To understand financing options for conventional borrowers – just ask me. In October 2016 the Federal Government announced some significant changes to mortgage rules for high ratio borrowers. Changes for high ratio mortgages took effect Oct 17th. Changes for conventional borrowers took effect Nov 30th. These changes will result in tighter guidelines to qualify for a mortgage, pressure on rates and may impact home prices in a market which has already been softening in recent months.
Let’s clarify the difference between a high ratio and conventional mortgage so we are all on the same page.
A high ratio mortgage occurs when a borrower has less than 20 percent down payment for their property purchase. The mortgage must be insured through one of the main insurers and the client pays a one-time premium which is rolled into the mortgage. A conventional mortgages occurs when a borrower has more than 20% down payment which means the mortgage does not require insurance coverage and no additional premium cost. In the case of rental properties or special mortgage programs an insurance premium can apply at a cost to the borrower.
Effective November 30th, all conventional borrowers are required to qualify at the benchmark rate (currently 4.64 percent) and a maximum of 25 year amortization for all mortgage terms if the lender is insuring the mortgage. In recent years banks and credit unions have opted to insure some of their conventional mortgages through CMHC, Genworth or Canada Guaranty. Mortgage companies are required to insure their portfolio of mortgages through these insurers if they source their funds through investors rather than using their own money. Since they are not a bank they do not have deposits to savings or chequing accounts. With an insured mortgage the lender transfers their risk of lending to the insurer in the event of default by the borrower. The mortgage is granted with insurance coverage and includes a mortgage premium. The lender covers the cost of this insurance so many borrowers would not have any idea if their conventional mortgage was insured or not.
Because mortgage companies insure their mortgages the announcement of the new rules had an immediate impact on their business and what they can offer as competitive products to consumers. Banks have the option to but don’t have to insure their conventional mortgages and can follow the previous rules for qualifying at contract rates and 30 year amortizations. However as expected, the banks have announced a premium to the interest rate for borrowers to access the 30 year amortizations. So rates have increased for all mortgages over the past couple of weeks by 20 basis points, for 30 year amortizations an additional premium will be added and a further premium for rental properties. Bottom line the cost to borrower has increased.
Over the past 20+ years the increase of mortgage companies has created competition for the banks. There are some concerns these changes to mortgage rules will mean the exit of some mortgage companies from the market place and limit the competition for consumers on rates and products. We have seen rate increases in the past few weeks which may be in part in response to the changes. Although after the fiscal year end of October 31st rates typically rise so this may be a non-event. As the deadline for the new rules for conventional mortgages passes some mortgage companies who fund with their own money have announced shifts to their products and rates to offer competitive options to consumers. The good news is there is always the power of choice.
I will continue to work with the banks, credit unions and mortgage companies so nothing has changed in that regard – business as usual.
As an independent mortgage broker I can access all lending options including 30 and 35 year amortizations. In addition there are solutions for rental property owners, financing options for self-employed people and alternative financing for those borrowers who do not fit within traditional offerings. Now more than ever it is important for consumers to consult with your mortgage broker to review any important aspects of your financial picture, address any concerns and source best solutions.
For assistance with your high ratio mortgage or to understand financing options for conventional borrowers – just ask me.
