Here’s What you NEED to Know
Over the last couple of weeks, the most common question I hear from clients has been, “what are the new mortgage changes, and will it affect me?”. To which I am always happy to explain. But perhaps more concerning to me, has been the number of people who have told me, “Because I have 20% [or more] in down payment, the new rules will not affect me”. If you’re looking for the generalized black and white answer, this might be true. However, if you’re interested to learn a bit about how these changes will affect every current or new home owner, read on. I’ll start from the beginning and we’ll explore it together.
What Mortgage Changes? – A Summary
In case you missed it, here’s a quick 101:
The Department of Finance announced a few weeks ago that they would be making big initiatives to:
- Change the way borrowers qualify for mortgages that have default insurance (regardless of the down payment);
- Limit mortgage lender’s use of insurance for mortgages with down payments of 20% or more (yes, mortgages that have greater than 20% down payment can still be insured, more on that shortly); and,
- Close tax loopholes being taken advantage of by foreign homebuyers (non-resident purchases)
*I won’t be covering foreign homebuyer changes in this segment, but if you are interested, I will cover this in a future article. Don’t forget to subscribe to the newsletter so you don’t miss it!
On October 17th, the first set of changes took effect. Commonly known as the ‘Mortgage Stress Test’, all mortgages that are insured must qualify under more strict rules. For example, if you are applying to get a 5 year fixed rate mortgage at 2.39%, our calculations have to qualify you ‘pretending’ your rate is 4.64% (the Canadian 5 Year Benchmark Rate, a rate set by the government, at the time this article was posted). The idea behind this is if rates rise in the future, the borrower would still be able to qualify for their mortgage. The drawback for homebuyers, is a reduced maximum mortgage that you can qualify for, reducing your buying power when it comes time to look for a new home.
This is just the first of the changes coming. With the Mortgage Stress Test designed to change ‘how’ insured mortgages are qualified; On November 30th, there will be another set of changes, this time affecting ‘what’ kinds of mortgages may be insured. As examples, mortgages with purchase prices greater than $1,000,000 and non-owner occupied properties can no longer be insured. For the purpose of this article, it’s not necessary to get into ALL the new restrictions, just know that less mortgages CAN be insured.
So Does it Affect Me? – The Analysis
Now that we’ve summarized what changes have occurred and are coming down the line, you might still be thinking, ‘okay, so what? I have 20% or more for down payment, I don’t need insurance, this has nothing to do with me’.
Oh but it does! Let’s explore.
When you purchase a property with less than 20% down payment, you must have ‘mortgage default insurance’. The cost of this insurance is added to the balance of your mortgage. The insurance protects your mortgage lender if you default on your mortgage, effectively reducing the risk to the lender.
Now, if you purchase a property with 20% or more down payment. Although you don’t know it, many mortgage lenders choose to insure the mortgage anyway (called portfolio insurance) but in this case, the mortgage lender pays for the cost of the insurance. Why do they do it? Again, to reduce their exposed risk in case you default on your mortgage. In fact, many mortgage lenders, do this for EVERY mortgage that they offer; And every one of these portfolio insured mortgages, must meet the new mortgage changes we discussed earlier.
If these mortgage lenders can no longer offer mortgages to clients who don’t meet the new rules, it is possible that we see less competition in the mortgage market. Less competition opens up the window for lenders to raise mortgage rates.
But more importantly, for the remaining mortgage lenders that choose whether they want to portfolio insure a mortgage or not, now a large portion of their mortgages can no longer be insured. If these mortgages default, the mortgage lender has no insurance to fall back on and must absorb this risk on their own. Higher risk, higher reward as they say, and that would point to raising mortgage rates for everyone. In fact, as I am writing this article, TD has just announced that they will be raising their prime rate by 0.15% (affecting all of their variable rates) with the other banks likely to follow suit.
So do these changes affect you? Unless you aren’t concerned about the rate you pay for your mortgage, I think it affects us all.
In trying to keep this article as short and as clear as possible, (it’s still ended up pretty long!) there are details that I’ve left out. if you’d like to know more, feel free to send me your questions! Next up, we will be exploring “Vancouver’s Foreign Homebuyer Tax, and How has that Affected us in Toronto?”. If you want to be kept in the loop, please subscribe to our newsletter so that you don’t miss a beat!