NEW MORTGAGE RULES
Here is the news release from the Canadian Association of Accredited Mortgage Professionals (CAAMP):
The Federal Finance Minister announced further changes to Canada’s mortgage insurance rules. Four measures were announced:
1. Amortizations reduced to 25 years
2. Refinancing limited to 80%
3. Properties purchased at over $1 million no longer eligible for mortgage insurance
4. GDS and TDS set at 39% and 44%
5. Line of Credits – LOCs – will soon be limited to 65% of the home value or LTV (Loan to Value.)
How the changes will be applied…
So we have until July 9th to get as many applicants under contract in order to access the current mortgage insurance rules. Possession on these contracts must be completed prior to Dec. 31, 2012.
Applicants going under contract on a home purchase drawn up after July 9th will have to qualify for a mortgage under the new guidelines. We will update all pre-approvals on July 9th under the new insured mortgage guidelines.
Q1. What is required to qualify for an exception to the new parameters?
A. The new measures will apply as of July 9, 2012. Exceptions will be made to satisfy a binding purchase and sale, financing or refinancing agreement 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.
These guidelines have existed for some time but are now more solidified. Lenders typically require that borrowers have a credit score of greater than 680 to qualify for these elevated GDS and TDS levels. Now that we are limited to a 25 year amortization knowing exactly what the upper limits on GDS and TDS are going to be critical.
Q2. Why is the Government limiting the maximum gross debt service (GDS) and total debt service (TDS) ratios?
A. The GDS ratio is the share of the borrower’s gross household income that is needed to pay for home-related expenses, such as mortgage payments, property taxes and heating expenses. The TDS ratio is the share of the borrower’s gross income that is needed to pay for home-related expenses and all other debt obligations, such as credit cards and car loans.
The new measure announced today will set the maximum GDS ratio at 39 per cent and reduce the maximum TDS ratio to 44 per cent. These debt service ratios measure the share of a household’s income that is required to cover payments associated with servicing debt. Both measures are already used by lenders and mortgage insurers to assess a borrower’s ability to pay. Setting a GDS limit and reducing the TDS limit will help prevent Canadian households from getting overextended and reduce the number of households vulnerable to economic shocks or an increase in interest rates.
More Technical Nerdy Data:
CAAMP believes that Canadians understand the importance of paying down their mortgages. These changes, together with new OSFI underwriting guidelines – also to be announced today – may precipitate the housing market downturn the government so desperately wants to avoid. The changes take effect July 9, 2012.
CAAMP was pleased that it was again successful in ensuring the 5% down payment rule remains intact; however, the government may have overreached with this latest round of changes.
-Important to note that these rules apply in high-ratio insured mortgage – not conventional mortgages. We will likely see changes to conventional lending over time. Many lenders will opt to apply the same rules to all mortgages but there will be exceptions. Many lender is Canada now only offer insured mortgage regardless of the down payment so these rules are going to impact the majority of applications.
-We have seen changes every year for the last four years and in all cases existing mortgages already approved under the old rules were exempt from the rule changes. I would expect the same response this time with existing approved files not being affected by the current changes. I will let you know as soon as I have some understanding of how pre-approvals will be affected.
-In his new release this morning Jim Flaherty specifically mentions the Toronto/Vancouver condo market so rather than restricting condo development in those two cities they have opted to impact the entire country. They also mention the concern over Canadian household debt which had already consistently been dropping.
-OSFI the mortgage regulator is also expect to make mortgage related changes today. 65% maximum finance for lines of credit and amortization restrictions relative to age have been discussed as additional possibly changes. There is going to be a lot of confusion relative to news releases so check in with me if you have questions on specific client situations.
1. Item one is pretty severe. Fewer buyers will qualify to get into the market, those that do qualify took a haircut on what they can afford.
2. Reduced from 85%. Somewhat immaterial because the reduction from 90-85% limited the refinance market significantly already. Now even more Canadians will not be able to move high interest debt into extremely low interest mortgage debt.
3. We don’t see a lot of insured mortgage files in this price range. This rule appears to be focused directly on Toronto and Vancouver.
4. This one needs some clarification. These higher GDS and TDS ratios have always been around but limited to very high credit score applicants. I will try to get some clarification on the specifics of this changes. I believe that this item is just solidifying rules that have been very subjective historically.