New mortgage rules in detail

[themortgageguy]

Nobody has actually covered these new rules off with much detail as of yet so here's the highlights. What is rarely covered is the fact that two sets of rules were issued not just those that effect insured mortgages. OSFI also issued residential mortgage lending guidelines to the institutions they regulate (banks primarily). These effect all mortgages not just those that are insured.

Highlights:

• The new rules take effect on July 9, 2012
• They apply to all mortgages on residential property with 4 units or less. Multiplex properties with 5 units or more are not directly affected by these new standards.
• Currently the maximum amount of refinancing allowed is 85% of the fair market value of the residential property. Effect July 9^th, 2012 the maximum allowable refinance is being reduced to 80% of the fair market value of a residential property.
• The maximum amortization period is being reduced from the current level of 30 years to 25 years. On a mortgage of $100,000 using a 5 year fixed rate of 3.09% that equates to an increase of $52.00 in the monthly mortgage payment.
• Previous to the announcement clients with excellent had an allowable GDS and TDS of 44%. These new rules reduce the allowable GDS to 39%.
• Government backed insurance is now only available on homes with a purchase price of less than $1,000,000.00. Effectively homes being purchased for $1,000,000.00 or more would require a down payment of 20%.

Exceptions allowed

Exceptions will be made when:

• a binding purchase and sale, financing or refinancing agreement exists, an
• where a mortgage insurance application has been made before July 9, 2012

While the changes come into force on July 9, 2012, any mortgage insurance applications received after June 21, 2012 and before July 9, 2012 that do not conform to the measures announced today must be funded by December 31, 2012.

On another note, The Office of the Superintendent of Financial Institutions (OSFI) also released the final version of the Residential Mortgage Underwriting Practices and Procedures document. These guidelines are directed at federally regulated financial institutions (Banks, trust companies etc.) and are intended to highlight OFSI’s expectations around prudent residential mortgage underwriting practices. These effect all mortgages not just those that are insured. Here are the highlights:

This guidelines are expected to be implemented by the banks by October 31^st:

• Home equity lines of credit will be limited to 65% LTV. You can probably apply for 80% in the near future but as the October 31^st deadline approaches that will disappear.
• It looks like the qualifying rate for uninsured mortgages will now be the same as for insured mortgages. If you are getting a mortgage for anything other than a 5 year fixed mortgage your qualifying rate will be the Bank of Canada benchmark rate. For a 5 year fixed mortgage your qualifying rate will be the greater of the bench mark rate and the contract mortgage rate. Previously lenders usually used a lower rate to qualify uninsured mortgages. The benchmark rate today is 5.24%.
• Cash back mortgages are also affected. Previously, individuals were still able to buy a home with no money down using a cash back product but that has effectively been closed.
• Business-for-self borrowers also seem to be affected. A large portion of BFS borrowers previously applied for and were granted mortgages by using stated income applications. The guidelines now specifically ask the lending institutions to obtain income verification. So for the BFS individual that practices heavy tax planning and minimizes his income this could be a problem if he only deals with the banks.

It’s important to note that none of the lenders affected by the guidelines issued by the superintendent has formally responded to them so we will have to wait and see how these actually shake out. The guidelines are pretty clear though but I suppose it’s possible that they could be revised.

If you sum up the two announcements we are looking at lower amortization periods (from 30 years to 25 years), lower allowable debt ratios (from 44% to 39%) and higher qualifying rates. These will definitely restrict buying and the ability to refinance your home for renovations or to pay off high interest credits cards.

While there is no mention of shorter amortization terms for uninsured mortgages, in the past anytime the insured mortgages amortization period was reduced, the banks typically used that shorter term for all mortgages, insured or not.

Thankfully there are excellent regulated lenders available not affected by the superintendent’s new guidelines and they offer great products and rates to boot.

[wendymac]

Thank you very mcuh for this clear explanation
wendymac

[themortgageguy]

my pleasure Wendy

[ING_rep]

Thanks for your time. Am I mistaking or was the maximum amortization period in 2010 fixed at 35 years?

[themortgageguy]

Amortization period was reduced to 30 years effective March 18, 2011

[ashedfc]

True, earlier we had 40yrs too, they reduced to 35yrs, then 30yrs...... & now 25yrs.
people stuck with 40yrs might see a substantial increase in their monthly payment at the renewal time.. that's a potential trigger point for catastrophe.

[themortgageguy]

If you're worried about the monthly payment increase due to the new amortization rules then there is no need to worry. Individuals with mortgage insurance greater than that allowed under these (and previous) reduced amortization periods are grandfathered.

Mortgage insurance is good for the life of the mortgage. That refers to the amortization of the original mortgage under the insurance originally written, NOT the term of the initial mortgage. So basically the insurance policy says they will pay off the property in 40 years.

So if an individual had a 40 year mortgage under their mortgage insurance and the initial mortgage was a 5 year term and they adhered to the payment schedule the amortization under the renewed mortgage would be 35 years. They will only have an issue should they try to increase the balance of the mortgage amount because then they are then not adhering to the original mortgage insurance policy.

I think these people will be fine. They should have a lot of equity in their homes given the rising real estate prices and they are likely renewing at a much lower interest rate.

[ssbean]

Thanks for the info OP.

[themortgageguy]

Happy to provide the info. Please fell free to email me any mortgage questions you may have.