New Mortgage Rules Explained 2018
On October 3, 2016 the government of Canada announced that they were going to implement changes to the mortgage industry. These changes would take effect a few weeks later. To say these changes were a surprise would be an understatement. Here’s a look at those changes including the new changes effective January 1, 2018.
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Before October 17, 2016 Mortgages are divided into 2 categories, High Ratio and Conventional. High Ratio– any mortgage that has a Loan to Value(LTV) of greater than 80%. These mortgages have less than a 20% down payment and are legally required to be insured by one of the three mortgage default insurers in Canada. Usually comes with best rate. Conventional– any mortgage that has a LTV of less than and equalled to 80%. These mortgages have at least a 20% down payment and are not required to be insured. Pricing is usually 0.10-0.15% higher than best rates. All variable rate mortgages and fixed terms of 1-4 years need to qualify at the greater of the contract rate(the rate the borrower pays) and the Bank of Canada qualifying rate. Five year and greater fixed rate mortgages are qualified at their contract rate. |
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As of October 17, 2016 Mortgages are divided into 3 categories, Insured, Insurable, Un-Insurable. Insured(High Ratio)- any mortgage that has a LTV of greater than 80%. These mortgages have less than a 20% down payment and are legally required to be insured by one of the three mortgage default insurers in Canada. All variable rate mortgages and fixed terms need to qualify at the greater of the contract rate(the rate the borrower pays) and the Bank of Canada qualifying rate. Borrower obtains best rates available. Insurable– any mortgage that has a LTV of less than and equalled to 80%. These mortgages have at least a 20% down payment and can qualify under the insurer’s guidelines. All variable rate mortgages and fixed terms need to qualify at the greater of the contract rate(the rate the borrower pays) and the Bank of Canada qualifying rate. Borrower obtains best rates available. Un-Insurable– any mortgage that has a LTV of less than and equaled to 80%. These mortgages have at least a 20% down payment and do not qualify(refinance, rentals) under the insurer’s guidelines. As of January 1, 2018, Five year and greater fixed rate mortgages are qualified at the greater of the following: 1.) Bank of Canada Qualifying Rate (currently 5.14%) 2.) Contract Rate(the rate the borrower pays) + 2% Borrower pays a rate premium of 0.20-1.00% higher than best rates. |
To fully understand how the new rules effect the borrower one must understand the guidelines of the insurer. See chart below.
| Insurer’s Guidelines | Un-Insurable |
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1) Purchase price of property has to be less than $1 Million. 2) Mortgage is a purchase transaction or a transfer (no refinances). 3) The minimum client credit score is 600. 4) Debt Servicing Ratios(GDS/TDS) are max 39%/44% and qualified at the greater of the contract rate(the rate the borrower pays) and the Bank of Canada qualifying rate(currently 5.14%). 5) Maximum amortization period is 25 years. 6) Rentals must be 2 to 4 units. |
1) All refinance transactions and/or equity take out mortgages. 2) Mortgages on properties that are valued at $1 Million or greater, regardless of LTV. 3) Amortizations exceeding 25 Years. 4) Single unit rentals. |
To add more confusion, mortgage products differ from one lending institution to another and may not be in line with the insurer’s minimum requirements. For example, a lender may have a 620 minimum credit score requirement even though the insurer has 600. Also, the lender may not offer a mortgage for rentals even though the insurer will insure one. Combine this with every category having a different set of rates and you’ll understand why every borrower should use a mortgage broker to guide them through the mortgage process.
The new rules have once again shaken up the lending community. It probably won’t be until the middle of 2018 until the dust settles. As of this writing a variety of lenders are still dealing with the changes and are in the process of adjusting their lending policies accordingly.
If you are planning to purchase in the near future or you currently have an existing mortgage and would like to know your options please do not hesitate to contact us at 519-495-4281 or 1-888-635-6109 or info@mortgagesbycraig.com.
*information subject to change without notice