October 12th, 2016
Dominion Lending Centres breaks down the new changes to the mortgage space, answering your most asked questions.
Why is the Department of Finance implementing these new changes?
These new regulations are aimed at protecting the financial security of Canadians and supporting the long term stability of the housing market in Canada.
What is an Insured Mortgage (High Ratio) vs. a Non-Insured Mortgage (Conventional Low Ratio)? An Insured Mortgage is when a home buyer has less than 20% down or the mortgage, is insured by either Canada Mortgage and Housing Corporation (CMHC), Genworth, or Canada Guaranty. The insurance premium is passed on to the borrower. This insurance provides security to the Lender in the event of home buyer default.
A Non-Insured Mortgage is when a home buyer has 20% or more for a down payment and therefore is not required to pay mortgage insurance.
Currently insured mortgages with a term of less than 5 years, and/or a variable rate mortgage had to qualify on the Bank Of Canada (B.O.C) rate. Under the new Department of Finance regulations, all insured mortgages, regardless of term (fixed or variable) will now have to qualify on the B.O.C rate.
How does this affect a home buyer with less than 20% down payment?
The biggest effect will be on the amount that the home buyer will be able to qualify for. Previously, the five year fixed mortgage qualified at the lender contract rate. Now, the home buyer must qualify at the Bank of Canada Rate.
Previously, for example, a five year fixed rate mortgage at 2.39% rate was qualified at a 2.39% rate. Under the new rules a five year fixed rate mortgage at 2.39% must be “stress tested” by qualifying at the B.O.C posted rate (currently 4.64%)
The net result is an approximate 20% reduction in the amount of mortgage money available.
How does this affect a home buyer with a down payment of 20% or more?
There is no significant impact anticipated for home buyers placing 20% or more down. Dominion Lending Centres has many different options and there is still a variety of solutions for the majority of home buyers.
Do I still have the option to refinance my home?
Yes, home buyers will still have the ability to refinance up to 80% of the value of their property. Specifics may differ from lender to lender.
The new criteria for low-ratio conventional mortgages will include the following requirements:
- Property must be owner occupied – rental properties are now excluded
- A maximum amortization of 25 years
- A maximum property purchase price of, or below, $999,999.99
- Minimum credit score of 600
- Maximum gross debt service (GDS) of 39% of home buyer’s income and a total debt service (TDS) of 44% calculated by using the Bank of Canada conventional 5 year fixed posted rate.
New reporting rules for the primary residence capital gains exemption
Currently, any financial gain from selling your primary residence is tax- free and does not have to be reported as income. As of this tax year, the capital gains tax is still waived, but the sale of the primary residence must be reported at tax time to the Canada Revenue Agency.
Who does it affect?
Everyone who sells their primary residence will have a new obligation to report the sale to the CRA; however, the change is aimed at preventing foreign buyers who buy and sell homes from claiming a primary residence tax exemption to which they are not entitled.
While officials say more data is needed, Ottawa is responding to extensive anecdotal evidence and media reports showing foreign investors are flipping homes in Canada and falsely claiming the primary residence exemption.
Now more than ever, home buyers are going to rely on mortgage brokers for their guidance and expertise in navigating through these regulatory changes.
There are differences among the many Lenders that we have access to and the greatest value a broker can provide is the knowledge of the lending environment and in choosing which Lender is best suited for your needs.
These new rules and regulations implemented by the Department of Finance were abrupt and without consultation. Dominion Lending Centres will continue to report and educate our mortgage brokers and our home buyers as new data arises.
For our most up to date blog posts, and industry updates please visit www.dominionlending.ca/newrules
How much home can you afford with a benchmark qualifying rate of 4.64%?
|Annual Gross Income
|| 5% down
|| 10% down
|| 20% down
NOTES: 32% of the indicated gross income is used to calculate the borrowers maximum shelter expenses such as mortgage payments, taxes, utilities and condo fees. In addition, the chart assumes that borrowers spend no more than an additional 8% to 10% of their gross income on non-shelter debt obligations.
This data is for information purposes only and should not be relied upon without verification by contacting your Dominion Lending Mortgage Consultant.
The above discounted rate is not an offer or a rate commitment. APR assumes no fee(s) apply. Should any fee(s) apply the APR would increase.
The above information is based on a 25 year amortization period.
Note: This information is based on information acquired from Dominion Lending Centres. For more info as it becomes available, please contact Gemma Riley Laurin at 613-845-0786 | firstname.lastname@example.org .
“Royal Bank of Canada is set to raise rates on several of its mortgages, the latest in a series of changes to the mortgage industry that could help cool the housing market this year.
Starting Friday, the bank said it planned to increase rates on fixed mortgages of between two and five years by 10 basis points. (A basis point is 1/100th of a percentage point.) RBC’s five-year variable rate will increase by 15 basis points.
The move reflects RBC’s discounted rate specials given to customers who qualify, and pushes its five-year fixed rate up to 3.04 per cent. No other major Canadian banks announced matching rate increases on Tuesday, although lenders often closely follow each other in changing mortgage rates.
RBC’s move comes amid sweeping changes by federal regulators last month to curb soaring home prices in cities such as Toronto and Vancouver, including hikes to minimum down payment rules, higher costs to lenders who securitize and sell their federally insured mortgages and a proposal by the Office of the Superintendent of Financial Institutions to require banks to hold more capital against some mortgages.
In an e-mailed statement Sean Amato-Gauci, RBC’s senior vice-president of home equity financing, said rate increases weren’t a response to the recent federal rules changes, but “reflect a number of factors (beyond the bond yield), including changes in market conditions driving increased short-term funding costs and long term/wholesale funding costs.”
Funding costs to mortgage lenders have increased in recent months amid intense competition for deposits and from investors who have started demanding greater risk premiums for bank debt.
But the recent regulatory changes, which have yet to take effect, are also putting pressure on banks, said Robert McLister, a mortgage planner at intelliMortgage Inc. and founder of RateSpy.com. “To a certain extent lenders are pricing that in, in advance,” he said. “These are real behind-the-scenes factors that are inflating lenders’ funding costs.”
This article is reproduced from The Globe and Mail and posted here in case you missed it.
News from CMHC that will affect some of us. It’s best to be aware.
OTTAWA, February 28, 2014 — Following the annual review of its insurance products and capital requirements, CMHC will increase its mortgage loan insurance premiums for homeowner and 1 – 4 unit rental properties effective May 1, 2014.
The increase applies to mortgage loan insurance premiums for owner occupied, self-employed and 1-to-4 unit rental properties, including low-ratio refinance premiums. This does not apply to mortgages currently insured by CMHC.
CMHC’s capital management framework is consistent with international practices and Canadian guidelines for mortgage insurers. Increased capital targets are consistent with Canadian and international industry trends and makes the financial system more stable and resilient.
“The higher premiums reflect CMHC’s higher capital targets” said Steven Mennill, CMHC’s Vice-President, Insurance Operations. “CMHC’s capital holdings reduce Canadian taxpayers’ exposure to the housing market and contribute to the long term stability of the financial system.”
For the average Canadian homebuyer requiring CMHC insured financing, the higher premium will result in an increase of approximately $5 to their monthly mortgage payment. This is not expected to have a material impact on the housing market.
Effective May 1st, CMHC Purchase (owner occupied 1 – 4 unit) mortgage insurance premiums will increase by approximately 15%, on average, for all loan-to-value ranges.
Standard Premium (Current)
Standard Premium (Effective May 1st, 2014)
|Up to and including 65%
|Up to and including 75%
|Up to and including 80%
|Up to and including 85%
|Up to and including 90%
|Up to and including 95%
|90.01% to 95% – Non-Traditional Down Payment
CMHC reviews its premiums on an annual basis and, going forward, plans to announce decisions on premiums in the first quarter of each year. The homeowner premium increase follows changes CMHC made to its portfolio insurance product earlier this year.
As Canada’s national housing agency, CMHC draws on more than 65 years of experience to help Canadians access a variety of quality, environmentally sustainable, and affordable housing solutions that will continue to create vibrant and healthy communities and cities across the country.
For additional highlights please see attached backgrounder and key fact sheet.
- Mortgage loan insurance helps protect lenders against mortgage default and enables consumers to purchase homes with a minimum down payment of 5% with interest rates comparable to those with a 20% down payment. Mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price.
- CMHC mortgage loan insurance premium is calculated as a percentage of the loan based on the loan-to-value ratio. The premium can be paid in a single lump sum but more frequently is added to the mortgage principal and amortized over the life of the mortgage as part of regular mortgage payments.
- CMHC reviews its premiums on an annual basis and has adjusted them several times since being commercialized in 1998. Adjustments have included both increases and decreases to the premiums.
- CMHC’s new premium rates will be effective for new mortgage loan insurance requests submitted on or after May 1, 2014. The current mortgage loan insurance premiums will apply for applications submitted to CMHC prior to May 1, 2014, regardless of the closing date. As is normal practice, complete borrower and property details must be submitted to CMHC when requesting mortgage loan insurance.
- The increase applies to mortgage loan insurance premiums for residential housing of 1-to-4 units. This includes owner occupied, self-employed and 1-to-4 unit rental properties, including low-ratio refinance premiums.
- In 2013, the average CMHC insured loan at 95% loan-to-value was $248,000. Using these figures, the higher premium will result in an increase of approximately $5 to the monthly mortgage payment for the average Canadian homebuyer. This is not expected to have a material impact on the housing market.
|Increase to Monthly Mortgage Payment
Based on a 5 year term @ 3.49% and a 25 year amortization
*Premiums in Manitoba, Ontario and Quebec are subject to provincial sales tax — the sales tax cannot be added to the loan amount.
|Increase to Monthly Mortgage Payment
Based on a 5 year term @ 3.49% and a 25 year amortization
*Premiums in Manitoba, Ontario and Quebec are subject to provincial sales tax — the sales tax cannot be added to the loan amount.
For more information visit http://www.cmhc.ca/en/hoficlincl/moloin/moloin_013.cfm
Fixed-rate mortgages are experiencing an increase in rates, according to an article published by CBC News. Royal Bank is just one of several big Canadian banks moving to increase their rates, which is being done as a reaction to higher borrowing costs on the bond market. The rates are closely tied to the bond market, as this is where many banks finance their fixed-rate mortgages. Closed rate mortgages will see the hike in terms of small percentage increases, but even slight increases can add up over time.
Click here to read the full article from CBC.
For a chart showing the “slow fall” of Canada’s mortgage lending rates, visit http://www.cbc.ca/news/interactives/mortgage-rates-fixed/
5-year rate hiked to 3.29%
Canada’s largest lender has raised its residential mortgage rates by a few basis points.
Starting Monday, many of Royal Bank’s fixed-rate mortgages will be higher. The bank is hiking its special four-year closed rate offer higher by 10 basis points, to 3.09. The standard one-year closed will increase by 14 basis points to 3.14, the two-year closed will also be 3.14 per cent (up 10 basis points in that case) and the three-year closed fixed rate mortgage will increase by 10 basis points to 3.65.
Most significantly, the bank’s benchmark five-year fixed-rate mortgage rate will increase by 0.2 percentage points, to 3.29 per cent.
The five-year rate is by far the most common mortgage rate selected by first-time home buyers.
The hike sounds like an incremental difference, but it can add up fast. Under the old rate, a $300,000 mortgage for 25 years would cost just over $1,433 a month. Under the new rate, that same mortgage would cost $1,464 a month — that’s $31 more per month, every month, or more than $9,300 over the 25-year life of the mortgage.
The move is a reaction to increases in the bond market, where the banks have seen their borrowing costs tick higher of late. Increasing consumer lending rates is the bank’s way of passing those costs on to consumers. Royal’s rivals are likely to follow.
In contrast to fixed-rate mortgages, which are largely set by the bond market, variable rate mortgages are more dependent on the rate the Bank of Canada sets every six weeks.
In March, Finance Minister Jim Flaherty caused a mini furor when he urged BMO and Manulife to rescind their temporary offers of a five-year mortgage rate below three per cent, something he worried would encourage reckless borrowing.
BMO quietly allowed its offer to expire naturally, but Manulife rescinded its offer after pressure from the Department of Finance.
Article source CBC June 9th, 2013
This is from the Ottawa Business Journal
Finance Minister Jim Flaherty is coming under fire for using his position to pressure a private sector mortgage lender to raise its interest rates.
“That’s Banana Republic behaviour,” said NDP Leader Tom Mulcair, who added the minister has no business interfering with the free marketplace.
Liberal interim leader Bob Rae called the minister’s actions “ridiculous” and in essence working to increase borrowing costs for Canadians.
“Either we have a market or we don’t,” he said. “The banks have huge profits. The idea that they shouldn’t be able to give a break to consumers is ridiculous and the idea that the Minister of Finance would basically be trying to create some kind of a cartel among the banks and the financial institutions as to what they can offer consumers by way of interest rates is I think completely inappropriate, completely wrong actually.”
On Tuesday, Flaherty admitted he asked a member of his staff to phone Manulife Financial Corp. (TSX:MFC) after it had cut its posted rate for five-year fixed mortgages to 2.89 per cent from 3.09 per cent.
The company quickly reversed its decision, saying only that “after consulting with the Department of Finance, Manulife Bank has withdrawn the promotional campaign and reverted to our previous posted rate.”
It’s the second time in a few weeks that Flaherty interfered in the mortgage market. Earlier in the month, he called the Bank of Montreal (TSX:BMO) after it had dropped its posted five-year rate to 2.99 per cent, but on that occasion BMO did not reverse itself.
Afterwards, he thanked other institutions for not following the BMO lead, at least until Manulife’s brief discounted offering.
Since the government tightened mortgage rates in July, Canada’s housing market has slowed considerably in terms of sales, starts and even prices. Two weeks ago, the Bank of Canada signalled it was no longer as concerned about Canadian debt levels, saying it does not expect the situation to worse appreciably from its current high levels.
Slowing home sales and credit, however, has intensified competition among financial institutions and banks for a dwindling slice of the mortgage market, a relatively safe and lucrative sector of the industry.
Flaherty told reporters he acted with Manulife to keep lenders from taking on risky loans and was happy with the company’s subsequent decision.
“As I said before, we encourage prudent lending practices, we don’t want a race to the bottom on mortgage rates by our financial institutions so I’m pleased at their response,” he said.
“I had one of my staff call them and indicate my displeasure, which is the same thing I did with the BMO except I called myself.”
But the opposition leaders said the government has no right to interfere in the free marketplace once it sets the ground-rules. To act otherwise is to substitute its opinion for that of the players in the market.
“That company is operating completely with full respect of the law, they see an advantage in attracting clients at this rate, why shouldn’t they go out to do that?” Mulcair asked.
“It’s none of his business. It’s the minister’s opinion, it’s nuts. We’ve never seen this before.”
Flaherty has for the past several years complained that Canadians are borrowing beyond their means, particularly on mortgages, and worried they will be trapped once interest rates start to rise.
To slow down borrowing, he has tightened the rules on four occasions, reducing the amortization rate to 25 years from a historic high of 40 years, which was reached under Flaherty’s watch.
As well, he has asked the federal watchdog on financial institutions to enact stricter lending practices and controls.
While the first three attempts did little to slow down the housing and credit growth, the last move in July seemed to accomplish the trick. The market has been on a steady downward slide ever since, with analysts predicted prices may fall between 10 per cent and 25 per cent over the next few years.
The central bank notes that credit growth has also slowed, adding it expects household debt to disposable income to remain at or near the record level of 166 per cent, where it has been the past two quarters.
But while the Conservatives have apparently succeeded in pricking the housing bubble, one of the offshoots of the policy has been to slow down economic growth to below two per cent.
By Robert Hof
In July of 2012, the federal government implemented new, tougher regulations surrounding mortgages, including shortening the maximum amortization period on insured mortgages from 30 to 25 years, and limiting refinancing to 80% of a home’s value, from the previous 85%. The new guidelines were instituted as a measure to cool what was feared to be an overheating housing market. Shorter amortization periods have proven to have a significant impact on first-time home buyers, effectively increasing the monthly payment on a given mortgage.
Jim Murphy, the head of the Canadian Association of Accredited Mortgage Professionals (CAAMP) recently made efforts to convince finance department officials that the new regulations were a step too far. His suggestions are to resume insuring mortgages with 30 year amortizations (with the caveat that the borrower must qualify for a 25 year amortization) and to increase the $750 tax credit that first-time buyers receive.
Although the finance department has not released a comment at this time, it is the belief that the likelihood of these steps being taken is low. Finance Minister Jim Flaherty has previously stated that he is pleased with the results that tightening the mortgage legislation has produced, and that his concern for inflating house prices remains.
Click here for the full article from the Globe and Mail.
I received this Toronto Star article from our great mortgage specialist, Gemma Riley-Laurin, who wrote the intro. The link to the complete article is at the end of Gemma’s piece. Robert.
“This is a great article explaining why a collateral mortgage may not be in your best interest, long term. TD, Scotia, ING, National Bank and RBC offer “collateral mortgages”. “Collateral Charge” is a type of registration. Most lenders will register a Home Equity Line of Credit or HELOC as a collateral as it can be re-drawn in the future.
A “collateral” registration for a mortgage means that you cannot have the mortgage “assigned” or “transferred” to another lender at maturity. You as a consumer would have to go to the cost of legal fees to bring your mortgage elsewhere. The option to register as a “collateral” reduces your overall competitive advantage in the future.
Some lenders “ING and TDCT) have taken the position that ALL of their mortgage be registered as “collateral” mortgages. This should be explained at the time of application, but we believe it is not. Most consumers do not cover this topic. “
The story behind Jim Flaherty’s recent announcement:
The looming damage from Europe’s banking crisis was front and centre Thursday as Finance Minister Jim Flaherty and Mark Carney, the central bank governor, went public in a joint campaign to head off runaway inflation in the overheated housing sector.
“There’s grave concern about the economic recovery in Europe,” Flaherty told reporters after announcing measures to take some of the steam out of Canada’s mortgage market. “I’m concerned, obviously, that we may get a shock from Europe.”
It was a tacit admission the economy is too iffy to allow the Bank of Canada to raise interest rates, which would drive up borrowing costs and reduce the risk of too high inflation in real estate.
The extent of the danger from Europe’s mess was evident everywhere Thursday. Global stocks fell more than 1 percent and Brent crude hit its lowest point since December 2010 following data showing manufacturing in three of the world’s biggest economies, China, Europe and U.S., had slowed further.
Despite the U.S. Federal Reserve’s promise this week to extend its stimulative “Operation Twist” program, U.S. stock indexes suffered their worst day Thursday since June 1. Gold was on track for its biggest decline in more than three months on global economic worries, and the TSX slumped 350 points, its biggest one-day drop since November.
“The genesis is Europe and it’s starting to flow through everything now. Business has slowed down,” said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.
The decision on mortgage-lending follows this week’s G20 summit in Mexico, where Flaherty, Carney and Prime Minister Stephen Harper spent two days grappling with the European Union’s long-stalled effort to overcome the alarming financial breakdown on the continent.
“We just came back from the G20 meeting of leaders and finance ministers and the reality is that the European situation is very challenging, to put it mildly,” Flaherty said. “So my job is to look at our own country and look at the residential real estate market and make the best judgment that we can.”
Earlier this year, Carney warned Canadians the central bank was looking to push up their borrowing costs to head off a burst of price inflation. But a few weeks ago he changed his tone, suggesting as long as Europe’s problems continue to undermine the global recovery, he would have little choice but to keep the bank’s trend-setting interest rate at or near the current 1 per cent to spur economic expansion at home.
Still, Carney and Flaherty are worried historically low interest rates are enticing Canadians to take on dangerously high levels of debt, particularly in home-buying. So the Harper government is trying to offset the negative impact of the central bank’s pro-growth low-interest rate policy by making it harder for Canadians to take out mortgages.
In a speech in Halifax, Carney chimed in, “Federal authorities have taken additional prudent and timely measures to support the long-term stability of the Canadian housing market, and mitigate the risk of financial excesses.
“Our economy cannot depend indefinitely on debt-fuelled household expenditures, particularly in an environment of modest income growth,” the bank governor pointed out.
He noted that “Europe is now stagnating—its (annual economic output) is still more than 2 per cent below its pre-crisis peak.”
Flaherty said he acted to toughen mortgage rules for the fourth time in six years to slow the growth of a real estate bubble. He noted that the bursting of the U.S. housing bubble caused long-term damage to the American economy.
He singled out the condominium market in Toronto as the most troubling hot spot. Buyers should conduct themselves prudently he said. “Some calming of the market is desirable.”
The government is tightening mortgages by reducing the maximum amortization for a government-insured mortgage to 25 years from 30 years.
It is also lowering the maximum amount Canadians can borrow when refinancing a property to 80 per cent from 85 per cent of the value of their homes. Flaherty has complained in the past about people using their homes at ATM machines.
And government-backed mortgage insurance will no longer be available for homes with a purchase price of more than $1 million.
With files from Reuters and Canadian Press
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Something we should be aware of. We’ll keep you posted as things develop. RH
From Tuesday’s Globe and Mail
Canada’s mortgage brokers are warning the banking regulator that its proposed mortgage underwriting rules could result in people losing their homes.
The brokers are concerned about a number of the potential rules, but the one that worries them most outlines what banks would have to do when a consumer wants to renew or refinance their mortgage.
The proposed rules suggest that banks recheck areas such as employment status, current income and the current value of the home for renewals and refinancings.
“This would be a significant, significant change,” Jim Murphy, the head of the Canadian Association of Accredited Mortgage Professionals (CAAMP). Currently, when mortgages come up for renewal, banks tend to focus on the borrower’s payment history. They rarely appraise the property again and not all banks will check the borrower’s updated income level, Mr. Murphy said. “CAAMP strongly recommends that this concept be clarified so that mortgages continue to be renewed at maturity without requalification,” the industry association said in a submission to the Office of the Superintendent of Financial Institutions (OSFI). “If not, homeowners who have been in compliance may no longer qualify. This would result in a number of properties hitting the market at the same time and thereby driving down prices.”
Such a phenomenon could add further fuel to a real estate downturn if lower house prices and higher unemployment caused more people to lose their homes upon renewal, Mr. Murphy suggested.
Household debt driven by mortgage credit expansion is the main threat to the credit risk profiles of Canadian financial institutions, Fitch Ratings said in a report Monday.
OSFI unveiled the proposed new rules in March, and requested submissions from the industry. Rod Giles, a spokesman for the banking regulator, said it has received a significant number of submissions from trade associations, lenders, insurers and the brokers as well as private citizens.
OSFI is still reviewing them, but hopes to release final rules by the end of June, along with a summary of the submissions and the reasons for its decisions. It released the potential rules after the Financial Stability Board, a global financial oversight body, called on all regulators to ensure mortgage lenders were adhering to certain underwriting principles. But, with Ottawa seeking to prevent a runup in Canadian house prices from leading to a crash, Canada’s proposed guidelines go a bit further.
OSFI has signalled it wants banks to limit home equity lines of credit to 65 per cent of a property’s value. “Many borrowers use HELOCs to invest in capital markets or even for their own business purposes,” CAAMP says in its submission. “In this way, many Canadians are using their HELOCs for retirement and job creation – a positive goal which the government is trying to encourage.”
Canada’s six biggest banks held $912-billion worth of exposure to the residential mortgage market at the end of January, according to figures compiled by Fitch. That included $730-billion of mortgages and $182-billion of home equity lines of credit. The mortgage brokers would like to see people with good credit and income be able to borrow more than 65 per cent of the value of their home.
One proposed rule that the group applauds would eliminate so-called “cash back” mortgages, which essentially allow a consumer to borrow their down payment from the bank. In 2008, Finance Minister Jim Flaherty changed the rules so that consumers had to put at least 5 per cent down (after a period of time during which Ottawa had allowed mortgages with a zero down payment). However, Ottawa left the door open for consumers to borrow that 5 per cent.
The big banks subsequently came out with products in which they will lend a mortgage and give the borrower an amount equal to 5 per cent of the value up front (at a steeper rate). “Borrowers should have ‘skin in the game,’ ” CAAMP said in its submission.