Connecting the dots...
Recently announced mortgage qualifying changes brought some concerns and confusion to many people including experts in the industry, so it is worthy to spend some time and shed some light on it.
My goal is not to try to explain everything related to these changes in great details, quoting all the government records, but to touch on few points based on the most frequent questions Im getting from clients and friends.
To summarize the recent events, a couple of approaching changes were publicized in the beginning of October this year, amongst which the mortgage qualifying Stress Test got larger popularity, so lets start with it.
Our Ministry of Financeannounced that going forward, for all government-backed insured mortgages, the home-buyers must qualify at the greater of their contract mortgage rate (the actual one that the lender is giving) or the Bank of Canadas conventional five-year fixed posted rate (the Qualifying Rate) which currently is twice bigger. This is the so called Stress Test rule, which by the way was already in place for high-ratio, variable rate, and short term mortgages.
It may be obvious to some but we have to clarify that this rule applies to mortgage loan applications subject to government-backed insurance only, a.k.a. Mortgage Default Insurance, or simply mortgage insurance, which protects the lender not the homebuyer/borrower. Government-backed in this context means that if the borrower defaults on the mortgage payments and for some reason the insurer is not able to pay off the whole outstanding amount to the lender the government will give the money to the insurer. Nice! :) There are three big mortgage insurers in this business a government institution CMHC (Canada Mortgage and Housing Corporation), which is backed by the government 100%, and two private institutions Genworth Financial and Canada Guaranty, which are also backed by the government but 90% (subject to 10% deductible)
With these changes we can say that the government simply restricts the eligibility for mortgage loans to be insured by government-backed insurance by adjusting the criteria for that. In other words the government will not back the insurers for mortgages not matching these criteria, but at the same time requires federally regulated lenders to obtain mortgage default insurance for all high-ratio mortgages. Kind of a deadlock situation, isnt it?
Now, the question comes naturally If I pay 20% or more down why would I need mortgage insurance? or I have an excellent score and dont want to pay extra for insurance, hence Im putting such a big down payment, why would the new rule affect me? The truth is you do not need mortgage insurance (it is not protecting you anyway) but the lender needs it or simply wants it. Now, for a high-ratio mortgage, where the insurance is mandatory, the lenders pass the insurance payments on to you. For a low-ratio mortgage the lenders still can decide to insure it and pay for that themselves without you even knowing.
Thats how you may end up being affected by these rules without expecting it, furthermore as an A client, paying down 20% of the purchase price, and having an excellent credit score and credit history.
In most cases the low-ratio mortgage insurance is a portfolio or bulk insurance, usually purchased by the lender after the mortgage origination. However, there are also single transactional insurance cases for low-ratio loans at lenders discretion, which some lenders may decide to cover themselves and some may pass the payments to you. As you can see, there are many variables in the equation, and many different equations as well. For this reason you always have to consider an independent mortgage consultant help in order to explore your options and secure the right one for you.
All this brings us to the second forthcoming change regarding eligibility criteria for government-backed insured low-ratio mortgages.
Starting with the end of the month all new low-ratio mortgages that the lenders insure using portfolio or transactional insurance must meet the eligibility criteria that previously applied to high-ratio mortgages only.
Some of these criteria are: maximum amortization period of 25 years; maximum property value of $1,000,000; if the property is single unit must be owner-occupied; minimum borrowers credit score 600; maximum applicants GDS ratio of 39% and maximum TDS ratio of 44%, on top of that the calculation for these ratios will be based on the Qualifying Rate, accordingly to the new Stress Test, as this is all about insured mortgages.
If you wonder what GDS and TDS are - these are the calculated ratios that lenders are using to determine the maximum mortgage amount you qualify for. These ratios represent the carrying cost of the home you are planning to buy relative to your gross income.
The difference between them is that GDS (Gross Debt Service) calculation includes only the mortgage payment, taxes, heating, and if applicable, half of the condo fee while TDS (Total Debt Service) calculation includes also some of your payments to additional debts, such as other loans, credit cards, child support, alimony, or generally any monthly payments that, if discontinued, will result in balance owing.
The third pending change, which is still in discussions (or in a public consultation process, to be precise) is about the lenders start sharing the risk of mortgage default in some modest levels, which may look reasonable and relatively mild, but eventually this will be a significant transformation that will affect the mortgage approval process for sure.
The last announced modifications that are not affecting directly the mortgage application are income tax related, mostly regarding the capital gain exception for principal residence (a.k.a. matrimonial home) which briefly are: individuals not resident in Canada in the year they accrued a residence will not be able to claim capital gain tax exception for that year when they sell their property; Canadian residents can designate only one principal property per family for a specific year; and going forward CRA will obligate the Canadian taxpayers to report when they sell their principal residence in their tax return for the year the property is sold, which was not required until now.
I hope my article makes the recent financial government announcements easier to understand.
If you have specific questions regarding this matter or something is not fully clear please do not hesitate to contact me. Ill be happy to discuss further :)
Bank of Canada maintains overnight rate target at 1/2 per cent
The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.
Uncertainty about the global outlook is undiminished, particularly with respect to policies in the United States. The Bank has made initial assumptions about prospective tax policies only, resulting in a modest upward revision to its US growth outlook. Overall, the global economy is strengthening largely as expected and prices of some commodities, including oil, have risen. The rapid back-up in global bond yields, partly reflecting market anticipation of US fiscal expansion, has pulled up Canadian yields relative to the OctoberMonetary Policy Report(MPR).
Bearing in mind the important assumptions embedded in its forecast, the Bank projects that Canadas real GDP will grow by 2.1 per cent in both 2017 and 2018. This implies a return to full capacity around mid-2018, in line with Octobers projection.
In the context of a projection that is largely unchanged, the Banks Governing Council judges that the current stance of monetary policy is still appropriate and maintains the target for the overnight rate at 1/2 per cent. Governing Council will continue to assess the impact of ongoing developments, mindful of the significant uncertainties weighing on the outlook.
Source: Bank of Canada
Canadian Housing Starts Trend Declined in December
The trend measure of housing starts in Canada was 198,053 units in December compared to 200,105 in November, according to Canada Mortgage and Housing Corporation (CMHC).
The trend is a six-month moving average of the monthly seasonally adjusted annual rates (SAAR) of housing starts.
CMHC uses the trend measure as a complement to the monthly SAAR of housing starts to account for considerable swings in monthly estimates and obtain a more complete picture of the state of Canadas housing market. In some situations analyzing only SAAR data can be misleading, as they are largely driven by the multi-unit segment of the market which can vary significantly from one month to the next.
The standalone monthly SAAR for all areas in Canada was 207,041 units in December, up from 187,273 units in November. The SAAR of urban starts increased by 11.8per cent in December to 187,621 units. Multiple urban starts increased by 13.9per cent to 120,750 units in December and single-detached urban starts increased by 8.1per cent, to 66,871 units.
In December, the seasonally adjusted annual rate of urban starts increased in Ontario, Quebec and the Prairies, but decreased in British Columbia and in Atlantic Canada.