Mortgage Rule Change Q&A

Mortgage-Rules-QuestionsYesterday brought an avalanche of inquiries about the new mortgage rules.

Here’s a little Q&A on topics that might be top of mind at the moment.

We’ll touch on individual borrower issues first. Then we’ll follow up with a 2nd story on industry implications.

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Q:  When must I apply in order to secure a 35-year amortization on a high-ratio mortgage or a 90% loan-to-value refinance?

A:  To be safe, ensure that you are approved by Thursday March 17.

Be careful about making changes to your application after March 17 if those changes would require that your application be reapproved. Otherwise your mortgage could be underwritten under the new rules and may not close.


Q:  How are pre-approvals affected?

A:  The act of getting a pre-approval before March 17 does not guarantee you’ll be approved for a 35-year amortization. That’s because insured pre-approvals that turn live after March 17 will be subject to the new amortization limit of 30 years.

“Turn live” refers to the time when a borrower has signed a binding purchase agreement and submitted a full bona fide mortgage application with a specific closing date.


Q:  How will the elimination of 35-year amortizations on high-ratio insured mortgages affect monthly payments?

A:  The payment on a 30-year amortization is $34.72 higher for every $100,000 of mortgage, compared to a 35-year amortization. (This assumes a 4% sample interest rate and standard underwriting criteria.)


Q:  How many people will be affected by the reduction to 85% loan-to-value on refinances?

A:  Lowering the refinance LTV threshold to 85% likely impacts less than a tenth of all refinances (Src: TD).

For those affected, they’ll now be able to refinance an average of $17,228 less debt based on the typical Canadian home value. The average Canadian has $25,163 in non-mortgage debt (Src: TransUnion via WSJ).

In addition, we’re waiting to confirm how this change affects mortgagors with collateral charges over 85% LTV. In those cases, switching lenders at renewal requires a refinance. Thus far, the Finance Department hasn’t stated that it will allow exceptions to the 85% LTV refinance limit. This is a key point so we’re awaiting official confirmation from the Finance Department. We’ll report back shortly once we’re certain.

The 85% refi limit also handicaps peoples’ ability to refinance in the event of higher rates or falling home prices. If you’re a mortgage professional, ensure that you counsel clients about this possibility if they are buying a house with less than 15% down. If home prices tumble, some people won’t be able to refi to lower their payments.


Q:  Can I still get 40-year amortizations?

A:  Lenders not bound by insurance restrictions can theoretically offer any amortization they want, regardless of a borrower’s equity. That said, not many actually go to 40 years.


Q:  Will 35- and 40-year amortizations still be available on conventional insured mortgages?

A:  35-year amortizations will still be available on conventional insured mortgages. However, we’ve heard that 40-year amortizations on conventional insured mortgages might be outlawed (but we haven’t confirmed it). Currently, very few lenders still allow 40-year amortizations on prime conventional mortgages. Merix Financial is one example.


Q:  What can people do if they want to refinance up to 90% after March 17?

A:  A small number of niche lenders offer uninsured refinances to 90% LTV. As time goes on, expect additional specialty lenders to hit the market with second mortgages up to 90%. (There is good opportunity here for selective lenders who can manage default risk.) In all cases, the rates will be notably higher than insured mortgage rates (often 3-6 percentage points higher, or more).


Q:  I have a HELOC now. Will it be affected by the new HELOC rules?

A:  Lines of credit put in place before April 18 will generally be unaffected by the HELOC rule changes. Insured HELOCs will stay insured until they are discharged.


Q:  Is 100% financing still available?

A:  Essentially yes. The government’s rule changes did not eliminate one’s ability to borrow a down payment. That means borrowers can still get their 5% down payment from lenders who offer cash-back down payment programs. It is “interesting” that the government saw more risk in HELOCs (which have rigid qualifications and are backed by 20%+ equity) than in cash-back down payment products, which are effectively 100% LTV on closing day.

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Exceptions to the above may exist so always consult a mortgage professional about your specific case.


Rob McLister, CMT

  1. Is a 100% LTV dangerous? It all depends on whether it’s a responsible borrower…
    I don’t know how many good borrowers choose a cash-back mortgage, but maybe the marketshare was too small the attract attention for the rule change.

  2. I noticed yesterday the Scotiabank has just raised its overdraft protection rate from a somewhat reasonable Prime + 5% to 19%. A 235% price increase is nice if you can get it. This continues the pattern of the last couple of years of credit card companies and banks dramatically increasing rates (e.g. Citibank’s 22%) despite their near historic low cost of funds. With the government’s recent step making it much tougher for Canadians to refinance and effectively manage their debt, banks and credit card companies should see short term windfall profits soar. At least until the bankruptcies hit.

  3. Please let us know when you hear more on the collateral charge treatment at higher LTV’s. This is a bigger issue than those being discussed. Especially considering 2/5 banks register CMHC high-ratio deals almost exclusively this way.
    Its my belief that high ratio deals should only be registered as standard charge terms anyway. Perhaps this is the intention with the new rule on HELOC’s – if so, the roll-out of these changes is considerably vague.

  4. See if this comment stirs up some comments. I see a bigger more subtle impact on mortgage borrowers, whereby a hi-ratio borrower will become captive to a lender until they have paid down their mortgage enough to amass 15% equity in the property thereby earning the flexibility or option to switch to a more competitive lender at renewal time should their current lender decline to make a competitive renewal offer, which is exactly what I think will happen. One 5 year term will likely not be sufficient to meet this hurdle, though it was at 90%. You can be sure the big banks who lobbied the government to tighten rules discussed this outcome! So perhaps one of the unintended consequences will be removal of competition. From a mortgage broker’s point of view, we (should) look at the life-time value of a customer and all their future renewals. Once could ague this change represents another grab at our renewal business from the Big 5, especially ____. If banks are “alarmed” by increasing debt levels, why don’t they lower their credit card maximum limits or reduce the number of high-priced consumer loans? Instead, they have to lobby the government to do their dirty work! These rule changes do nothing to curb irresponsible borrowers!

  5. Chris – This was my thought exactly. There is more going on here with the gov’t than trying to control debt. I believe the big 5 are in a battle over market share. If the gov’t was really worried about debt, there would be more talk about the unsecured debt and interest rates as you said.

  6. There was a question raised about “conventional insured” mortgages which asked whether or not 35 or 40 year ammortizations would be available for these products. The term “conventional” normally refers to those mortgages which are not considered high-ratio and do not require an insurer such as CMHC, Genworth, or AIG to underwrite. My understanding is that applicants who have a min. 20% downpayment would be offered a 35 year amortization as they would not have to obtain mortgage insurance.

  7. Hi Al,
    A conventional mortgage refers to a mortgage that does not exceed 80% of the market value of the property. (CAAMP definition)
    Many conventional mortgages are insured nowadays. In fact, roughly 71% of all CMHC-insured mortgages are conventional. (Source: TD, 2010)
    More to the question, various lenders (but not all) will continue to offer conventional mortgages with 35-year amortizations.
    Cheers…

  8. Hey Rob,
    Would you know approximately what percentage of conventional mortgage borrowers buying DETACHED HOUSES in ‘Vancouver’ and the ‘Northshore’, have 20% or greater down payment and as such would not be affected by the new mortgage rules of amortization reduction of 30 years from 35 years?
    Fn

  9. Rob…Thx for replying. At a general level my understanding is that there are absolutely no first-time home buyers for detached houses in ‘Vancouver’ and the ‘Northshore’ because all buyers of detached houses in these 2 specific local markets are folks who have traded up and have built up more than 20% equity over the years for their down payment. They also appear to have solid credit scores! So these folks could still qualify for a 35 year amortization after March 18 with their conventional mortgage and qualify for the high prices prevailing in these markets. For this reason these specific local markets may still remain immune to the recent measures by the Fed. and prices may still go higher from here?! Your general view on this observation? Would you agree?
    FN

  10. If banks are “alarmed” by increasing debt levels, why don’t they lower their credit card maximum limits or reduce the number of high-priced consumer loans? Instead, they have to lobby the government to do their dirty work!”
    The banks are afraid to lose market share, so none of them wants to risk making a change. Even if they did all make similar changes, then they would be accused of collusion. Keep in mind, these changes aren’t forcing the banks to do anything. A bank can offer any loan they see fit. The government is simply changing service they offer.

  11. FN,
    The chain is first time buyer (newbie)purchases a condo or row or whatever, and the former owner (mover) moves up to a detached. If there are fewer newbies able to buy out the movers, then there are fewer customers for detached. Also, the movers may get less for their old property leaving them less purchasing power for the detached.
    I don’t believe any market will be completely unaffected by the changes, but the effects will vary in extent and timing.

  12. Hey Rob, another question for you please…
    Do you know of any other country that has an equivalent of a government controlled mortgage insurance agency like the CMHC set up here in Canada to control and steer the housing market from as and when required?
    USA has Fannie and Freddie but initially they were not set up to be an extension of the government.
    What about in Australia? UK? Europe? Japan? Any other country that come to mind?
    Thanks!

  13. Thank you Guys! :)
    A follow-up that is kind of related: Can a prospective buyer use a currently pre-approved 35yr amortization mortgage on or after March 18? My guess is yes but I am not sure.

  14. Hi Takloo,
    Assuming it’s a high ratio mortgage then you’d need two things in place before March 18:
    1) A bona fide purchase agreement
    2) A signed approval on that property from the lender
    Cheers…

  15. There were lots of issues when we were planning to purchase home in Toronto. We found these guys and they were extremely helpful. The Savers Mortgage guy and my realtor made our dream possible. I don’t remember any thing of these numbers!!

  16. If I have a triplex income property (not currently my resident) up to what percentage of the value of the triplex can I refinance? (80 or 90%?)

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