What you should know about new mortgage rules.
On October 3rd, Finance Minister Bill Morneau announced that new mortgage rules will include more stringent “stress testing” for borrowers. The new rules are designed to lower debt levels, enforce some belt-tightening, and protect the housing market over the long term. Here’s how these new rules will affect Canadians.
THE HIGH-RATIO RULE
There has been a long-time rule that you must have “high-ratio mortgage insurance” if you have less than 20% downpayment. This insurance is there to protect the lender, and the premium is almost always added to your mortgage amount.
What’s changed? If you require an insured mortgage, you must qualify for your mortgage using the Bank of Canada qualifying rate (currently 4.64%) regardless of what your actual mortgage rate will be.
That means that – although I can find you a much better mortgage rate – you’d still need to show you can handle the mortgage using the qualifying rate. This financial “stress test” was already applicable for fixed and variable mortgages with terms of 1 to 4 years. Now, it also applies to fixed-rate mortgages of 5 years or longer.
Why the new rule? The government wants to be sure that borrowers can withstand any increases in mortgage rates when their mortgages come up for renewal.
Will my payments be higher? No. Your payments will still be based on your much lower actual mortgage contract rate. Keep in mind that mortgage rates are expected to stay at record lows into 2020. So this new rule isn’t costing you more. The potential change will be in how much mortgage you will qualify for: up to 20% less. You may need to plan on purchasing a less expensive home, or save up a larger downpayment, or ensure you eliminate all or most of your other debts.
Are any loans grandfathered? The new mortgage stress test does not apply when:
- A mortgage loan insurance application was received before October 17, 2016;
- The lender made a legally binding commitment to make the loan before October 17, 2016; or
- The borrower entered into a legally binding agreement of purchase and sale for the property against which the loan was secured before October 17, 2016.
THE CONVENTIONAL MORTGAGE RULE
Maybe you have more than 20% down or equity in your home and you are planning to purchase, renew or refinance. Since you have strong equity, you aren’t considered a “high-ratio” borrower.
What’s changed? Effective November 30th, any mortgage loans that lenders insure using portfolio insurance must now meet eligibility criteria applicable to “high ratio” mortgages, including the new qualifying stress test. This means that rental properties, properties over $1 million, and mortgages with an amortization greater than 25 years will no longer be eligible for portfolio insurance.
Does this mean I will have trouble getting a mortgage? Certainly not. The change will only affect certain lenders that insure or securitize these types of mortgages. I have access to a wide range of lenders, which means I can help you find the best mortgage for your situation. But if you are thinking of refinancing, get in touch now just to be sure you lock in a low rate.
THE CAPITAL GAINS REPORTING RULE
Canadians love the capital gains exemption they get on their primary residence: if your home grows in value, you aren’t taxed on that growth when you sell.
What’s changed? Starting this tax year, the sale of a primary residence must be reported at tax time to the Canada Revenue Agency, even though all capital gains are still tax exempt.
Why? This new rule was designed to prevent foreign property purchasers from claiming a primary residence tax exemption to which they are not entitled.
Although there are definite regional variations, the Canadian housing market is strong. A good part of the reason for that strength is that we have had stringent mortgage requirements. Mortgage defaults in Canada continue to be very low: in spite of the ups and downs of the economy.
The new rules are aimed at ensuring home ownership continues to be a solid, long-term investment. Give me a call: I’ll help ensure you make the most of it!
Sunny days! We expect a great spring market
It’s true the uncertainty in the economy is making some Canadians anxious about their financial security. But the current environment is also creating opportunities, given that we expect another year of record-low mortgage rates. Don’t let fear drive your decision making, focus instead on your current situation and your long term goals. Here are some tips to help you get the most out of your spring market opportunities
Be realistic and prepared. A mortgage pre-approval will let you know how much home you can afford. There is no fudging the numbers or wishful thinking so be sure to provide accurate information. Your mortgage approval will ultimately be based on the documentation you provide to verify your downpayment and income. Assembling everything your lender needs is a critical component of mortgage success and doing this early in the process will put you in a good position to take advantage of opportunities.
Go one step further. Do a budget that includes your new mortgage payment and all of your life expenses. You will want a mortgage that lets you live comfortably.
Be confident. Become a homeowner when you are financially and emotionally ready, without worrying about trying to time the market. Always remember that residential real estate has proven to be an excellent long-term investment.
Three cheers for the home team! It’s not just a roof; it’s your financial future. As your mortgage broker, I can anchor a strong team; you’ll also need a realtor, a lawyer and a home inspector you can trust.
Carefully planned for, your home and mortgage can provide financial security and the opportunity to build real long-term wealth.
So there’s a move in your future. It can be a stressful juggling act: selling one home, buying another. We deal with this all the time, and have some tips for making a smooth move through these two transactions:
- Dig up your mortgage papers. You’ll want to begin with the facts on your current mortgage. Find out if it’s portable. If so, you may want to carry your mortgage to your new property: saving you discharge penalties. Are there any conditions to port the mortgage, and if you need more funds, can you blend the rate?
- Ask about penalties. If you want to pay out your mortgage, what is the penalty? Sometimes it’s worth paying a penalty for a much lower overall interest rate. I can run the numbers for you.
- Find out what your home is worth. Get a market evaluation of your home from your Realtor. Understand the costs involved in selling; you’ll want to know how much you will have available to purchase your new home.
- Get a mortgage pre-approval for your new home. Know how much you can afford.
- Ready to shop. With your Realtor, start the business of buying and selling.
- Plan your down-payment. If your down-payment funds are coming from the sale of your current home, you’ll need to provide a current mortgage statement and a copy of a fully-executed sale agreement.
- Qualify for your mortgage. This will be similar to getting approved the first time, although your employment, credit situation, or lender guidelines may have changed, which means qualifying could be different. I will advise you accordingly.
- Bridging any gap. Sometimes the sale of your old house closes after you take possession of the new one. Your lender may be able to provide a short-term bridge loan.
- Make a smooth move. And celebrate this important milestone!
We can help you with all of the mortgage details for your new home!
This is the type of advice that you will received when working with a mortgage broker. Not all mortgages are the same. From the very low-rate “no-frills” mortgage offering the lowest possible rate – with the least future flexibility TO the high-rate “fully-open” mortgage – providing the most flexibility, and many many other types of mortgages in between.
One aspect of a mortgage that dwells within the domain of the lawyers’ office is the the type of charge registered against the title of the property.
There are two types of charges lenders use to document the security for a mortgage loan: conventional charge and collateral charge.
Conventional Charge: the specific details of the mortgage loan (interest rate, amortization period, term, payments) are included in the charge registered on title to the property. The balance ($$) of the charge will decrease with each scheduled payment.
The conventional charge only secures the mortgage loan.
Collateral Charge: the specific details of the mortgage loan are NOT included in the charge registered on title to the property. A separate credit agreement contains the specific agreement to the mortgage loan.
It is also possible for the lender to put a charge of 125% of the value of the property.
The balance ($$) of the charge will not decrease.
The collateral charge may secure other debt besides the mortgage loan. (If you have equity in your home and you have defaulted on another loan or credit card, the lender can increase your collateral mortgage and pay out this other debt).
Transferring your mortgage at Renewal time
Although each lender has their own rules for accepting transfers from another lender, they will only do so if they feel comfortable with the existing charge. Since a Conventional Charge key elements are fairly consistently amongst lenders, transfers are usually acceptable.
Also since the legal costs involved to transfer are minimal (eg there is no discharge, and new charge applied to the title – only a change), the new lender is usually willing to pick-up those costs for your business.
To transfer the existing collateral charge from one lender to another is very complicated – it is easier to discharge, and create a new charge for the new lender. This cost, however, is comparable to the cost of a refinancing – which is usually picked up by the borrower.
Borrowing Additional Funds
Applicable to Both
- You will need to apply and be approved by the lender for the increased amount based on the current credit criteria of the lender, your ability to repay the mortgage loan and verification that your home’s value supports the mortgage loan request.
- If you want to borrow additional funds from a different lender, the new lender may have to register new security by registering a new additional charge (a second mortgage) or by discharging the existing charge and registering a new charge. In either case, there may be costs such as legal, administrative and registration costs. Talk to us.
From the same lender
- For a conventional charge mortgage, if you want to increase the principal amount of your mortgage loan, the lender will likely need to discharge the existing charge and register a new charge for the higher amount. If you want to add a second mortgage loan, your lender will need to register a new charge against the home. There may be costs such as legal, administrative and registration costs. Talk to us.
- For a collateral charge mortgage, your lender may not need to re-register the charge when increasing the principal amount of your mortgage loan or taking out another loan secured by your home, provided that you don’t exceed the registered amount on the existing charge. There will be no registration or discharge costs and any legal costs may be lower.
From a different lender (while keeping the existing charge and mortgage loan)
- If you have a conventional charge mortgage and you want to borrow additional funds from a new lender using your home as security the new lender may agree to register a second charge against the home. There may be costs such as legal, administrative and registration costs. Talk to us.
- If you have a collateral charge mortgage that is registered for more than your loan amount and you want to borrow additional funds from a new lender using your home as security, your new lender may require information about the outstanding balance or may ask your existing lender to take certain actions to allow room for the new charge. There may be costs such as legal, administrative and registration costs. Talk to your lender.
I am not going to take any credit for this, although it is a very good article on how the overnight lending rate influences the banks’ prime rate. For your convenience it is reprinted from the CBC web-site. (or click here to go directly to CBC for the entire article)
* The overnight rate is the interest percentage paid by banks and other institutions to lend money to each other, which they do on a daily basis.
* This rate is set eight times a year by the Bank of Canada as a means of influencing monetary policy.
* A bank’s prime lending rate is set at a given percentage above the overnight rate.
* All five of Canada’s biggest banks have set their prime lending rates at three per cent since September 2010, when the Bank of Canada raised its overnight rate by 0.25 per cent to one per cent.
* Historically, the large Canadian banks have adjusted their prime lending rates in tandem, tracking the Bank of Canada’s overnight rate.
The major banks don’t always adjust their prime lending rates in lockstep with the Bank of Canada’s overnight rate, however. For example, in December 2008, the Bank of Canada cut its overnight lending rate from 2.25 per cent to 1.5 per cent, a reduction of 0.75 per cent. Canadian banks cut their prime lending rates by just 0.5 per cent.
The price of lending money is ultimately up to the banks that lend it, explained David Madani, Canada economist at Capital Economics. “If they perceive perhaps there’s some increased risk in lending to households or businesses,” the banks will decide not to reduce their prime rate in order to mitigate that risk.