On February 16th Finance Minister Flaherty, announced some changes to “insured” mortgage lending in Canada. These changes affect mortgages insured by CMHC, Genworth and AIG United Guarantee.
From the Globe and Mail: Finance Minister Jim Flaherty Tuesday announced tighter lending standards for mortgages, saying that while the housing market is healthy and there's no solid evidence of a bubble, the moves are needed to “help prevent negative trends from developing.”
The intent of the changes is to preserve the integrity of the Canadian Housing Market and to ensure Canadians will continue to find housing affordable despite the increases in interest rates which we must be prepared for.
Gentles Comment: From sixteen economists we could hear twenty opinions and some suggest that fixed rates could begin to rise before the end of June 2010 in anticipation of increases to Prime beginning in the third quarter. Others suggest that based on the growth in GDP, employment rates, money market and bond yields, exchange rates and analysis of past recessions -- that the rise in rates will not be before mid 2011. Sorry – no crystal ball on this one. How high will rates go? There seems to be some consistency of opinion that rates will peak 3-4% higher than rates today.
So if the 5 year is 3.89% today then rates could double. What does that do to a mortgage payment in 5 years? Here is a rule of thumb:
$300k mortgage, 35 years. At end of 5 years on the outstanding balance, if interest rates double then payments increase by 50%.
We don’t have all the details yet but here is a summary of the changes and my comments on how these changes will impact borrowers. The effective date of the changes is April 19th, 2010.
There will apparently be exceptions granted after April 19th where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19th, 2010.
Change: The debt servicing or “affordability ratios” will now be calculated using the 5 year fixed rate even if the mortgage is to be for a shorter term or if the mortgage is going to be on a variable or adjustable rate.
Gentles Comment: In Canada the affordability or debt service ratios have been calculated using the 3 year rate for many years. The intent was to make sure that even as rates changed that our Canadian homeowners would not be subject to large “payment shock”. So this change is fairly minor. It was in the United States that borrowers were qualified on very low rates for floating rate mortgages. The Canadian Government has not yet clarified whether they expect lenders to use the 5 year posted or the 5 year discounted rate. As a benchmark those rates today are 5.49% and 3.89%. The three year rates are 4.5% and 3.5% respectively. It was not uncommon for lenders to use the 3 year posted rate for qualification purposes. Many Canadians did their pre-approvals based on the 5 year fixed rate anyways; even if they did choose a floating rate mortgage once they had selected the home they wished to purchase.
Before the housing crisis in the US the “90 days arrears rate”, counting mortgages with payments 90 days overdue was 2 in 100. At the same time in Canada the 90 Day Arrears Rate was 2 in 1,000. Today the Canadian rate is only 3 in a 1,000 but the US rate has increased dramatically to 9 in a 100. So clearly, the level of concern in Canada is nowhere near the level of concern in the US.
Change: Refinances will be limited to 90% of current market value vs. 95% of current market value.
Gentles Comment: 95% refinances of insured mortgages have only been possible for a short period of time in my experience very few people have refinanced to 95%.
Change: The minimum down payment for investment or revenue properties has increased from 5% to 20%. This does not apply to someone buying two sides of a duplex or all three or four units in a tri-plex or four-plex where they will be occupying one of the units.
Gentles Comment: The high ratio (CMHC) insurance premiums have always been considerably higher on revenue property as compared to owner occupied property. As a result we have used strategies such as equity takeouts on principal residences or other revenue property, or 2nd mortgages, to achieve 20% down payments on revenue property and avoid the CMHC premiums altogether.
Certainly these changes will impact some borrowers. It may take some first time buyers a little bit longer to become prepared for their first purchase, their first mortgage. As mortgage professionals we are pleased that the Government did not increase the minimum down payment to 10% and did not reduce the maximum amortization to 30 years. These ideas had been on the table for discussion.
I encourage existing mortgage borrowers to look at strategies to pay down their principal faster. Always happy to share ideas.
If your current mortgage rate is 5% or higher and your renewal is within the next 2-3 years then it may make sense to pay the penalty now to renew for a new 5 to 10 year term at today’s rates. Again, we are always happy to walk through the analysis with you.
If you, or other homeowners are carrying non-mortgage debt at rates 8% to 18% to 28% then it could certainly be worthwhile to look at a refinance. We’ve helped people achieve significant reductions in interest expense, we’ve improved cash flow and some of that cash flow has gone into paying off principal faster.
The market is excellent for buyers also. Adjustable rate mortgages at Prime minus .35% with 120 day rate holds and the opportunity to “lock in” for 5 years or longer at any time without cost or penalty; based on the 5 year rate in effect on the day you make the decision to “lock in”.
We look forward to your call. Thank you.
Brian Gentles AMP
Alberta Broker - Alberta Regional Manager
Mortgage Sub-broker – British Columbia
Home n Work Mortgages Inc.
Licensed Mortgage Originator in Alberta and British Columbia
Direct Calgary 403.216.8302 Toll Free 1.866.273.6192
Fax Calgary 403.398.1401 Toll Free 1.866.273.6194
Alternate Fax 403.238.2240 Mark Attn: Brian Gentles
e: brian.gentles@telus.net
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