Come Oct 17, 2016 Qualifying for a mortgage will be much harder!
You now must qualify at a higher rate than your actual contract rate
Applying for a new mortgage won’t be so easy after today’s announcement by Federal Finance Minister Bill Morneau. That’s because now all insured mortgages must qualify using the Mortgage Qualifying rate rather than your agreed upon contract rate.
At present, these guidelines only applied to Fixed Rate Mortgages with terms less than 5yrs and Variable Rate Mortgages. But as of Oct 17th, all insured mortgages will have to qualify under these new guidelines.
What is an insured mortgage?
Lenders are required to obtain mortgage loan insurance for any high loan-to-value mortgage—a loan where the homebuyer’s down payment or equity in the home is less than 20%. It’s pretty much an industry standard for lenders to pass on the cost of this mortgage insurance premium to homebuyers.
If you were to opt for a five-year mortgage, at 2.4%, you would have to prove to the lender that you could make monthly mortgage payments based on the 4.64% Mortgage Qualify Rate. On a $650,000 home, with 10% down, that would mean this homebuyer would need to show that they could increase their monthly mortgage payment by almost $700 per month, in order to qualify for that mortgage. Qualifying rates are used to ensure borrowers can handle their payments if rates go up.
How is this 'Mortgage Qualifying' rate determined?
The Bank of Canada surveys the six major banks’ posted 5-year fixed rates every Wednesday and uses a mode average of those rates to set the official benchmark and is published by the Bank of Canada every Thursday.
How will this impact me if I put 20% Down Payment?
In most cases, if you put more than 20% down payment you can avoid paying the Mortgage Insurance Premium. But Lenders can still opt to pay the premium themselves if they feel they want the extra protection against any default or potential loss. Which means you will still have to qualify under the new guidelines and criteria. If your lender does not opt for the Mortgage Insurance protection you can qualify based on the agreed upon rate and not the Mortgage Qualifying Rate.
Should the lender take more risk on themselves vs. shifting it to Mortgage Insurance (Which in turn is paid by the taxpayer)?
Since last November, the Department of Finance acknowledged that it was examining the impact of shifting more of the risk of insured mortgages onto the banks and mortgage lenders.
As of today’s announcement, the government still hasn’t shifted the responsibility but plans to hold consultations on risk in housing finance, including whether it would require mortgage lenders to assume a portion of losses on default loans. Currently, the risk falls onto taxpayers, who ultimately back insurers.
The most popular policy would be to require the banks and mortgage lenders to pay a deductible on each mortgage loan insurance claim made, however, the Department of Finance has not confirmed if this is the policy route they will take. Still, home buyers should pay attention. In such a low-rate environment, almost all mortgage lenders are passing the cost of more stringent regulation on to borrowers. So, any change in the regulations governing mortgage loan insurance could mean an increase in costs for banks, which is passed on to home buyers, or banks could simply make it harder for borrowers to qualify for mortgages, as they look to reduce their exposure to riskier mortgages.
Homeowners with an existing mortgage or renewing their mortgage will not be affected by these new mortgage changes.
Source: Money Sense | Globe and Mail