The New Regulations Countdown

Regulations-for-Mortgages-TighteningIn less than seven weeks, 35-year amortizations will disappear on high-ratio insured mortgages. At the same time, the limit on insured refinances will drop to 85% loan-to-value (from 90%).¹

Borrowers have no later than Thursday, March 17 to arrange a signed lender approval under today’s mortgage insurance guidelines.

This affects people that might want:

  • A 35-year amortization to boost their monthly cash flow or augment their purchasing power; or…
  • A 90% LTV refinance to consolidate high-interest debt, pay for renovations or education, buy investments or fund a rental property down payment

The coming deadline will cause thousands of people to hasten their mortgage plans. Thus far, we’ve heard multiple lenders reporting above-normal mortgage volumes. These elevated volumes will likely continue for the next seven weeks, culminating in an especially busy stretch from March 14-17.

For illustration purposes, assume you want to apply for a $300,000 insured mortgage. Here’s a comparison of lending guidelines before and after March 18.

  Before March 18 After March 18
Maximum high-ratio amortization¹ 35 years 30 years
Maximum LTV on a Refinance¹ 90% 85%
Minimum qualifying income² $46,600
(with 35yr
(with 30yr
Monthly payment at 3.89% interest³ $1,303
(with 35yr
(with 30yr amz)
Maximum insured mortgage refinance $270,000 $255,000

Quick Tips:

  • A handful of lenders are covering legal/registration costs on refinances that close in the next month or two. Ask your mortgage professional for details.
  • We’re hearing reports of CMHC scrutinizing 90% LTV refinance applicants more than usual, especially if the applicant has higher-than-normal debt utilization and/or minimum net worth

Stats of Note:

  • Roughly 30% of new mortgages last year had 35-year amortizations and first-time homebuyers used them the most.
  • TD estimates that the amortization reduction will impact 20,000 home sales (TD projects 2011 home sales at 420,000 units)
  • Dropping the amortization from 35 to 30 years cuts peoples’ maximum possible purchase price by 6-7%.
  • Roughly 10% or less of mortgagors who refinance get a mortgage over 85% of their home’s value.

¹  Certain uninsured mortgages will still be offered with 35-year amortizations and 90% LTV refinance limits.

²  Assumes a qualified borrower with 5% down, 680+ credit score, 44% TDS, a 3.89% interest rate, 1% property taxes, no condo fees or non-mortgage debt, and $100 monthly heat

³  3.89% is an average 5-year fixed mortgage rate today.

Rob McLister, CMT

  1. “Roughly 30% of new mortgages last year had 35-year amortizations and first-time homebuyers used them the most.”
    “New Mortgages” includes a lot of people who already have significant equity in homes previously bought.
    More interesting stat I would like to see: what percentage of first time homebuyers have 35 year amortizations? How does this number shake out according to house price? For example, do first time home buyers who purchase homes at or above the median sale price have longer amortizations than those you purchase below the median price?

  2. Are there any stats available anywhere that show average TDS and GDS values on actual mortgages and possible default rates by TDS and GDS values?

  3. Yes Rob, this rush to get approved is to be expected.
    But on a positive note it is my understanding that RBC has just clarified that this time around they will ONLY apply the new restrictions to High-Ratio borrowers and NOT to Conventional borrowers who have 20% down payment.
    So now other banks and credit unions are perhaps likely to match RBC.
    Last time around in 2008 when mortgage rules changed all banks extended the restrictions to all borrowers, High Ratio borrowers and Conventional borrowers too. Not likely this time!
    So this time around I believe the rush to get a mortgage approved before March 18 will only come from High Ratio borrowers and not Conventional borrowers.
    Rob, it will be interesting to know if TD, BMO, Scotia, etc have clarified their position like RBC has?

  4. Hi fn, Thanks for the post. While we haven’t seen any formal announcements on this yet, there will likely be plenty of options for 35-year amortizations on LTVs of 80% or less. Cheers…

  5. It is all a crock of S**t. Banks will just lend more unsecured money at a higher rate. Mr. farthly did not do his homework.(or did he?) again it is the FI’s that win.

  6. Hi Traciatim,
    Here are the stats on average TDS:
    Avg TDS in 2009: 32.8%¹
    Avg TDS in 2010 (purchases): 31.7%²
    Avg TDS in 2010 (refis): 33.9%²
    I don’t know any source of default rates by TDS but that would be fascinating. There’s definitely a very positive correlation between high TDS and defaults. I’m sure the insurers have this data.
    ¹ CAAMP, Revisiting the Canadian Mortgage Market, 2010
    ² CAAMP, Revisiting the Canadian Mortgage Market, 2011

  7. Hi Prof.,
    As of November, 42% of new purchase financing over the prior 12 months had amortizations over 25 years. Two years ago it was 47%.
    The bulk of those were 35-year amz but I don’t have the exact ratio or the breakdown by home price.
    Source: CAAMP’s Annual State of the Residential Mortgage Market in Canada, Nov. 2010

  8. Hi all,
    Wondering, if someone can comment on weather such a reduction (in amortization) will mean a reduction in new home prices? I wonder if the builders will need to adjust their prices to reflect the lower purchasing limits of their potential clients? Thoughts ??

  9. There are no purchasing limits. The only limit is how much you can afford. On a $300,000 mortgage at today’s fully discounted 5-year fixed rate, reducing the amortization from 35 years to 30 years would result in a monthly payment increase of about $100. That’s a negligible increase that can be sorted out with proper budgeting.
    The refinance limit, however, would send more business to brokers and lenders that bypass the insurers.
    The HELOC issue would affect every consumer who has a HELOC. The few lenders that insured their HELOC portfolio would likely stop offering a HELOC by April. With less lenders competing for business, consumers may face paying a higher rate on their HELOC. In fact, I predict HELOC rates would head up in the near future.

  10. Hi ComputerGuy, To the extent Genworth insures their mortgages with the government’s guarantee, they are bound by the same general guidelines as CMHC (regarding amortization, max. loan-to-value, etc.).

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