Devilish Details From Yesterday’s Announcement

Details-on-Mortgage-Rules Yesterday’s mortgage rule changes sparked as many questions as answers.  Here’s what we know (to the best of our knowledge) at this point. The quotes come from an insurer memo we received…

Qualifying Rate:

  • Regardless of the mortgage term you choose, the interest rate used to qualify you will be “the greater of the contract rate and the Approved Lender’s five-year fixed rate.”
  • There is big confusion about which 5-year fixed rate will be used:  discounted or posted.  A source at CMHC tells us this is the #1 question they’ve been getting.
  • It’s a key point because posted 5-year rates are as much as 1.6% higher than 5-year discounted rates.  If posted rates are used, it means borrowers will qualify for lower mortgage amounts.
  • The Finance Department is apparently aware of this ambiguity and is expected to announce clarification on this point in the next few days.
  • It’s interesting to note that CMHC used to require that lenders use the 5-year posted rate to qualify people on variable-rate mortgages. Perhaps they’ll go back to this?  We’ll see.

Second Homes:

  • CMHC will no longer insure 2nd homes with more than one unit.
  • The borrower or his/her relative must live in the property “at some point during the year” and on a “rent-free” basis.  Lenders must confirm that this will be the borrower’s intention.

Rental Debt Servicing Changes:

    • This is a biggy if you want to buy rental properties.  CMHC is changing how rental income is used in a borrower’s debt service calculations (TDS formula).
    • Previously, CMHC allowed 80% of the gross rental income from all rental properties to be deducted from the total household debt service cost when calculating the TDS ratio.
    • Effective April 19, “50% of the gross rental income from the subject property may be included into the borrower’s gross annual income for the purposes of calculating the borrower’s TDS ratio.”
    • Rental income for all other rental properties will be treated the same as regular non-salaried income.  Borrowers will need to prove rental income. That will be done “using the average income for the previous two-year period from line 150 of the borrower’s two most recent CRA NOAs.”  Borrowers will be able to “gross up” the non-salaried portion of that line 150 income by 15%.
    • In practice, lenders may instead simply choose to rely on line 126 (“Rental Income”) on the borrower’s tax return.
    • For non-subject rentals, lenders may be allowed to make exceptions where the borrower does not have a two-year track record of a property and can prove rental income by some other means. (This is unconfirmed.)
    • The new TDS formula:

   PITH (subject property) + Other Debt Costs
      Gross Annual Income + 50% rental income

*  PITH = Mortgage payments, taxes, heat, and 50% of condo fees.

Borrowed Down Payments:

  • We hear that borrowers might no longer be able to borrow their down payments on an insured rental mortgage.  We’re awaiting confirmation of this.

Porting Existing 95% Rental Mortgages:

  • If you switch an existing rental mortgage to a new lender, and the loan-to-value is over 80%, you will not be affected by the new 80% maximum LTV requirement. (As long as the loan amount, LTV, and amortization do not change.)

5+ Unit Rental Properties:

  • 5+ unit rental mortgages will not be affected by these changes when insured under CMHC’s Multi-Unit program.

The above changes will apply to all mortgages with signed commitments dated after April 18.  The rules are still subject to final review by the Department of Finance.

If these rental rules go through, they’ll have drastic effects on rental financing. We’ll do another piece on the repercussions of this shortly…

  1. Rob, You guys continue to have the best coverage in the business. Bravo and well done.
    There was one thing I was wondering about. If these changes happen why would someone want to get an insured rental property mortgage? With 20% down, couldn’t they get a non-insured mortgage and not have to deal with these new restrictions?
    Take care
    Phil

  2. Engrossing article, with some particularly vital information. These changes to mortgage rules is something anyone thinking about investing should read and understand well; especially considering that markets such as realty in Calgary are expected to grow this year, and therefore the number of people willing to invest.

  3. “There is big confusion about which 5-year fixed rate will be used: discounted or posted.” This is ridiculous, it should be the posted rate otherwise the qualifying rate can vary for different persons.

  4. Regarding the confusion for qualifying on posted rates vs. discounted rates, this will be impossible to police as many lenders do not subscribe to the posted rate theory, ie: ING and several other virtual / non bank lenders. Most of these lenders will have a “posted rate” which is equal to bank’s discounted rates, essentially making it significantly easier to qualify for mortgages with them vs. qualifying at bank posted rates with a bank.
    And pardon me if this has already been addressed, but basically all of the government backed rules for investment properties really don’t mean a lick, as there are several great options up to 80% LTV that are not insured, or bulk insured by their lenders. So, anyone paying default insurance on an 80% LTV rental (up to 4 units) is kind of a sucker anyways.

  5. “but basically all of the government backed rules for investment properties really don’t mean a lick, as there are several great options up to 80% LTV that are not insured, or bulk insured by their lenders.”
    Are these “other lenders” backed by the govt also? I seem to recall hearing that Genworth was pretty mad that CMHC was 100% backed but that they were only 90% backed.
    If these rules don’t apply to every insurer with govt backing they don’t mean much (other than reducing CMHC exposure, but not overall taxpayer exposure).

  6. When was the last time anyone with one ounce of financial knowledge and flexibility signed up for a big bank, 5 yr fixed posted rate mortgage?
    Posted rates are irrelevant and should be eliminated. Posted rates inhibit competition since discounted rates discriminate against many vulnerable people like seniors, disabled, self employed, temporarily unemployed or over financed to name a few since at refinance time, their only option maybe to accept whatever their existing mortgage holder offers them which if its the big banks, its post!
    All the government is doing here with these changes is slowly closing the barn door after nearly all the horses are let out. CMHC got into these expanded product lines (zero downs, refinance, 35 yr amort. etc) in response to the strong competition from Genworth and AIG a few years back and wanted to maintain market share. They are seemingly tightening the requirements 1 step at a time and I expect to see them do some futher tweaking in the near term like eliminate 35 yr amort. Time will tell but recent behaviour favours further intervention in the near term.

  7. Does anyone know if Genworth be required to make similar changes? Or can Genworth continue to do 95% refi’s, 95% LTV rental properties, 80% rental offsets while having… and continue to have more or less guaranteed by the Canadian government?

  8. “”The Finance Department is apparently aware of this ambiguity and is expected to announce clarification on this point in the next few days.””
    This is what I don’t get, why the finance department doesn’t consult with mortgage professionals when making changes. And address the possible questions from the start.

  9. “And pardon me if this has already been addressed, but basically all of the government backed rules for investment properties really don’t mean a lick, as there are several great options up to 80% LTV that are not insured, or bulk insured by their lenders. So, anyone paying default insurance on an 80% LTV rental (up to 4 units) is kind of a sucker anyways. ”
    I agree with John. But this rises a couple of questions. Why is it that you can insur a 5+ unit building for 15% with the CMHC Multi-Unit program? Do you need to Insur to get 30-35 year amort.s? Why even bought with insuring anymore if you have 20% down?
    But at the same time, 3 years ago it took 25% down if you didn’t live in the building or went with a high interest lender like Xceed. I don’t think the rule change will have a long term effect, however it will have short term hit becuase of the government’s flipflop over the last few years.

  10. All this talk and confusion about the 5 year qualifying rate is a joke. For as long as I can remember, the rule was the 3 year rate was used to qualify for any term less than that. It was up to the lender to decide to use the rate that was available to them – posted or not. The rule has been changed from the 3 year to the 5 year, and all of a sudden nobody knows what rate to use.

  11. if cmhc goes back to the antiquated 50% of rent “ADDED to income” rather than offset method, (currently at 80%), then reducing ratios to 80% is likely redundant. ( take 50% of the rent and add to income and then take 40% of that 50% to use as qualifying income ?- not many properties qualify on that basis, especially if you add in the investor’s p/ res, using the same “add on” method). I can see reducing the offset rules down to 75% (or as an extreme to 50%) but to go back to the old “add to your personal income” reminds me of how the Bank of Nova Scotia ( and others – I am just picking on them!) used to lend money in 70’s (“we dont lend to women- please bring your husband in to sign” !!)

  12. The government is just creating a different kind of monster here from the one they think they are slaying. The next thing they will have to deal with is escalating rent prices because of the lack of supply in the rental housing market.

Your email address will not be published. Required fields are marked *

More Stories
millennials struggle with homeownership
High Home Prices a Growing Obstacle for First-Time Buyers
Copy link