Mortgage Rule Changes - Understanding Current Impacts
January 10, 2017 | Posted by: Shayne Beeler
Multiple mortgage rules changes took place in October and November of last year that will impact consumers this year.
In October 2016, a rule was implemented where clients with less than a 20% down payment must now qualify their mortgage payments based on a 4.64% interest rate rather than the actual discounted rate they’re receiving (routinely referred to as the “stress test”).
Another change that took place in November was directed at what’s known as “bulk insurance” and how lenders securitize mortgages. To recap on insurance requirements, in Canada it is mandatory to have an insured mortgage if your down payment is less than 20% of the purchase price. When a mortgage is insured by CMHC, Genworth or Canada Guarantee, the lender is safeguarded by the insurance company should a consumer be unable to make their mortgage payments. This insurance is commonly known as “mortgage default insurance”. A conventional mortgage on the other hand (20% or greater down payment), doesn’t require default insurance. However, that doesn’t mean there aren’t benefits to lenders insuring these mortgages, even if the borrower isn’t paying the cost. Lenders routinely bulk insure these conventional mortgages and pay the insurance premiums themselves. Why would they do this? This makes the mortgages more attractive to investors. Institutional investors seek mortgages that are secured by mortgage default insurance for their safe and predictable nature. One of the key benefits for the lender in this case, is freeing up capital that can continue to inventory lending demand. Our benefit of this process as a borrower is lenders being able to offer lower interest rates.
On November 30, 2016 refinances were no longer able to be bulk insured, which in turn, increased the lenders costs to fund these types of mortgages. These mortgages are then less attractive to investors because of the higher risk, which warrants a higher cost that gets passed down to the consumer by way of increased interest rates.
In the short term, you’ll hear of scenarios comparing interest rates from one borrower to the other where there is greater rate discrepancy than you’d expect. This is because they may not be comparing apples to apples based on their borrowing requirement (think “insured purchase” vs. “refinance”). There are solutions to this disparity that will eventually work themselves into the market to fill the opportunity gap these changes have created. That said, we still always conclude with suggesting the best approach – let us assist you through the process.
