided by government-backed low-ratio mortgage insurance towards safer forms of lending.
Effective November 30, 2016, mortgage loans that lenders insure using portfolio insurance and other discretionary low loan-to-value ratio mortgage insurance must meet the eligibility criteria that previously only applied to high-ratio insured mortgages. New criteria for low-ratio mortgages to be insured will include the following requirements:
- 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 maximum property purchase price below $1,000,000 at the time the loan is approved;
- For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once every five years to conform to the original amortization schedule;
- A minimum credit score of 600 at the time the loan is approved;
- A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent at the time the loan is approved, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate; and,
- A property that will be owner-occupied.
These changes will apply to low-ratio mortgage loans insured on November 30, 2016 or later. Low-ratio loans for which mortgage insurance applications were submitted prior to October 3, 2016 will not be affected. These new criteria will also not apply to loans for which mortgage insurance applications were submitted between October 3, 2016 and November 30, 2016, provided that the loans are insured by November 30, 2016.