CMHC Mortgage Rule Changes Clarified
There have been some interesting updates over the weekend. The bond rates have increased and there is a lot of speculation that rates are on the increase. Of course, we are not sure how soon this will happen, but if you are considering purchasing a home within the next 3-4 months, it would be wise for you to have a mortgage broker do a pre-approval and rate hold at this time. Some of these changes may seem confusing and overwhelming especially for a first time home buyer. Rather then get lost in all of these changes, we recommend that you book an appointment with a mortgage broker and discuss the changes which may or may not affect your personal situation. Sometimes a one-on-one consultation will help to answer any questions you may have and elevate any doubts of being able to quality for a mortgage.
What the rule changes are and who they are going to affect:
Changes to ‘Business for self’ (BFS) stated income product
Canada Mortgage and Housing Corporation (CMHC) will no longer be accepting stated income for those who have been BFS longer than 3 years or are commissioned sales. So what does this mean? You must have been in business for more than 2 years to use the ‘stated income’ but not longer than 3 years. Once you hit the 3 year mark, you must quality on ‘provable income’ (NOA’s). They have also reduced the Loan to Value (LTV) from 95% to 90% on the stated product. 10% down payment now required unless you use proven income (claimed on your income tax submission)
More Mortgage Rule Changes Clarified
The speculation from the governments February 16th mortgage rule changes is over. They finally ruled on which interest rate consumers are to qualify, based on fixed terms less than 5 years and variable rate mortgages after April 19th, 2010 but only if you require an insured mortgage, meaning less than 20% down.
The changes are as follows:
*Fixed term mortgages less than 5 years and Variable Rate Mortgages (VRM’s) all have to qualify at the Bank of Canada’s posted rate (which today is 5.39%). These will be posted by the Bank of Canada every Monday morning. The rate can be found at Bank of Canada’s website.
*If you have a 5 year fixed or longer interest rate term, then you can qualify based on that lenders’ discounted interest rate, if they offer one (Mortgage Brokers and Agents all deal with easily available and the best discounted interest rates). For example, if you choose the 5 year fixed rate mortgage, and if the Bank of Canada posted five year fixed rate is 5.39%, and you want the 5 year fixed but have chosen a lender that offers a lower discounted rate of 3.79%, the 3.79% is the rate the lender can qualify your mortgage on.
During the average year, approximately two thirds of Canadians choose a 5 year fixed rate term anyway, so this only affects those that want less than five year terms, and VRM’s. During 2009 and up to today, with the super low emergency interest rates, 92% of Canadians taking out a new mortgage chose the 5 year option, telling us that this new government program wouldn’t have affected that many consumers during the past 14 months.
Going forward, it’s going to affect consumers that choose the shorter terms and those that chose the VRM’s in the coming years as lenders come out with the discounts they had previous to September 2008.
To put this into perspective, if you had to qualify based on the current system of most responsible lenders’ systems and used the 3 year discounted rate as the qualifying measure (for mortgages with less than a 3 year term) then the qualifying difference between the two programs is only about $10,000.00 in mortgage amounts comparing it to a lender that today has a 3.69% 5 year fixed rate, which would be the new mandated qualifying criteria.
However, the qualifying difference is huge if you wanted the VRM or less than 5 year term on the new program and have to qualify based on the posted rate. In effect this is going to make the 5 year fixed discounted program even more popular going forward.
Simply put, these new measures aren’t going to affect a huge qualifying change for the average Canadian buying a home, as most of us opt for the 5 year fixed rate mortgage anyway as we enjoy the safety and security of the 5 year fixed program. So it’s a great thing that the government essentially left the 5 year fixed program alone.
And those that want the VRM or shorter term mortgages usually have more than 20% equity in their property anyway as they can afford and want to take that little extra risk with their mortgage.
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Jean-Guy Turcotte is a Mortgage Professional with Regional Mortgage Corporation and can be reached at 403-343-1125 or jturcotte@regionalmortgage.ca