Could the new mortgage rules be costing you $15,000?
In November of 2016 the government introduced changes to the rules for what mortgages would qualify for the government backed mortgage insurance programs. The new criteria for mortgages to be insured will includes 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 property value below $1,000,000;
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 established amortization schedule;
A minimum credit score of 600;
A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate; and,
If the property is a single unit, it will be owner-occupied.
If your mortgage does not meet these guidelines the lender can no longer insure the mortgage. This will have the biggest impact on anyone who is looking to refinance their mortgage to access the equity in their home.
Why is this important?
Lenders in Canada don’t lend their own money! They go into the marketplace to raise capital which they can then lend out to borrowers. If the cost of getting their capital goes up, these costs are passed on to the borrower as higher interest rates.
The cheapest source of mortgage funds come from government sponsored programs that allowed lenders to insure the mortgages that they set up. The lenders package up these mortgages and sell them to investors. This process is known as securitization. Because these mortgages were insured by the government the investors were willing to take a lower rate of return in exchange for knowing that their investment was guaranteed. This source of funds is used by both the banks, credit unions and non-bank lenders. And because the cost of getting the funds is the same for all lenders it created a lot of competition to offer the best rates in order to attract new mortgages to their companies.
With the changes the non-bank lenders had to look to alternative sources of getting the funds for mortgages that cannot be insured. Because these mortgages can’t be insured the non-bank lenders have higher costs of getting their funds. As a result the non-bank lenders had to increase interest rates on these mortgages to cover the additional costs. And even though the banks and credit unions could fund these mortgages from their deposits they have also increased rates on these types of mortgages.
With the rule changes lenders now look at mortgages as following into three different categories and set the interest rate they will charge the borrower based on which category that mortgage falls into. These categories are:
Insured – These are for purchases or switches of existing mortgages where the client will be paying the mortgage insurance fees. The maximum amortization for these mortgages is twenty-five years, borrower must qualify using the benchmark interest rate of 4.64% and the maximum purchase price is $1 million. These mortgages will offer the best interest rates
Insurable – These mortgages meet the guidelines to be insured but the borrower has more than 20% to put down. In the past lenders were willing to cover the cost of bulk insuring these mortgages. With the new rules the lenders are looking to pass the cost of the mortgage insurance on to the borrower. In most cases the lenders are doing this by offering higher interest rates depending on the loan amount in relation to the purchase of the property. This is known as the loan to value. If the loan to value is less than 65% it is possible to get the same rates as an insured mortgage. As the loan to value increases the cost of the mortgage insurance increases so lenders will charge a higher interest rate to compensate for the additional cost of the insurance. When the loan to value exceeds 75% it is likely that you will be paying a similar interest rate to the mortgages that fall into the uninsurable category.
Uninsurable – This applies to any purchase where the property value is over $1 million and any refinance where the borrower is looking to access the equity in their home. These mortgages will attract the highest interest rate as it costs lenders more to obtain the money they need to make these loans.
Currently an insured five year fixed term is available at 2.59% while an uninsurable five year fixed term will be closer to 2.79%. So if your new mortgage falls into the uninsured category and you have a $350,000 mortgage it will cost you an additional $14,702 in interest over the life of your mortgage. Not $15,000 but pretty darn close.
If you have questions about the new mortgages rules or any other mortgage questions please give me a call at 604-961-2400.