Back to the Chopping Block – More Mortgage Rules Ahead

This summer we are going to see yet another set of mortgage rules hit the market, making our lives a little bit more ‘interesting’. CMHC published a notice that gave us the implementation dates of three new policies that are going into OSFI’s guideline. Even though we knew that they had something in the making for us, getting those new restrictions will nonetheless make our lives a lot harder. The three things that are going to get a great deal more difficult to get are low-ratio insured variable-rate mortgages, self-employed mortgages and 100% financing.

Here is an Overview of the Mortgage Changes:

1. Somewhere between June 30th 2015 and December 31st 2015 we are going to have the qualifying interest rate for low-ratio variable and fixed terms of less than five years will officially made the Benchmark Qualifying Rate.
2. As of June 30th, 2015, third party verifications of all borrower incomes will have to be obtained by all lenders. This will include substantiation of employment status and income history. The CMHC states that this rule is meant to add clarity and re-affirm CMHC’s position on this matter. It did (or tried to do) away with “stated income” financing a while ago already, but some private insurers still offered a form of income verification from Genworth and Canada Guaranty. Those programs will also have to change following the new rule, only we are not sure in which way.
3. June 30th 2015 will also see a sweeping elimination of cash-back downpayment mortgages, unless the borrower can bring a 5% down payment on their own. This product is already being offered by a limited amount of lending institutions since the OSFI’s guideline B-20 that pretty much killed these products in the banks.

The last rule will likely have people wondering how it makes sense for people to be allowed to borrow the downpayment from a high 20% interest credit cards and not be allowed to derive their payment from lender provided cash back payments. To be frank, this is a question that we have been pondering for a while ourselves, as likely have been many other mortgage firms and brokers in Canada.

The only answer we did receive is that lender cash-back mortgages are typically associated with higher interest rates charged to the borrower, as opposed to borrowed funds. A larger mortgage will result in a larger insured loan and potential additional risks for the mortgage insurer in a situation of a default. If the downpayment is borrowed outside the loan, the insured loan amount is smaller and the risks are smaller as well. In case of a 100% rebate loan, the insured loan amount is such that the insurer faces severe losses on default, and if the downpayment was borrowed externally, then by the end of 5 years, the loan balance covered by the insurer can be almost 5% less. Ok, this explains it. This is not put in place to protect you, the buyer. In case you were wondering.

This all essentially means that the homeowner is going to have to borrow the downpayment funds, incurring higher interest costs and payments, depending what interest rates and amortization apply to the borrowed down payment funds. This in turn will likely increase the probability of default, since the burden of monthly payment is going to be greater. In the end, this also means that the risk of default is not diminished by this rule, but made bigger. The world will never be the same.

We hope you found this information useful, if not very uplifting. It may mean that you need to hurry up and secure the loan now if you have cause to worry that you will have harder time getting it under the new conditions. Don’t hesitate to call us at Best Mortgage Montreal for mortgage advice and any assistance you may need!

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