Then, Now & How
July 2013 marked the 1-year anniversary on Minister of Finance Flaherty’s fourth round of mortgage rule changes in as many years. The motivation behind the rule changes were likely to reduce our exposure to a possible housing market bubble and also to reign in a growing consumer debt trend. At the time we couldn’t predict what kind of long term effect the mortgage restrictions would yield though now that some time has passed since the first rule change was announced, we can see what kind of implications they’ve had on our market. This week, I want to revisit what used to be, detail what is now, and explore how it has affected the typical Canadian mortgage borrower.
What it was then: Maximum 40 year amortization.
What it is now: Maximum 25year amortization unless you have over 20% equity or downpayment.
How it affects you: A lower mortgage amortization means you pay off your mortgage faster though it comes with a higher mortgage payment which can disaffect your mortgage qualifying ability. Good news is the low interest rates we are still experiencing tend to offset that, however, when rates go up, you may not be able to qualify for as much of a mortgage as you’d like. This can be especially concerning if you have a certain price range in mind though you can counteract that restriction by increasing your downpayment or paying down some of your debt before you buy.
What it was then: The lender guidelines determine the qualifying rate based on your term selection.
What it is now: You must qualify at a “benchmark” rate unless you take a 5-year fixed rate term or longer. In those cases, you would qualify at the rate for that specific term which today is a lot less than the benchmark rate.
How it affects you: Previously, each of the lenders had their own guidelines about what interest rates would be used in qualifying a client for a specific mortgage amount. That gave you as a borrower more flexibility in which lender you would work with in order to qualify for the mortgage amount you needed to buy the property you wanted. Now, if you choose a fixed closed or open term of less than 5 years or a variable rate term, you have to qualify at the benchmark rate which is determined by the Bank of Canada. Today, the benchmark rate is 5.14%, compared with a 5-year fixed qualifying rate of 3.19%. As you can see, the 5-year fixed term (or longer) can be attractive if you are trying to qualify for the maximum mortgage amount based on your income. The only way around the benchmark rate is to take a longer term. If that’s not an option for any reason, you can increase your qualifying power by reducing personal debt balances or increasing your downpayment.
What it was then: Refinance up to 95% of your home value.
What it is now: Refinance up to 80% of your home value.
How it affects you: You cannot access as much of your home equity as before the change. This isn’t good news if you’re trying to use a mortgage refinance as a low interest rate and payment solution to high interest personal debts as it restricts how much you can consolidate into your new mortgage amount. The other downside to this change is if you are trying to benefit from a lower mortgage rate by restructuring your mortgage with the same or a different lender you may simply not have enough equity to do this. The good news is this new rule can provide a buffer against property value fluctuations, thereby preserving the equity in your home over the long term. As a result of this change, before some people can make any changes to their existing mortgages, they may have to wait until their property value goes up or work at accelerating the pay down of the existing balance owing.
What it was then: You could get a mortgage with zero downpayment which meant the lenders would provide a mortgage for 100% of the purchase price.
What it is now: You must have at least 5% of the purchase price as a down payment from your own resources, a gift from relatives or borrowed via a separate loan or line of credit as the lenders will now only provide up to 95% of the purchase price.
How it affects you: Truthfully, I’m not too sad to see this rule change. Those zero downpayment mortgages came with a much higher interest rate which resulted in an increased mortgage payment which ultimately meant they were more difficult to qualify for. The other issue with this product is if you bought your home with a zero down mortgage and broke your term early for any reason or you sold your home prior to the end of the term you had to pay a pro-rated portion of that money back! Not a good product in my opinion.
In addition to the above detailed mortgage rule changes, mortgage lenders have also adjusted their qualifying policies and guidelines internally. And do be aware, depending on the lender, you may have to provide a substantial amount of supporting documentation PRIOR to your application even being considered for a mortgage approval. Even if you are not planning on applying for any financing in the near future I would suggest you keep all of your personal financial documentation in one central location. This may include income taxes, proof of payment of any debts as well as bank statements.
I have read the majority of the mortgage qualifying rule changes are based on years of mortgage default analytics and these recent changes were implemented to prevent some buyers from becoming part of those statistics. First time homebuyers were hit the hardest by the recent rule changes, however Canadians are a resourceful bunch and it is looking like they are still finding ways to enter into the housing market.