This article applies to you if you’re planning to buy a home with less than a 20% downpayment as I’m sure many of you already know the high ratio default mortgage insurance premiums are going up effective May 1st, 2014. It was also recently announced there will be further mortgage insurance changes effective May 30th , 2014. The government insurer, CMHC has advised on that date the second home and self-employed without 3rd party income validation mortgage insurance programs will no longer be offered. Self-employed Canadians can still qualify for CMHC insured financing with a validation of their income using traditional methods. Also effective on this date, CMHC will limit the availability of homeowner mortgage loan insurance to a maximum of one residential property per borrower/co-borrower at any given time. The other 2 insurers in Canada, Genworth and Canada Guaranty seem to have no plans at this time to follow CMHC with the May 30th changes. Any specific questions regarding options of these other 2 insurers should be directed to a mortgage broker as not all lenders have access to BOTH of the other insurers.
Default Mortgage Insurance Premiums
As of May 1st, all three mortgage insurance companies are raising their premiums. While I could write a whole article on this change alone, instead, I’m going to provide a quick Coles notes version. Mortgage insurance premium amounts are a set percentage based on your downpayment and mortgage amount. Presently the mortgage premium for a 5% downpayment amount is 2.75%, as of May 1st you will pay 3.15% for the same product. The impact of this premium increase is minimal as for every $100,000 you insure, your mortgage payment will go up by about $2.
Stated Income Self-Employed Mortgages
CMHC currently offers a mortgage insurance product that caters to self-employed borrowers who cannot confirm their income through third party documents such as Notice of Assessments or tax returns. This product allows you to ‘state’ your income at a level that is reasonable for type of work you perform and time in the industry. In exchange for relaxed income requirements, they require an excellent credit score and a minimum 10% downpayment from your own resources. As of May 30th, CMHC will no longer offer this program.
After May 30th, if you’re self-employed, you will be required to provide income confirmation via 2 recent years of income tax documentation to be approved by CMHC. Going forward, given the income confirmation documents required vary with the different lenders do double check with your mortgage professional about what exactly is considered acceptable to the lender and insurer approving your mortgage application.
If you’re unable to prove your income to the satisfaction of the mortgage insurer and/or mortgage lender, you can look at other lender, alternate or subprime lender options often available only through a mortgage broker. If you’re taking this route, you may have to make a larger downpayment and the interest rates may not be as low as best rates available. The question you have to ask yourself is “does it make more sense to pay a little more for the mortgage versus paying a lot more income taxes on a higher income taken from your business?”
CMHC has now restricted mortgage insurance availability to only one property per borrower. This means you can only have one insured mortgage at a time with CMHC. For example, if your residence is insured by CMHC and you want to buy a 2nd home or vacation property you could not obtain mortgage insurance on it through CMHC and a minimum 20% downpayment would be required to purchase that property. Or if you currently have a CMHC insured mortgage and want to co-sign for a borrower that is buying and requires mortgage insurance as well, you would not be allowed to co-sign as you already have a CMHC insured mortgage.
This definitely affects your ability to co-sign for future mortgages, or alternatively to find a strong co-signer for mortgage approval if you require one. I think this change especially will emphasize the need for mortgagors to qualify on his or her own rather than depending on a co-signer to help get approved for a home purchase. Instead, you could look at getting a gifted downpayment from a potential co-signer to help you qualify for the mortgage you need, or avoid the need for a co-signer by maintaining a strong credit profile and obtaining financing that is affordable based on your qualifying income.
In order to get in before the product changes, you need to have an accepted Offer to Purchase on a specific property and your application must be submitted to CMHC for approval prior to May 30th. Some lenders are setting their own cut off a few days before the 30th in anticipation of a backlog. In order to avoid mortgage insurance completely, you must have a downpayment of at least 20% of the purchase price and while there are exceptions to that rule, the alternative can sometimes be a bit more expensive route.
Again, we don’t know yet if the other two mortgage insurers are going to follow CMHC’s lead and also make changes to their stated income self-employed and second home programs. For now, if you’re thinking of buying soon, do contact your favourite mortgage professional for up to date information on upcoming mortgage changes and how they could affect your plans