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OSFI/CMHC Clamps Down on (One Form of) 100% Financing

There’s another set of mortgage rules coming this summer. CMHC sent out a notice recently with implementation dates for three policies related to OSFI’s B-21 guideline.

We knew this stuff was coming but these rules could nonetheless make it harder to get low-ratio insured variable-rate mortgages, self-employed mortgages and 100% financing.

Here’s what’s happening:

  1. The qualifying interest rate for low-ratio variable and fixed terms of less than five years will officially become the Benchmark Qualifying Rate (currently 4.64%). This change only applies to transactionally insured mortgages, not bulk insured mortgages, says CMHC. Effective date: “As early as possible after June 30, 2015, and no later than December 31, 2015.”
  2. Lenders will officially be required to obtain “third-party verification” of income for all borrowers, “including substantiation of employment status and income history.” CMHC did away with “stated income” financing many moons ago, but the private insurers still offer a form of non-traditional income verification (see Genworth’s program and Canada Guaranty’s program). We don’t yet know if/how their programs might change. For CMHC’s part, this announcement “is simply [meant] to add additional clarity and re-affirm CMHC’s position,” spokesperson Charles Sauriol says. Effective date: June 30, 2015.
  3. Cash-back down payment mortgages will be eliminated unless the borrower can come up with 5% down on their own. Ever since OSFI’s Guideline B-20 killed these products at the banks, this type of 100% financing has only been offered by a small number of credit unions. Effective date: June 30, 2015.

With this last rule, you might be wondering why people can borrow their down payment from a 20%-interest credit card but not derive their down payment from lender-provided cash rebates.

“To differentiate the two—in other words, use of lender cash backs versus borrowed funds to satisfy minimum equity requirements—lender cash-back mortgages are typically associated with higher interest rates charged to the borrower,” says Sauriol. That “translates into a larger insured loan amount and in the event of a default, into potential additional risks for the mortgage insurer.”

“In cases where funds are borrowed to satisfy minimum equity requirements, the borrowing is outside of the insured loan amount and is also factored in the total debt service ratio, and therefore taken into account for borrower qualification purposes.”

The end result is that the insurer incurs less severe losses on default (e.g., after five years, the loan balance being insured can be 3% to 4% less if the down payment was borrowed).

Unfortunately, borrowed down payments can also result in higher interest costs and/or payments for the homeowner, depending on what interest rate and amortization applies to the borrowed down payment. In cases where this makes it tougher for the borrower to debt service, that could theoretically increase the probability of default.

Sidebar: It appears none of these rules prevent a lender from offering an unsecured line of credit for the borrower’s down payment. It should be noted, however, that lenders scrutinize applications very carefully if someone is borrowing his/her down payment.