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 :)
Top five home renovations that increase property value
Looking to increase your homes property value? Here are five of the best renovations you can do to your home to increase property value. These five renovations can sometimes have a return on investment 5-6x what they cost.
Flooring is one of the most important aspects of your house. You will see an immediate rise in property valuation with the installation of hardwood floors. Existing hardwood floors that you can refinish are ideal as they are less costly to restore and in higher demand than new flooring materials. For the bathroom, tile will always be in demand and retain value exceptionally well.
Kitchens often look tired and dated, in large part due to old fixtures. Replacing or updating cabinet hardware, light fixtures, countertops and faucets will result in an immediate increase in your homes value. This small, but effective upgrade will also revitalize the entire home. Pot lights are in high demand in open concept style homes.
Thebathroomis the second most important room in the home in terms of valuation. If you can add a three-piece bathroom to a home with only one full bathroom, you will see a dramatic rise in the market value of your home. While you should never compromise bedroom space for a bathroom, try sneaking one in dead space in the home. Scott managed to fit in a 3-piece bathroom under a staircase the width of the room measured just 44 inches. As an added tip, use glass for the shower to make the bathroom feel more spacious.
Kitchens are the single most important room in the home relating to valuation. The kitchen can make a significant difference in the value of your home. As such, it is crucial that you invest in having a modern, fresh anddesirable kitchen. Modern cabinetry, under cabinet lighting and new appliances will all significantly increase the value of your home on the market. To save on cost without compromising construction and desirability, look at options like Ikea cabinets as opposed to custom cabinetry.
#1 An Income Suite
No surprise, but the single biggest way to increase the value of your home is to build an income suite within the property. Whether this is converting yourbasement into a rental, or another floor in the home, an income property will increase your homes worth. The main reason for this is that it covers a portion, or sometimes all of your mortgage payments, and results in your home being cash flow positive which creates real wealth that can supplement your income.
Valuable Fraud Prevention Tips for Homebuyers and Homeowners: Part 1
March is Fraud Prevention Month. Canada Mortgage and Housing Corporation (CMHC) has consistently been a leader in the fight against mortgage fraud and offers the following tips to protect yourself against becoming a victim of mortgage fraud.
Misrepresentation of Information
Mortgage fraudoccurs when someone deliberately misrepresents information in order to obtain mortgage financing that would not have been granted if the truth had been known. This can include:
Misstating ones position or inflating ones income or length of service at their job;
Misstating employment status (ie. salaried/full time versus contract, part time, hourly or commission-based or self-employed);
Misrepresenting the amount and/or source of the down payment;
Purchasing a rental property and misrepresenting it as owner-occupied;
Not disclosing existing mortgage and/or debt obligations;
Misrepresenting property details or omitting information in order to Inflate the property value;
Adding co-borrowers who will not be residing in the home and do not intend to take responsibility for the mortgage.
Another common form of fraud is when a con artist convinces someone with good credit to act as astraw buyer.A straw buyer is someone who agrees to put his or her name on a mortgage application on behalf of another person. In return for their participation, straw buyers may be offered cash or promised high returns when the property is sold. Often, straw buyers are deceived into believing that they will not be responsible for the mortgage payments.
Consequences of Misrepresentation
Borrowers who misrepresent information and straw buyers who allow a property to be purchased in their name are committing mortgage fraud and will be responsible for any financial shortfall in the event of default. They may also be held criminally responsible for their misrepresentation.
If you suspect that you or someone you know has been the victim of mortgage fraud, please contact your local police department or The Canadian Anti-Fraud Centre.
Toll Free: 1-888-495-8501
Toll Free Fax: 1-888-654-9426
To find out more about mortgage fraud, visit the fraud prevention section of the Canadian Association of Accredited Mortgage Professionals (CAAMP) website athttp://mortgageconsumer.org/protect-yourself-from-real-estate-fraud.
For over 65 years, Canada Mortgage and Housing Corporation (CMHC) has been Canadas national housing agency, and a source of objective, reliable housing information.