There’s been a lot of changes in the mortgage market over the last few months. If you’re a homeowner, you’ve probably noticed…but you may not know what they all mean for you and your long-term plans.
These news rules should not deter you from purchasing a home or refinancing! Quite the contrary. The new set of rules actually offers more protection to homeowners. I’ve summarized the main points below to help you better navigate the often-tricky world of mortgage rates and regulations.
- New qualification rules came into play in October where even though actual contact rates are sitting at 2.79%. All Canadians have to qualify at the Bank of Canada Benchmark rate of 4.64% in order to prove that payments can still be met when the rates go up in the future. Doing so, it will take 20% of people’s purchase power out of the equation.
- There is a second round of rules which were implemented at the end of November with the government requiring banks to carry more of the cost of lending that has to do with how they utilize mortgage insurance and the level of capital they have to have on reserve.
This means that a bank now must have more capital in their reserve to cover the costs of the mortgages they lend out. This means it’s more costly for banks to lend so they are passing some of that cost to Canadians.
- The result is a rate-pricing system based on whether you are “insurable” and meet new insurer requirement to qualify at 4.64% with a maximum 25-year amortization or are “uninsurable” where you may have more than 20% down but can’t qualify at the benchmark rate or need an amortization longer than 25-years to qualify or are self-employed and can’t meet traditional income qualification requirements.
Canadians who are uninsurable will be charged a premium to their rate of anywhere from 15-40 base points – this means the percentage change in the value of a rate. So your rate would go from 2.79% to 2.94% at the very least.
This protects the banks from defaults, but also protects the consumer in the long run; the less people default on their loan and the more reserve banks have, the lower rates will stay.
- The Canadian Mortgage and Housing Corporation (CMHC) announced that they are increasing mortgage premiums as of March 17th. The other two Canadian insurance companies are likely to follow, Genworth and Canada Guaranty. The insurance premiums are based on a percentage of the mortgage amount requested and how much you have put down. For people with 5% down the premium will go from 3.60% to 4.00%.
The lesson here is, more down equals a lower rate, which has always been the case. For too long, mortgage rates have been a free-for-all of lending and borrowing more than what anyone can reasonably and comfortably afford, with refinancing and second mortgages becoming a common occurrence. This is not good for anyone.
Overall these 4 changes will make mortgages more costly and confusing. With the complexity of the new mortgage market, now more than ever buyers need someone with extensive knowledge such as myself to help you get the right finances and find the right deal to purchase your dream home.