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

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

Mortgages for Self-Employed Borrowers

Self employed people seemingly have two realities when seeking a mortgage these days: declare more income and pay higher taxes, or show lower income and pay higher interest rates. All in part to some major rule changes made in 2014 by OSFI (the Office of the Superintendent of Financial Institutions), who introduced a guideline change known as B-20 for FRFIs (Federally Regulated Financial Institutions) to follow. Even though the rule came into effect in 2014, lenders had until their fiscal year end to implement, which meant that we are just starting to truly see the effect of the changes recently.

“This Guideline sets out OSFI’s expectations for prudent residential mortgage underwriting.”

There were several recommendations OSFI sets out in these recent changes to mortgages, and we will focus on the specific changes to self-employed income earners, primarily – “Principle 3: FRFIs should adequately assess the borrower’s capacity to service his/her debt obligations on a timely basis”

OSFI’s Rule Change

OSFI: “A borrower’s income is a key factor in the assessment of their capacity to repay the mortgage loan, and verification of income helps detect and deter fraud. FRFIs should make reasonable inquiries and take reasonable steps to verify a borrower’s underlying income. This includes substantiation of:”

Notations in red highlight the comments below each OSFI point.

  • Employment status; and
    • To prove self-employment, there are a number of items available: business license, GST filing, corporate annual return, personal income tax returns including section T2125 – Statement of Business Activities, audited financial statements, articles of incorporation (or a recent corporation search from a Registry Office)
  • The income history of the borrower.
    • More below, typically a 2-year average

OSFI: “For borrowers who are self-employed, FRFIs should take reasonable steps to obtain income verification (e.g., Notice of Assessment) and relevant business documentation. In determining the reasonableness of the documentation used to support the income, sound practice suggests that:”

  • The income amount is verified by an independent source;
    • Typically, lenders are asking for this documentation to come from a third party source such as accountant-prepared financials. In the case of a sole proprietor, or those who prepare their own corporate tax returns, be prepared to supply additional supporting documents
  • The verification source is difficult to falsify;
    • This speaks to the first item; supplied documentation from third party
  • The verification source directly addresses the amount of the declared income; and
    • Verification can include Notice of Assessment (NOA) from Canada Revenue Agency (CRA)
    • If there are taxes owing, it will need to be paid prior or supply proof it has already been paid
    • Additional proof can be requested that include: previous NOAs from the year before for a 2-year average, personal income tax returns including section T2125 – Statement of Business Activities, or even business bank statements
  • The income verification information/documentation does not contradict other information provided by the borrower in the underwriting process.”
    • Pretty straight forward and this is what the verification is meant to serve in the process. An example would be if the NOA income does not match the income tax returns.

Option A: Verified Income

What lenders are seeking for an approval with verified self-employed income:

  • proof of self-employment for 2 years
  • prove type of business owned (landscaping, bookkeeping, etc)
  • prove ownership structure (sole proprietor or incorporation) and percentage of ownership
  • minimum 5% own down payment
  • 2 year’s of accountant-prepared financial statements
  • 2 year’s personal tax returns with T2125 Statement of Business Activities (sole proprietors)
  • most recent year’s and past year’s NOA’s to confirm no tax arrears and perform an average
  • additional documentation may be requested

With verified income, you can obtain regular mortgage terms, best rates, and obtain approval with as little as 5% down. If you are unable to supply these documents, then the application process will need to change to support a different approach.

Option B: Stated Income

Former guidelines have changed, and CMHC no longer supports Stated Income applications as of 2014 as well. That leaves insurer Genworth with their Business For Self Program Alt-A Program and Canada Guaranty’s (CG) Low Doc Advantage™ Program. Since CMHC’s exit from this program, Genworth has been the go-to, and not every lender is on board with using Canada Guaranty.

The highlights for this program are similar for the remaining insurers:

  • proof of self-employment for 2 years
  • prove type of business owned (landscaping, bookkeeping, etc)
  • prove ownership structure (sole proprietor or incorporation) and percentage of ownership
  • minimum 10% own down payment, none of which can be borrowed
  • reasonability of income used in relation to the length of time in operation, type and size of business, and should be able to debt service standard guidelines for GDS/TDS
  • include line 150 from most recent NOA
  • stated gross revenue from borrower’s business
  • no mortgage arrears in the past 5-7 years
  • no credit delinquencies in the past 12 months
  • no previous bankruptcies
  • commission sales income is not eligible under this program
  • recent year NOA confirms no tax arrears
  • additional documentation may be requested
  • higher than standard mortgage insurance premiums

It is quite a bit more paperwork than in the past from even 2 years ago, and the verification test of “reasonable income” in relation to actual-earned income has quashed many an application. Many lenders require an application be insured by the insurers from 10% down payment all the way up to 34.99% down payment using stated guidelines. In this case, 20% down does not bypass the insurable requirements for mortgage insurance. At the 35% point and more down payment, the rules lessen with traditional lenders using equity lending guidelines.

Option C: Alternative Lending

Lenders can be a bit more liberal, but here is where it can start to get expensive. Guidelines for approval with alternative lenders (sometimes known as “B” lender or subprime lenders) can include:

  • proof of self-employment for 2 years
  • prove type of business owned (landscaping, bookkeeping, etc)
  • prove ownership structure (sole proprietor or incorporation) and percentage of ownership
  • larger down payment, 25%-35% of the purchase price to not require the insurers premium
  • cost of an appraisal, as dependency will be on the collateral or property
  • recent year NOA confirms no tax arrears
  • business bank statements ranging from 3-12 months depending on lender’s policy or requirement
  • higher interest rates will apply based on risk-based pricing and down payment
  • additional documentation may be requested
  • lender and broker fees can also apply in most cases

This blog updates a previously published blog article from 2014 on the same topic with more detail pertaining to each option available. The guidelines presented are taken from various sources, and not intended to be all-inclusive of every lender policy available. Policy guidelines are fluid, often vary from the insurer’s basic requirements, and subject to change at any time. Check with your Broker or lender directly for specific examples to your individual circumstance. Have more questions? Let me know how I can help!

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