Change in Mortgage Insurance Rules
After changing the minimum down payment requirement for homes above $500,000 in 2015, the Government of Canada announced a change in mortgage insurance rules on October 3, 2016 (with revision on October 14, 2016).
As background information, federal laws require federally regulated lenders to obtain mortgage default insurance (“mortgage insurance”) for homebuyers who make a down payment of less than 20 per cent of the property purchase price, known as “high-ratio” insurance. The homebuyer pays the premium for this insurance, which then allows homebuyers to purchase homes with a down payment as low as 5 per cent of the property value.
Lenders also have the option to purchase mortgage insurance for homebuyers who make a down payment 20 per cent or more of the property purchase price, known as “low-ratio” insurance. There are two types of low-ratio mortgage insurance: transactional insurance on individual mortgages typically paid for by the borrower, and portfolio (bulk pooled) insurance typically paid for by the lender.
Mortgage insurance is provided by the Canada Mortgage and Housing Corporation (CMHC), a federal Crown corporation, and two private insurers, Genworth Financial Mortgage Insurance Company Canada and Canada Guaranty Mortgage Insurance Company.
With the background information above, the Government of Canada announced the following two changes:
1. Applying a Mortgage Rate Stress Test to All Insured Mortgages
Effective October 17, 2016, all high-ratio insured homebuyers must qualify for mortgage insurance at an interest rate the greater of their contract mortgage rate or the Bank of Canada’s conventional five-year fixed posted rate. This requirement will also be extended to low-ratio insured mortgages effective November 30, 2016 (see below). This requirement is already in place for high-ratio insured mortgages with variable interest rates or fixed interest rates with terms less than five years.
The Bank of Canada’s conventional five-year fixed posted mortgage rate is updated weekly and is available on the Bank of Canada’s website. The Bank of Canada’s posted rate is typically higher than the contract mortgage rate most buyers actually pay. As of September 28, 2016, the Bank of Canada posted rate was 4.64 per cent.
Amongst other things, lenders and mortgage insurers usually assess two key debt-servicing ratios to determine if a homebuyer qualifies for an insured mortgage:
- Gross Debt Service (GDS) ratio—the carrying costs of the home, including the mortgage payment and taxes and heating costs, relative to the homebuyer’s income; and
- Total Debt Service (TDS) ratio—the carrying costs of the home and all other debt payments relative to the homebuyer’s income.
To qualify for mortgage insurance, a homebuyer must have a GDS ratio no greater than 39 per cent and a TDS ratio no greater than 44 per cent.
The announced measure will apply to new high-ratio mortgage insurance applications received on October 17, 2016 or later. This measure will not apply to high-ratio mortgage loans where, before October 17, 2016: a mortgage insurance application was received; or, the lender made a legally binding commitment to make the loan; or, the borrower entered into a legally binding agreement of purchase and sale for the property against which the loan is secured.
Homeowners with an existing high-ratio insured mortgage, including those renewing or transferring an existing high-ratio insured mortgage to another lender, are not affected by this change as high-ratio mortgage insurance spans the life of the mortgage.
2. Changes to Low-Ratio Mortgage Insurance Eligibility Requirements
There are also changes to the eligibility rules for newly insured low-ratio government-backed insured mortgages.
Effective November 30, 2016, mortgage loans that lenders insure using portfolio insurance and other discretionary low-ratio mortgage insurance must meet the eligibility criteria that previously only applied to high-ratio insured mortgages.
New criteria for low-ratio mortgages to be insured will include the following requirements:
- A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan;
- A maximum amortization length of 25 years;
- A property value below $1,000,000;
- For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once every five years to conform to the established amortization schedule;
- A minimum credit score of 600;
- A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate; and,
- If the property is a single unit, it will be owner-occupied.
These changes will not apply to low-ratio mortgage loans where, before October 17, 2016: a mortgage insurance application was received; or, the lender made the loan or made a legally binding commitment to make the loan; or, the borrower entered into a legally binding agreement of purchase and sale for the property against which the loan is secured. The new low-ratio mortgage insurance eligibility requirements also do not apply if, during the period beginning on October 17, 2016 and ending on November 29, 2016, at least one of these three criteria is met and the loan is funded before May 1, 2017.
Technical Backgrounder: Housing Insurance Rules and Income Tax Proposals (Revised October 14, 2016), http://www.fin.gc.ca/n16/data/16-117_2-eng.asp
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