New mortgage insurance criteria could make it a little tougher for new homebuyers to get their first mortgage. The new measures were announced Monday by federal Finance Minister Bill Morneau. Beginning Oct. 17, all homebuyers that require mortgage insurance will have to qualify at the Bank of Canada’s conventional five-year-fixed posted rate. That includes homebuyers seeking a five-year fixed-rate mortgage which used to be exempt from the requirement.
Mortgage insurance criteria includes a “stress test”
Typically the Bank of Canada’s five-year-fixed posted rate is higher than most buyers would actually pay through their lender. Qualifying at that rate acts as a kind of stress test to ensure a homebuyer’s mortgage payment, property taxes and heating costs don’t exceed 39 per cent of their household income, and all debts aren’t greater than 44 per cent of income. The Bank of Canada’s rate is updated weekly. On Sept. 28, it was 4.64 per cent. The current rate at most commercial lenders is less than 3 per cent. “The first set of measures is meant to ensure that Canadians are taking on mortgages they can afford, even if interest rates go up or their income drops in the future.” said Morneau. As realtors we often feel uncomfortable working with clients we know may be stretching themselves too thin to get the property they love. These new mortgage insurance criteria will make it harder for them to get overextended and help us feel more comfortable writing offers for them. Mortgage insurance is a requirement for any mortgage obtained from a federally-regulated lender when the homeowner’s downpayment is less than 20 per cent of a property’s purchase price. That’s known as “high-ratio” insurance and it protects the lender if the homeowner defaults. The premiums are paid by the homeowner. Lenders can also obtain “low-ratio” mortgage insurance for homeowners whose downpayment is greater than 20 per cent of a property’s purchase price. Its premiums are usually paid by the lender.
As of Nov. 30, the mortgage insurance criteria for both high and low ratio policies will be the same:
• a loan for the purpose of purchasing a property, or subsequent renewal of such a loan
• the property being purchased will be occupied by the owner
• a maximum amortization of that loan for 25 years
• a maximum purchase price of less than $1 million at the time the loan is approved
• a minimum credit score of 600 when the loan is approved
• meeting the new stress test criteria
The new mortgage insurance criteria apply only to new applications and not existing mortgages or mortgages up for renewal. Morneau said low interest rates and changing attitudes about debt are encouraging some households to take on more debt than they can handle. “Affordability is an issue that concerns many middle class families,” said Morneau. “Federal government policy cannot control house prices directly but it does have a role in ensuring that housing markets are stable and functioning efficiently.” Morneau also said the government will begin a series of consultations on spreading the risk of mortgage insurance so taxpayers won’t bear the full brunt of defaulted mortgages. Currently all mortgage insurance in Canada is provided by the Canada Mortgage and Housing Corporation, a federal crown corporation, and two private insurers whose policies are also backed by the federal government minus a 10 per cent deductible.
The Minister said the government will also close loopholes surrounding capital gains tax exemptions on the sale of a principal residence to ensure those exemptions are only available to Canadian residents and that families can only designate one principal residence in any given year.
On Oct. 16, I was interviewed by local television on what these changes to mortgage insurance criteria will mean for buyers and sellers in the local real estate market. Here is the link: New federal mortgage rules come into effect today – Global TV