Tuesday, October 4, 2016 / by Chris Matlashewski
Lending Rules Set To Affect How People Borrow
The Government announced more rules today “aimed at supporting the long-term stability of the housing market and improving the integrity and fairness of the tax system, including ensuring that the principal residence exemption is available only in appropriate cases”.
Here is a quick recap of some most notable changes as these will have a significant impact on our clients and businesses.
Effective October 17, 2016 (could be sooner, depends on when the lender implements the new rules), ALL NEW HIGH RATIO MORTGAGES must be qualified at the Bank of Canada benchmark rate, currently at 4.64%, it used to be the contract rate (presently 2.44%). Presently, only variable rate and 1 – 4 year fixed rate mortgages are qualified at the benchmark rate. The 5-year fixed rate mortgage used by most borrowers, must now be qualified at 4.64%. This reduces the qualifying purchase price by about 20% (at today’s rates)!
Note: Applications between October 3 – 16, 2016 and funding by March 1, 2017 are eligible under the old rules.
Effective November 30, 2016, new low-ratio insured mortgages* must be:
a. Qualified at the Bank of Canada benchmark rate. Banks who may choose not to insure their low-ratio (conventional) mortgages by keeping them on their books may still qualify according to their own policies. Non-bank lenders do not have that option so less competition could lead to higher conventional rates.
b. Maximum 25 year amortization. This reduces the qualifying purchase price by about 9% from the commonly used 30 years! (at today’s rates)
c. Owner-occupied only. (Rentals won’t be eligible for low-ratio insurance so only banks who can hold on their books will offer). More rate premiums seem likely with less competition and the need for banks to hold more capital for these mortgages.
Note: Applications for insurance between October 3 – November 30 are eligible under the old rules IF the mortgage is insured (funded) by November 30, 2016.
*Low-ratio “bulk” or “portfolio” insurance is used by lenders to bundle conventional mortgages (20%+ down) for purchase by investors. This is used extensively by non-bank lenders and to varying degrees by bank lenders. New restrictions will constrain product offerings from non-bank lenders, in particular, who require portfolio insurance thereby reducing competition.
For more information, you can go through these links.