By now you likely have heard of the new B20 mortgage rule updates set by the Federal Government in October of 2016 and the increase in premium in default mortgage insurance in March of 2017 and the newest addition to conventional mortgages that came into effect January 1 of this year. The Office of the Superintendent of Financial institutions (OSFI) intended purpose for these new regulations are aimed at protecting the financial security of Canadians and supporting the long term stability of the housing market in Canada.
So what does it all mean and how does it affect you, and your mortgage. Well to start- these changes essentially recategorized mortgages and with that changed what kind of rate you can expect depending on what category your mortgage fits into.
HIGH RATIO AND CONVENTIONAL
Loan to Value (LTV)– is a percentage ratio that describes the size of a loan compared to the value of the property securing the loan. Lenders and others use the ratio to understand how risky a loan is, and it can be used for approving loans or requiring mortgage insurance. Ex. 5% down payment= 95% LTV or 35% down=65% LTV
High Ratio mortgage- has an LTV of 81% and up to 95%- but a required minimum of 5% down (for homes valued over $500,000 the minimum down payment is calculated differently). Any mortgage that is high ratio must have client paid default mortgage insurance and thus can only be considered INSURED.
Conventional Mortgage– now refers to an LTV of 80% or less. A conventional mortgage is not required to be insured with a default insurer. A conventional mortgage can be considered: INSURED, INSURABLE OR UNINSURABLE.
An Insured Mortgage is when a home buyer has less than 20% down or the mortgage is insured by any of the three default mortgage insurance companies in Canada: Canada Mortgage and Housing Corporation (CMHC), Genworth, or Canada Guaranty. Default mortgage insurance protects the lender in the event of defaulting mortgage payments.
The insurance premium is scaled depending on the amount of down payment (or LTV) and is paid by the borrower.
For a mortgage transaction to be INSURED, these are the current requirements:
- Property must be owner occupied – rental properties are now excluded.
- A maximum amortization of 25 years
- A maximum property purchase price of, or below $999,999.99
- Minimum credit score of 600
- Maximum gross debt service (GDS) of 39% of home buyers income and a total debt service (TDS) of 44% calculated by the “stress test” using the Bank of Canada Benchmark 5 year conventional interest rate (Benchmark/Qualifying Rate).
A conventional mortgage can be considered INSURABLE. Insurable means the mortgage transaction fits into the insured guidelines and is portfolio (or back end) insured at the lenders expense. At the time of this posting, a conventional mortgage that is insurable may be qualified the same way an insured mortgage is (using the Benchmark rate) , or the way an uninsured mortgage is (Benchmark or contract rate plus 2%) depending on the lender.
Uninsured mortgages require at least 20% deposit on a home, or 20% equity left in a refinanced home. As these types of mortgages are deemed riskier, this risk is passed on with a higher contract rate compared to an insured or insurable rate. Uninsured mortgage rates are variant amongst different lenders depending on how their lending platform is structured.
Uninsurable Mortgage are :
- mortgages that are over 1 million
- have an amortization above 25 years
- rental properties (one where owner does not live in)
- All refinances
- Uninsurable mortgages are stress tested at the BOC Qualifying rate, or the CONTRACT RATE plus 2%. See our blog on OSFI mortgage rule changes.
CONTRACT RATE IMPACT FROM DEFAULT MORTGAGE INSURANCE PREMIUM INCREASE
When the increase in default mortgage insurance premiums went up, the cost to insure high ratio mortgages at 10% down and conventional mortgages went up substantially. While at 10%-19% down payment (or 81-95% LTV), the cost goes directly to the buyer, there has also been an impact on conventional mortgage rates with some lending institutions.
Lenders who take out insurance (portfolio or back end insure) on all of their borrowers mortgages are paying much higher premiums. So while the borrower may not pay the insurance- the cost for the Lender to insure the mortgage increased forcing the cost to be passed onto the borrower via higher mortgage interest rates. However there are Lenders that do not insure all of their mortgages whose rates are the same or similar as insured high ratio and there are situations where your conventional mortgage may still be considered insured so it is very important to be educated by your licensed broker.
“Customers more than ever need to turn to mortgage brokers as we have access to many lenders and products that can meet everyone’s unique borrowing needs” — DONG LEE former President, Mortgage Architects- our parent brokerage.
At Mortgage Sisters West we carefully take the time to empower you with knowledge, choice and the highest levels of service. Mortgages are not a one size fit all, you will love the way we customize your mortgage solutions because we listen to your unique needs and we have lender partners with a variety of products designed for you.