The Department of Finance threw a major wrench in the gears on October 3rd by making huge material changes to the way that many borrowers get qualified. Here's a summary of an easy to read rundown on the changes as posted on Michael Campbell's Money Talks.
What is changing?
Effective October 17th, the qualification rate will apply to all insured mortgages, not just those taking terms shorter than 5 years or choosing variable rate terms. Currently the qualification rate is 4.64%. Many first time buyers have been forced to choose a 5 years fixed rate term as they would qualify at the actual rate itself instead of 4.64% (as of October 6th, many lenders are still offering 5 year fixed rates at or below 2.49%).
The new rules kick in for any appplications received by the insurer after October 17tg, but in many cases lenders will stop taking new applications a few days in advance to give them time to prepare and submit deals to the insurers.
In order to be sent to an insurer, you must have a live deal (an accepted offer). Pre-approvals do not count.
This will not impact existing mortgages already in effect or existing mortgage applications that have already been approved (just not pre-approved)
Impacts of the new rules (there are a lot)
Lower purchasing power for buyers (somewhere between 15-20% depending on your income level and the amount of mortgage)
Less competition - Non-bank lenders back-end insure most or all of their mortgages currently. If they are unable to insure them going forward, those clients will have to deal with deposit taking institutions who can keep the clients on their own balance sheet.
Higher rates - If banks/trust companies have to hold mortgages on their balance sheets, interest rates, especially for rentals, self-employed, and other hard to insure business, will increase as the cost of funds is higher when thaty are not able to sell the mortgages in the mortgage-backed securities (MBS) market.
Renewals that are conventional (more than 20% equity) coming up that don't fit the criteria listed below won't be able to remain insured which may increase the cost, and so the best rates may not be passed on to thise who don't fit these criteria. These rules apply November 30, 2016.
Loan for the purchase of a property or renewal
Owner occupied (sorry, no rentals)
Maximum amortization of 25 years
Maximum purchase price of $1,000,000 at the time the loan is approved
Minimum credit score of 600 at the time of approval
Maximum TDS/GDS of 39%/44%
If there are less non-bank lenders doing rentals, self-employed, etc, that business will likely flow to the few remaining banks who are doing them. I fthis iss a the case, the banks will likely either tighten guidelines to stem the flow of new business or surchage the rates for 'unique' deals.
Margins will shrink for non-insured mortgages, which may create a larger gap between insured and uninsured mortgages (currently the best rates for owner occupied with less than 20% down are about .1% better of a rate).
Revised B-20 guidelines are likely to include qualifying at the Bank of Canada rate even for borrowers with over 20% down.
Amortizations over 25 years may be surcharged or simply not available as lenders won't be able to insure these mortgages
What should I do?
If you plan to buy, make sure you know how the new rules will impact you. You may wish to pull the trigger sooner rather than later.
If you are buying a pre-sale, make sure a full application is made through your broker (that's me) to get an insurer's approval now. The rate may not be guaranteed but at least financing will be approved.
Refinance now. You are most likely to get the highest possible appraised value that we may be seeing for the short-medium term and new rules may make this more difficult to obtain.
A lot to digest all at once. Needless to say the advice and guidance of a mortgage broker will be more important than ever to help borrowers navigate this new landscape. Please call (613)394-5810 if you have any questions you need answered, or if you need advice on how best to plan and proceed.
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