June 10, 2012
Since the credit crisis began in 2007, the Department of Finance has been fairly aggressive at clamping down on mortgage lending. We saw the first round of changes back in 2008; followed by a second round in 2010 and a third in 2011. Today, Finance Minister Jim Flaherty has announced the fourth round of mortgage restrictions in four years!
Starting today, borrowers with less than 20% downpayment will no longer be able to get a prime-mortgage using a 30-year amortization; the maximum amortization will now be 25 years. Refinancing will be reduced from 85% LTV (loan to value) to 80% (no change to purchases). In addition, the government will:
Limit the maximum gross debt service (GDS) and total debt service (TDS) to 39% and 44% respectively (Currently, GDS does not apply to qualified borrowers with credit scores of 680+), and Ban mortgage insurance on properties over $1 million.
These rules are a “judgement call” says Flaherty. They’re meant to “lower risk” for taxpayers and curb excessive household debt, which is Canada’s biggest economic risk. The above initiatives are in addition to pending mortgage restrictions, which will dampen home-buying demand even further.
The impact of these guidelines is equivalent to well over a percentage point (increase) in mortgage rates. However, these guidelines are less concerning than the government’s original draft (which proposed things like re-qualifying for a mortgage upon renewal). In many ways this news isn’t as market-shaking as today’s announcement by Finance Minister, Jim Flaherty. That said, here are additional changes worth mentioning (Note – this applies to federally regulated lenders only):
HELOCs (home equity lines of credit):
The maximum loan-to-value on a HELOC will drop from 80% to 65%. That will sting borrowers who leverage HELOCs for productive purposes (e.g., as substitutes for open mortgages, or as a low-cost borrowing source for income-generating investments or small business). However, lenders can still provide a 15% amortizing mortgage on top of a HELOC, for 80% loan-to-value total. Existing HELOCs are not affected, but future offerings are subject to the limits.
The qualifying rate is being toughened for conventional mortgages. For variable rates and fixed terms less than five years, it will be “the greater of the contractual mortgage rate or the five-year benchmark rate published by the Bank of Canada.” This will push a small number of borrowers into 5-year fixed mortgages because they won’t qualify for shorter terms.
Going forward, all self-employed borrowers must provide “reasonable” income verification (e.g., a Notice of Assessment). Most lenders already have such policies. It appears that true “no-income documentation” stated income mortgages are officially a thing of the past at mainstream lenders.
“Cash back should not be considered part of the down payment,” says OSFI (Office of the Superintendent of Financial Institutions. This effectively eliminates 100% financing, and is one of the most common sense guidelines of them all.
As always, feel free to contact me directly with any questions or concerns pertaining to the above!
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