New Mortgage Rules: The Impact

Benjamin-Tal CIBC economist, Ben Tal, predicts mortgage volumes will fall due to the Finance Department’s new mortgage rules.

Here are his estimates of how overall mortgage originations will be affected:

  • New Rule #1:  Increased qualifying rates on fixed terms less than five years and variable mortgages.  (The new qualifying rate is yet to be determined.)
    • Effect:  5%-6% decrease in overall origination volumes
  • New Rule #2:  5% increase in the down payment requirement when refinancing.  (90% LTV will be the new maximum for refinances. Currently it’s 95%.)
    • Effect:  7%-8% decrease in overall origination volumes
  • New Rule #3:  15% increase in the down payment requirement for rental property financing. (20% will be the minimum down payment for insured rental financing. Currently it’s 5%.)
    • Effect:  2%-3% decrease in overall origination volumes

These new rules are currently scheduled to take effect April 19.

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  1. It’s interesting to see an estimate of how many fewer mortgages will be taken as a result of each of the new rules. Of course, eliminating some mortgages was the goal. Brokers’ and banks’ primary concern would be the reduction in volume, but I’d like to know whether these rules are eliminating the right mortgages. Are these rules meeting the apparent goals to have fewer Canadians get into financial trouble, and to lower the odds of having a housing bubble that later bursts, etc.?

  2. If I want to close on a purchase by say May 1st, can I get a mortgage preapproval now to avoid the new rules (namely rule #1, the 5-year fixed requirement)? TIA

  3. The first two rules make sense. The last one makes no sense because it throws the baby out with the bathwater. There are good qualified investment property buyers that will be affected by this, for no good reason. The government could have set tighter guidelines to curtail risk. It didn’t have to stop lending on rentals altogether.

  4. I have to say I’ve always enjoyed Ben Tal when he speaks, and the drops in business are not as severe as some had thought. Furthermore, as someone above said, a drop in business is bad short-term, but good long-term as we stabilize the market.
    Gokou – yes, if you get a commitment from a lender before April 19th, you’re good to go under old rules (at least that’s what a major lender said to me today).

  5. What happens if a borrower has bought a house with a 5% down, short term mortgage, and a year later needs to refinance wuth only, say 7% in equity?

  6. well nothing happens because they can’t refinance with that little equity as closing costs/penalties etc. will eat up the 2%. furthermore as of april 19th the rule clearly states NO REFINANCES BELOW 90%.

  7. Gokou, you can purchase a house with a closing after April 19th as long as you get it approved before the 19th. A pre-approval means nothing regarding qualification.
    Not sure if I am breaking the rules here but email me if you would like more information
    avanloenen@northwoodmortgage.com
    Rob, sorry if I am breaking the rules, if I am I will refer the questions to you.

  8. Hi Adam, May I ask what this means: ” A pre-approval means nothing regarding qualification.”?
    If I get preapproved before April 19 but I find a house and the deal turns live after April 19, which qualifying rate will be used? Today’s rate or the new higher rate?
    Thank you

  9. It is my understanding that it is when an application for approval is submitted that will determine which qualifying rate will be used.
    Many pre-approvals are based solely on what the applicant advises their income is. No proof is required for a pre-approval. Once a deal goes live then verifying documentation will be required. This is when the qualifying occurs.

  10. There could be a LOT of homeowners unable to refinance, if they had a long amortization, or short term, and bought with 5% down. Is no one else concerned about this?

  11. Once you are approved and you get a mortgage with CMHC insurance, renewing is not a problem.
    A mortgage specialist at RBC once told me that she had just renewed a woman on a 5 year term who didn’t have job. So if your TDS and GDS or whatever else are “out of line” when you go to renew, it’s not an issue.
    If you don’t have insurance, I bet things get much dicier if you come in to renew with negative equity or some other problem though. Then the lender is at risk and they will work hard to eliminate that risk.

  12. Thanks.
    CMHC insurance (upfront premium) covers the term of the mortgage, correct?
    If so, upon renewal, you must renew (re-pay) the premium if your gds is out of whack?

  13. you do not have to pay cmhc again upon renewal, period.
    sorry I meant 90%LTV and above.
    upon renewal the bank does (usually) not ask for documentation re: income therefore gds/tds is a non-issue.

  14. I should add that the RBC example I gave involved a woman who had no job, but also significant savings. So this was an example of someone who would not qualify for a mortgage in the first place, but because she was renewing an existing one, it was all good.
    I don’t know what they would do in the event that you are trying to renew with no job, and no savings and negative equity and having just lost a million dollar personal injury lawsuit :)

  15. If you have never missed a payment the lender won’t ask you to requalify. It doesn’t matter if it’s insured or uninsured.
    The exception is if the lender has gone out of business. Then you’d have to qualify with a new lender.

  16. Sorry there is one more exception. If your mortgage is subprime and the lender cannot get funding to renew it, you will have to go elsewhere.
    This happened to customers of Xceed Mortgage. It wasn’t really Xceed’s fault though because subprime funding dried up for almost everyone after the 2007-08 mortgage crisis.

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