OSFI adds stress test for uninsured borrowers

The Office of the Superintendent of Financial Institutions (OSFI) published the final version of Guideline B-20 − Residential Mortgage Underwriting Practices and Procedures, which comes into effect on January 1, 2018.

Now, even if you have 20% or larger down payment, you must qualify at the greater of either the Bank of Canada benchmark rate, or the contractual rate + 2%. This was previously only the case for insured borrowers with less than 20% down payment to undergo a stress test to protect against future rate increases.

It is important to point out that existing borrowers who remain with their current lender at renewal, the stress test will not apply. However, should you want to shop around for better terms, rates, features, or product, the stress test kicks in and could become a detractor or a disqualifier for many!

Another change coming is that OSFI is requiring lenders to enhance their loan-to-value (LTV) measurement and limits so they will be dynamic and responsive to risk.”

This means that more scrutiny and internal processes with lenders will also be applied to ensure they are not giving out mortgages too large in comparison to the value of the home. No clear direction from the lenders yet on that point, but suffice to say that TDS and GDS at the top ends will be scrutinized or drastically limited to higher beacon (credit) score borrowers.

We should expect to see extended amortizations come back into play (remember 30, 35, and even 40-year mortgages?). The 40-year is not likely to return, but to maintain affordability, 30 and 35-year amortizations can be a feasible option, but likely to come with a rate premium.

To see how the rules may affect you, contact me!

Mark Brennan
Mortgage Broker

CMHC increases mortgage insurance premiums (again, and again!)

Canada Mortgage and Housing Corporation (CMHC) announced a hike in the premiums being applied for mortgages that have less than 20% down payment. These new changes will affect borrowers as of March 17, 2017, and will not affect any currently approved or previously committed and underwritten deals.

In the 3rd round of increases in less than 3 years, we see another premium increase, this time across the board. Below is the premium changes, and the change to monthly payment that CMHC published with this increase announcement:

Shortly after the previous announcements, the other two insurers (Canada Guaranty and Genworth) also increased their premiums accordingly to match the increase. Expect the same thing this time around!

If you have any questions about how this may affect you, feel free to call me to discuss!

Mark Brennan
Mortgage Broker

Originally published March 5, 2014, and May 25, 2015 and updated January 17, 2017

More mortgage rule changes

On October 3, 2016, more rule changes were announced from the Department of Finance:

  • Bring consistency to mortgage insurance rules by standardizing eligibility criteria for high- and low-ratio insured mortgages, including a mortgage rate stress test;
    • The mortgage stress test is requiring all borrowers, that have less than 20% down payment, to be able to qualify using the Benchmark qualifying rate vs. the actual interest rate
    • By today’s standards, that means the difference between qualifying on a 5-year rate of 4.64% vs. a 5-year fixed of 2.39% today
    • Assume this scenario:
      • Purchase price of a condo is $300,000
      • 5% down payment ($15,000)
      • $500 in other debt payment obligations
      • $2500 annual property taxes
      • $300 monthly condo fees
      • $125 monthly heating
      • Current 5 year rate used to qualify over 25 year amortization (2.39%)
      • The interest rate you will pay does not change, but the way you need to qualify does –
        • Income required before: ~$65,000+
        • Income required after: ~$75,000+
  • Improve tax fairness by closing loopholes surrounding the capital gains tax exemption on the sale of a principal residence; and,
    • Aimed at Vancouver and Toronto markets mainly, this change is to make sure that the Capital Gains tax exemption on a primary residence is not abused by either residents or non-residents buying and selling a primary residence within the same year
  • Consult on how to better protect taxpayers by ensuring that the distribution of risk in the housing finance system is balanced.
    • Translation: there may be more changes yet to come!

Some good news – anyone who already has a mortgage, or who has already applied for mortgage insurance, is exempt from the new rules, which will formally kick in on October 17, 2016.

Conclusion: There could be a quick rush by some to get in and have an approval prior to the change date, as the crunch will be felt by many first-time buyers. Also, if you are looking to sell and qualify for a new mortgage, you may also be subject to these rules! Contact a Mortgage Broker to review your situation and guide you accordingly.

 

Mark Brennan
Mortgage Broker

 

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Down payment increasing for homes over $500,000

Today, Finance Minister Bill Morneau, announced that the government is increasing the down payment requirements for homebuyers seeking to purchase properties over $500,000 up to $1,000,000 effective February 15, 2016. The move is designed to cool down the real estate market in Toronto and Vancouver, but could also have some effects here locally.

The main consideration will be regarding the down payment amount will increase. This change is only for home purchases, and will not affect existing homeowners. What is important to note is that the new rule only applies for the amount in excess of $500,000.

Conclusion: This may spur an early spring market for homes in that price point in an effort to get ahead of the rule change. Morneau had noted that the change will affect only about “1% or less of the population” in a news conference today. The plus side is you are putting in more towards your purchase, and will be building equity faster.

Mark Brennan
Mortgage Broker

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Common Credit Myths

Your credit score in Canada is based upon a three-digit number ranging from 300-900 that tells future lenders how risky it is to lend you money based on your history of making debt payments. Lenders will look for a minimum 2-year history on the credit report, with 2 active trade lines in order to gauge your credit repayment history.

Myth 1: Paying cash is better than credit.

Truth: You need to use credit in order to build credit, and demonstrate your ability to make payments. Using credit at least once every 30 days and making payments on time will keep you in good standing.

If you can find a happy medium between the two, will put you in a stronger financial position for future borrowing purposes. Use credit for emergencies, or occasional small purchases to keep the rating going, and then pay the balance in full when the statement arrives; win-win!

In some circumstances, alternative forms of credit can be used to qualify if there is little history on the credit report: a lease or rent letter from your landlord, a bank reference letter confirming no NSF’s in your banking history, a letter from your insurance company of good repayment history on your car or tenant’s policy, or a 1-year billing history from a local utility bill are a few examples we have used in the past.

Myth 2: Only use major credit cards to build a good score.

Truth: If you’re unable to obtain a major credit card, there are other ways to build your credit history. Making regular payments on instalment loans such as a car lease can positively affect your score, as do department-store cards and secure credit cards, which require a cash deposit in the amount of the credit limit. Look at starting with one of these for a while and then try applying for a major credit cards after 6 months or so.

The frequency or how often you seek credit can also factor into your score. It is a process, and if you force it and try to apply at too many places at once can backfire with a low credit score as a result. Lenders will view you as a ‘credit shopper’, or worse – you could be approved for all of the accounts you applied for and look like you are at risk of being over-indebted!

Myth 3: I have made some late payments or missed payments on some of my bills, I will never get back on track.

Truth: It takes time, but your credit will become positive as you build consistency with timely payments. How much time it will take depends on a number of factors, including how long the ‘late payment’ has been on your record and how long you’ve had the debt.

One tip might be to set up automatic payment options with the account. Some companies have this option that you can time to match paydays, or debit the bill from your bank account or credit card automatically – set it and forget it! Now, just don’t forget to make sure the funds are available for those bills to come out.

Also be prepared to have a good answer for the question of ‘why did it get behind’ on missed payments!

Myth 4: I will not qualify for a mortgage if I have a low credit score.

Truth: Lenders look at your entire financial picture, including your assets, available cash flow, and debt-to-income ratio. They’ll also review your housing expense-to-income ratio, which is a comparison of your expected monthly mortgage payment with your gross monthly income.

A very good credit score of 680 will afford you most lenders and products, however, some lenders have lent to clients with lower scores. Non-prime lenders will be willing to take a risk on the right client who meets all the other criteria if credit is a little weaker.

When any lender is considering to lend to a prospective borrower, the 5 C’s of credit are still considered, and this is part of the thought process when determining your application:

  1. Capacity. Review the borrower’s ability to repay.
  • Can they handle the debt? Will the new debt result in payment shock in relation to their current situation?
  1. Capital. A measure of a borrower’s net worth and demonstrates ability to manage their finances while repaying debts.
  • Do they have sufficient financial resources? Do they have their own down payment? Have they shown a history of savings or other asset-building?
  1. Collateral. The pledge of assets taken as security against borrowed monies.
  • Can their assets back their debts? Is the property value supported in relation to down payment or would a co-signor provide additional comfort?
  1. Credit. An analysis of the credit history will give an indication of the ability and desire of the borrow to repay debts.
  • Do they pay bills on time? Is there sufficient repayment history to support this amount of debt?
  1. Character. Borrower’s stability in career, residence, and willingness to provide complete and accurate information.
  • How long have they lived at their present address and worked at current job? Do any of the other 5 C’s contain inconsistencies or cause to question the ability to lend? Would you lend them your own money?

Final note: the credit score you may have obtained from online services are often times different than the scores that we obtain for credit purposes. Don’t always rely on that to be 100% accurate. For more information about your credit score, and how it may affect your mortgage application, please contact me today.

 

Mark Brennan
Mortgage Broker

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Now offering: CHIP Reverse Mortgages

What is a CHIP Reverse Mortgage?

A CHIP Reverse Mortgage is a Canadian financial solution that benefits Canadian homeowners. The CHIP Home Income Plan, now called a CHIP Reverse Mortgage, has been available to Canadian homeowners since 1986 and is provided by HomEquity Bank, a Schedule 1 Canadian Bank.

It’s a financial solution designed for senior Canadian homeowners. Features include:

  • You can access up to 55% of the value of your home
  • You always maintain ownership of your home and never have to move or sell
    • The full amount only becomes due when you & your spouse pass away, when your home is sold, or if you decide to move
  • You can receive your tax-free cash over time or one lump sum
    • Does not affect your CPP, OAS, RRIF, or other benefits!
  • There are no payments required
    • If at any time you would like to repay the principal and interest in full or switch to paying interest on an annual or monthly basis, you can do that too (pre-payment charges may apply)

With close to 30 years of offering reverse mortgages, 99% of clients have equity remaining in the home when the loan is repaid. Below is an example illustrating the preservation of equity over a 15-year period.

This chart is an illustration for a client who owns a $300,000 home and took a lump sum of $100,000 with their CHIP Reverse Mortgage. The chart shows how the client maintains a large portion of equity in the home.

This is due to HomEquity Bank’s conservative lending practices combined with typical home appreciation, as well as a low interest rate environment.

equity-preservation-1
Calculations based on a CHIP rate of 4.75% and home appreciation of 3% annually

 

Contact Mark Brennan, Certified Reverse Mortgage Specialist for Reverse Mortgages to find out more!

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The Financial Consumer Agency of Canada (FCAC) also published a tip sheet article on their website with some good points to review, titled Understanding Reverse Mortgages.