By Elliot Funt
Mortgage Rule Changes From February
Last Last December the federal government announced new down payment measures to “Maintain a Healthy, Competitive and Stable Housing Market”. These rules were implemented in mid-February and attracted headlines at the time.
The primary change moved the threshold of 5% down payment on properties under $1,000,000, to 5% down payment for under $500,000, with 10% down payment from $500,000 to 1,000,000.
Over $1,000,000 the rules in place remain unchanged. As it stands, a 20% down payment is needed on properties over $1,000,000. In addition, you will need your mortgage insured if your down payment is less than 20% of the property value.
Stress Test Requirement Expanded Oct 17th
The stress test was already in effect for high-ratio mortgages (small down-payment or term less than 5-years). As of today, Oct 17th, 2016, the stress test requirements expand to encompass all buyers with insured mortgages.
This means that buyers will be tested against the federal 5-year conventional (fixed) mortgage rate (currently 4.64%), rather than a 5-year fixed rate offered by some lenders (as low as 2.14% in some cases).
The stress test does not mean that all borrowers now need to pay a rate of 4.64%, but rather that they need to qualify for their loan using this as their rate. The idea is that if the mortgage rate goes up on their loan (say from 2.7%), they will still be able to make payments toward their loan without financial difficulty.
There is a good chance you may have never heard of portfolio insurance because it primarily impacts lenders rather than buyers. This is a type of insurance from the CMHC (Canadian Mortgage and Housing Corporation) - a crown corporation. Portfolio insurance effectively gives a bulk discount on mortgages with down payments over 20% of the property value. Along with the other requirements announced, lenders looking to purchase Portfolio Insurance will now face stricter requirements.
I view these new requirements positively on the whole. I feel the “stress test” will make the mortgage market stronger and will lower the chance of a mortgage backed housing crash similar to the 2007/2008 housing crisis in the United States.
Stricter requirements on portfolio insurance will not have any immediate effect on mortgages, but will mean a small increase on rates in years to come as the stricter requirements translates into a higher cost of business for lenders.
The information provided here is meant to be a recap of current news and does not constitute advice about the market one way or another. It is advised you contact your REALTOR® (such as me) and other sources before making any major financial decision.