The latest mortgage rules: the good, the bad and the ugly and how it will impact your own mortgage
As of November 1, 2012, the Office of Superintendent of Financial Services (OSFI), has brought new mortgage rules to restrict qualification and curb Canadians' household debt to protect the Canadian economy from a US style housing correction. Here is what you need to know:
1. Cashback Mortgage
Cashback cannot be used for downpayment, only for closing costs. Downpayment must be from own resources or gifted from family (parents or siblings) only.
2. Home Equity Line of Credit (HELOC)
Restricted to 65% of home value. One can have a mortgage of 15% of home value bringing the total to 80% (65% HELOC + 15% mortgage) as long as HELOC does not exceed 65%.
3. Mortgage Qualifying Rate
1-4 year fixed mortgages and variable mortgages to qualify at Bank of Canada benchmark rate (in other words 5 year posted rate). This will make it very difficult for Canadians to qualify for shorter term mortgages and variable mortgages. How will anyone qualify for a variable mortgage when when the 5 year posted rate is at 6-7% range? I hope OSFI would revisit this rule in the future.
4. Self Employed Mortgage
The maximum allowed loan to value (mortgage and HELOC) for stated income applicants is reduced to 65%. Stated income programs are for business owners who maximize their tax write offs to reduce taxable declared income. Commissioned applicants such as real estate agents and mortgage brokers do not fall under the self employed program unless they have an incorporated business.
For applicants with 680+ beacon credit score, the maximum GDS/TDS is 39/44. For applicants with less than 680 beacon credit score, the maximum GDS/TDS is 35/42.
As you can see the new mortgage rules restrict qualification and might not be popular with various groups of Canadians, however they are designed to protect the economy since a significant real estate correction would have a major impact on employment numbers. In my opinion, the new rules unfairly penalize self employed Canadians since they will be forced to access funding through secondary more expensive channels; alternative and private lenders.
To discuss how the new mortgage rules impact your qualification whether you are a first time home buyer or self employed, please email Nawar.
The Minister of Finance, Mr. Flaherty, announced today the following regarding insured mortgages which will take effect on July 9, 2012:
- Refinances will be limited to 80% of home value from 85%
- Maximum amortization will be lowered to 25 years from 30 years
- GDS limited to 39% (currently no GDS requirement for 680+ credit scores) and TDS to 44%
- Mortgages over $1 million will no longer be insured
Here is how these changes will impact the following groups:
First Time Buyers
- They will be squeezed out of the market if they don't have the 20% downpayment. Qualifying at 25 years, especially in Toronto, is difficult due to home prices in the city (condo fees are taken into account when qualifying for a mortgage as well)
- More potential first time home buyers will turn into longer term tenants which is good news for real estate investors
- Parents, get ready to co-sign for your children if they want to buy their first home
Real Estate Investors
- Since more first time buyers will have to wait for their first home, the tenant pool will increase. This is good news since more demand results in higher rental income
- Qualifying for additional investment properties should not change since government requires minimum 20% downpayment. This is pending conventional mortgage amortization is not lowered to 25 years. Please note there are lenders offering 35 year amortization for investment properties.
- If one has 20% equity or more in their home, 30 & 35 year amortized mortgages are available for now. The changes are not impacting this group, but we will have to wait and see if lenders will reduce mortgage amortization to 25 years
This announcement came out of nowhere and it surprised many. If this announcement is intended to cool off investors buying condos in downtown Toronto, I'm not sure it will achieve that since the changes are targeted towards insured mortgages only. Furthermore, this change gives the Bank of Canada room to hold its benchmark rate steady for a longer period of time due to a slowing global economy. I believe since the Bank of Canada's hands were tied, Minister of Finance came in to help control the high household debt level.
There will be more clarifications coming out in the next few days from the lenders which I will elaborate on. To discuss how these changes will impact your mortgage financing, please contact me.
OSFI, Office of the Superintendent of Financial Institutions, which regulates the banking system in Canada is proposing to limit the home equity lines of credit (HELOCs) to 65% of home value from the current 80%. This is a significant change for the following reasons:
- Real estate investors access their home equity to finance investment properties (downpayment for buying an investment property, renovating an investment property until the property is refinanced and emergency funds if required)
- Self employed Canadians access their home equity to fund business capital requirements, cash flow requirements, as well as safety net if urgent matters arise
Canadians have taken on significant amounts of debt over the last few years (debt to income ratio is at all time highs around 1.5:1 ratio), however the mortgage delinquency rate in Canada is less than 1%. The new HELOC change will have a significant impact not only on self employed Canadians and real estate investors but also other Canadians who use their HELOCs to invest into the stock market to create a tax deductible loan and be tax efficient.
In my opinion, OSFI is overreacting by reducing HELOCs to 65%. 75% of home values would be a reasonable change. Afterall, Canada is known for moderate changes. Time will tell if this move is a good one for the economy and protects the housing market from a real estate bubble.
To discuss how these changes will impact your mortgage financing needs and options to address your capital requirements, please contact me.