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 :)
CREA Updates and Extends Resale Housing Market Forecast
The Canadian Real Estate Association (CREA) has updated its forecast for home sales activity via the Multiple Listing Service(MLS) Systems of Canadian real estate Boards and Associations in 2017 and 2018.
Canadian housing market trends continue to display considerable regional divergence. In British Columbia, activity in the Lower Mainland has cooled markedly from all-time highs recorded early last year; however, sales and price pressures elsewhere in the province remain historically strong.
In the resource-intensive provinces of Alberta, Saskatchewan, and Newfoundland and Labrador, sales activity is still running at lower levels and supply is elevated. This has resulted in weakened price trends for these provinces.
In housing markets around the Greater Toronto Area and including the furthest reaches of Ontarios Greater Golden Horseshoe (the region includes the GTA, Hamilton-Burlington, Oakville-Milton, Guelph, Kitchener-Waterloo, Cambridge, Brantford, the Niagara Region, Barrie and nearby cottage country), the balance between supply and demand has become increasingly tight. This is expected to lead to continued double-digit price growth, resulting in further erosion in affordability and sales activity in the absence of a significant and sustained rise in new supply.
Recently tightened mortgage rules, higher mortgage default insurance premiums and an expected rise in mortgage interest rates all represent headwinds to affordability in all Canadian housing markets. It will be some time before their full impact on housing markets is evident.
In some regions, the recently tightened stress test for mortgage financing qualification will force some first-time buyers to re-think how much home they can afford and may lead to a drop in home purchases as they shop for a lower priced home. In regions where there is a shortage of lower-priced inventory, some sales may be delayed as buyers save longer for a larger down payment.
In markets like Vancouver and Toronto, where single family homes are in short supply and there are few affordable options, some buyers may find themselves priced out of the market entirely. In Toronto, the stress test for mortgage qualification may prompt some buyers to move further out into communities located in the Greater Golden Horseshoe where homes are more affordably priced.
Nationally, sales activity is forecast to decline by 3% to 518,700 units in 2017.
British Columbia is forecast to see the largest decline in sales in 2017 (-17.5%), followed by Prince Edward Island(‑10.8%). Activity in both provinces is retreating from all-time highs reached last year. Newfoundland Labrador is also forecast to see a decline in sales in 2017 (-8.4%), continuing a softening trend that stretches back nearly a decade.
Alberta is forecast to have the largest increase in activity in 2017 (+5%) that still leaves it nearly 10% below the 10-year average.
Elsewhere, sales activity is forecast to be little changed from 2016 to 2017. Ontario sales are forecast to rise by less than 1% in 2017, as strong demand runs up against an increasingly acute supply shortage.
While prices are still rising rapidly in Ontario, British Columbia has seen a compositional shift in the average price that reflects softer sales activity in the Lower Mainland which has some of the most expensive real estate in Canada.
Average prices in other provinces are either rising modestly or holding steady, reflecting well balanced supply and demand.
The national average price is forecast to rise by 4.8% to $513,500 in 2017, with significant regional variations. The average price is expected to retreat by more than 5% in British Columbia as well as Newfoundland and Labrador, by 2.8% in Saskatchewan while rising by more than 15% in Ontario.
In other provinces where average price last year began showing tentative signs of improving, average price gains are forecast to hold below the rate of inflation in 2017 as the impact of recent regulatory changes and higher expected mortgage rates lean against stronger demand and tighter market conditions.
The national average price is forecast to rise by 5% to $539,400 in 2018, reflecting ongoing market tightness in Ontario and a further return to more normal levels in British Columbia. Price gains outside of the Greater Golden Horseshoe are not expected to approach the increase in the national average price.
CMHC to Increase Mortgage Insurance Premiums on March 17
CMHC (Canada Mortgage and Housing Corporation) will increase its homeowner mortgage loan insurance premiums effective March 17, 2017.
Premiums are calculated based on the loan-to-value ratio of the mortgage being insured. Lenders typically require mortgage loan insurance when a homebuyer makes a down payment of less than 20 %.
The premium can be paid in a single lump sum but more frequently is added to the mortgage principal and repaid over the life of the mortgage as part of regular mortgage payments.
For the average CMHC-insured homebuyer, the higher premium will result in an increase of approximately $5 to their monthly mortgage payment.
For example, if your property was $266,500.00 and you have a downpayment of 5% or $13,325.00, you would have a mortgage of approximately $253,175.00 and need mortgage insurance.
Prior to the increase, your cost for Mortgage Insurance from CMHC would be 3.60% of $253,175.00 or $9114.30.
After March 17, your cost for Mortgage Insurance from CMHC would be 4.00% of $253,175.00 or $10,127.00.
However this $1013.00 increase is spread out over the life of your mortgage, typically for 25 years. Your increase on a monthly basis will be about $5.10.