I can’t say that Monday’s late-day announcement from the Finance Minister comes as any great surprise. In fact, I completely understand the need for some form of action to curb rapidly advancing property prices in a few, select Canadian markets.
What remains to be seen, of course, is if these actions will actually have the intended impact, and at what cost.
Income Stress Testing to Become Stricter
As of October 17th, all borrowers with insured loans will undergo stress testing to verify their ability to service the mortgage in order to qualify for mortgage default insurance. For those applying for a 5-year or longer fixed rate mortgage, rather than simply using the contracted rate for the testing as was the previous process, the test will now be based on the higher of either the contracted rate, or the 5-year rate as posted by the Bank of Canada.
In most cases, this means the Bank of Canada rate will likely be used as it is generally a couple of percentage points higher than typical lending rates. With just this change alone, borrowers who might previously have passed the debt servicing requirements, will now fall short and will fail to qualify for mortgage insurance.
Fewer Borrowers to Qualify for Mortgage Insurance
Lenders are already required by federal rules to obtain mortgage default insurance for all applicants with less than 20 percent available as a down payment. Defined as a high-ratio mortgage, this requirement has contributed significantly to the stability of the Canadian financial sector by protecting lenders while making it possible for more high-ratio borrowers to obtain a mortgage.
For borrowers with down payments of 20 percent or more, lenders are not required to hold mortgage default insurance. However, in order to mitigate credit risk, lenders including Home Trust are able to purchase portfolio insurance and other discretionary low-ratio mortgage default insurance. These insurance products allow lenders to access CMHC-sponsored securitization programs which provide lenders with low cost funding alternatives.
The new income testing rules now make it more difficult for low-ratio borrowers to qualify for default insurance and lenders to qualify these loans for portfolio insurance. This may lead some lenders to discontinue serving these borrowers. The downside for the consumer should this happen is that with decreased competition, comes the potential for consumer costs to rise.
While these latest actions by the government are attempts to cool down a very hot market, the inescapable reality is that many individuals will now find it more difficult to qualify for an insured mortgage. This is where professional mortgage brokers working with an experienced lender like Home Trust, can provide custom solutions to serve this group.
The Home Trust Classic Mortgage Solution
Home Trust works with several private lender partners to offer a solution ideally positioned for high-ratio borrowers. With a Home Trust Classic first mortgage available for up to 80 percent of the total property value, bundled with a second private mortgage for up to 10 percent of the total value, it remains possible for homebuyers to borrow up to 90 percent of the total property value. Home Trust also offers a similar bundled product for refinance loans that allow for up to 85 percent of the total value.
We understand that you have questions following the announcement from the Department of Finance, and you have my assurance that we’ll be watching developments very closely. In the meantime, I encourage our broker partners to contact their BDMs with any questions or to learn more about our products as, collectively, we work through these changes.
Thank you for your continued business.
EVP Residential Mortgage Lending
Home Trust Company
This post is intended for informational purposes only and is not to be considered financial advice.