13 Feb

Changes to Canada’s mortgage rules since the 2008 financial crisis


Posted by: Garth Chapman

Actions taken since the 2008 financial crisis to address the federal government’s concerns about Canada’s housing market.

July, 2008:
• After briefly allowing the CMHC to insure high-ratio mortgages with a 40-year amortization period, then Conservative finance minister Jim Flaherty moved to tighten those rules by reducing the maximum length of an insured high-ratio mortgage to 35 years.

February, 2010
• Responding to concern that some Canadians were borrowing too much against the rising value of their homes, the government lowered the maximum amount Canadians could borrow in refinancing their mortgages to 90% of a home’s value, down from 95%.
• The move also set a new 20% down payment requirement for government-backed mortgage insurance on properties purchased for speculation by an owner who does not live in the property.

January, 2011:
• The Conservative government tightened the rules further, dropping the maximum amortization period for a high-ratio insured mortgage from 35 years to 30 years.
• The maximum amount Canadians could borrow via refinancing was further lowered to 85% of a home’s value.

June, 2012
• A third round of tightening brought the maximum amortization period down to 25 years for high-ratio insured mortgages.
• A new stress test was also introduced to ensure that debt costs are no more than 44 per cent of income for lenders seeking a high-ratio mortgage.
• Refinancing rules were also tightened for a third time, setting a new maximum loan of 80 per cent of a property’s value.
• Another new measure limited the availability of government-backed insured high-ratio mortgages to homes valued at less than $1-million.
• Limit the maximum gross debt service (GDS) ratio to 39% and the maximum total debt service (TDS) ratio to 44%.

December, 2015
• The recently elected Liberal government moved to tighten lending rules for homes worth more than $500,000, saying it was focused on “pockets of risk” in the housing sector.
• The package of measures included doubling the minimum down payment for insured high-ratio mortgages to 10% from 5% for the portion of a home’s value from $500,000 to $1-million.

October, 2016
• Borrowers who take out insured mortgages that are fixed-rate loans of five years or longer will be subjected to a “stress test,” by qualifying at the Bank of Canada’s Benchmark rate (then about 2% higher than a typical 5-year fixed rate). This same stress test is already in place for all mortgage terms of less than 5 years and for those taking a Variable Rate.
• Ottawa unveiled new measures aimed at portfolio insurance, a type of bulk insurance that banks use for mortgages with down payments of 20 per cent or more. Starting Nov. 30, the federal government will now require portfolio-insured mortgages to qualify under the same criteria used for the insurance taken out on homeowners with small down payments. Portfolio-insured mortgages will now be limited to a maximum amortization period of 25 years and a maximum purchase price of less than $1-million. It requires all portfolio-insured mortgages to be owner-occupied, prohibiting insurance on rental homes and investment properties. This change handed the banks a huge advantage over the Monoline mortgage lenders, and increased their market share and ultimately allowed the banks to increase mortgage interest rates.

January, 2018
• Home buyers with a down payment of 20% or more will be subject to stricter qualifying criteria (also known as a “stress test”) that would determine whether a homebuyer would be able to afford their principal and interest payments should interest rates increase. REFINANCING an existing property (20%+ Equity) will also be subject to the stress test. For qualification, the stress test will use either the 5-year benchmark rate published by the Bank of Canada or the customer’s actual mortgage interest rate plus 2.0%, whichever is the higher. Estimated reduction in borrowing for the average borrower, 15-20%
• OSFI directs lenders (excluding credit unions and private lenders) to have internal risk management protocols in higher priced markets (sometimes called “hot real estate markets” like Toronto and Vancouver). This is a continuation of a policy already in place. Many mortgage lenders have been following the principles of the policy for the last 10 to 12 months.
• Mortgage lenders (excluding credit unions and private lenders) are prohibited from arranging with another lender: a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law. This is often referred to as “bundling” or “bundle partnership”.

18 Oct

New mortgage Stress test to be imposed on Canadians effective Jan 1, 2018


Posted by: Garth Chapman

On October 17th Canadians awoke to the news that the nation’s banking regulator (OSFI) has announced that they will in fact go ahead on Jan 1, 2018 with a stress test for all conventional mortgage borrowers (those with more than 20% down).

This new Stress test will require that home-buyers (and those refinancing existing homes) who do not require mortgage insurance because they have a down payment (or existing equity) of 20% or more, will have to prove they can continue to make payments if interest rates rise by 2.0%. In fact it even goes a little further than that. “THE MINIMUM QUALIFYING RATE FOR UNINSURED MORTGAGES TO BE THE GREATER OF THE FIVE-YEAR BANK OF CANADA BENCHMARK RATE (that rate today is 4.89%) OR THE CONTRACT RATE PLUS 2.0%

The impact on buyers will be a reduction in their maximum mortgage amount of at least 20% and as high as 25%.

So if you are currently considering the purchase of a home, it is important to know that a purchase that closes after Dec 31, 2017 will have to qualify under the new rules, unless (maybe, we’ll know soon) you have a firm contract and a signed mortgage commitment in hand prior to Dec 31. Barring your having that, the mortgage amount you now qualify for will not be the amount you qualify for on Jan 1, 2018.

As has happened with past rule changes we expect that there will be clarifications issued around these dates to ensure that banks will honour the mortgage commitments signed by buyers, borrowers who have a home under contract and have waived all conditions. If so then buyers with firm purchase contracts and signed mortgage commitments should be able to close those purchases after Jan 1 as planned.

As to new-builds, well the question there is “how far out will they be able to close those deals under the terms of the mortgage commitments they have signed”.

On that front, Jencor has access to new-build mortgage commitments for 12 months at 3.29% where the appraisal can be done prior to signing the mortgage commitment and removing the finance condition, with an inspection just before possession to confirm completion of the build only.

This is huge, as there is thereby no risk of a lower future value wreaking havoc with the financing at time of possession.

If you are a pre-qualified purchaser you should now call your Mortgage Advisor or Banker and find out what your new maximum purchase price is effective Jan 1, 2018.


6 Nov

Interest Rates are on the move up so what is going on?

Interest Rates

Posted by: Garth Chapman

Well here we are now with a shift in the market and they always seem to come rather suddenly.  We have announcements today from a number of lenders that their rates are headed up. This will surely spread to virtually all the banks within days.

So what is behind this?

5-year bond yields drive 5-year mortgage rates in Canada

The 5- year benchmark Canadian Bond yield as of today Nov 6 is 1.04%  It has been as low as 0.6% in mid-September, and as high as 1.5% in January 2015, so quite a large range there.  This latest rise has bit into the spread lenders want to achieve, so we are now beginning to see increases in mortgage interest rates.

It seems to me the banks these days are less predictable than at any time in my memory as to just what yield they want, which makes it harder than ever to predict interest rate movements.

What is happening in the rest of the world and how does that impact us?

Bond markets around the world have been experiencing slowly increasing interest rates for the last few weeks.  The big bond traders around the world trade hundreds of billions of dollars in bonds daily seem to be pricing in an increase in the US Fed Rate in December.

If the US Fed does increase its overnight rate ,which has direct impact on variable rates, we will continue to see the variable discount decrease.  We are already off from the Prime less 0.65% rates we saw in the busy summer period.

Conclusions and Recommendations

This may be the beginning of a larger and longer move up, or it may just be a small adjustments. Hey, rates could even head back down next month, as we have seen happen over the last couple of years. World events can change markets very quickly and sometimes to large effect.

For Buyers on the fence, lock in a Rate Hold to protect against rate increase  for as long as 120 days.

For Borrowers with variable rate mortgages who have been planning to lock those mortgages in to a fixed rate when the fixed rates go up, now is a good time to review that plan.

22 Jul

The Devil In The Fine Print – some mortgages have restrictions

Mortgage Facts & Stats

Posted by: Garth Chapman

Not all mortgages are created equal.  In fact most mortgages, even within a single financial institution, will vary from one another. Pre-payment privileges, portability, increased payment and extra payment privileges, payment holidays, and all sorts of other issues come into play.

Your own particular needs and desires must be understood by your Mortgage Broker or Banker and then be considered what deciding which of these and many other specific rights and obligations are important or even necessary for you to have in your mortgage. Make sure these issues are addressed and explained fully so you will make the best decision possible for your borrowing needs.

One key clue to just how restrictive a mortgage is likely to be is simply the interest rate.  Most often the lower it is the more restrictive the mortgage itself will be.

There is an excellent article on this topic in Canadian Mortgage Trends here The Devil In The Fine Print

19 Jul

Why you should care about the banks’ posted rates on mortgages

Mortgage Facts & Stats

Posted by: Garth Chapman

There are not too many Canadians these days who blindly accept the posted rate on a mortgage, but that doesn’t mean no one should care when the banks drop their published rates.

What’s key about the posted rate is that it is used by the Bank of Canada to create what is called the ‘qualifying rate’. The prime rate is 2.70% as of the last change in July 2015 and you can obtain a Variable Rate mortgage at rates that are well below the Prime Rate, but if your mortgage is for a term under five years, you qualify based on the ‘posted rate’ — meaning you must borrow based on a higher monthly payment which ultimately means you will be restricted to taking on a smaller mortgage.

If you took a fixed rate mortgage, as 75% of Canadians have been doing for at least 5+ years, and you want to pay off the mortgage now, you would be subject to a mortgage penalty based on a very complex calculation call IRD (Interest Rate Differential).  Ostensibly this is to make the bank whole for you breaking your contract early as the bank would have contracted to pay a given interest rate to the entity that provided the funds for your mortgage for the entire term. When you break the term the bank is still obligated to the payments they committed to. And that’s fair enough, but many would argue that the IRD calculations are not in keeping with the above concept. And that’s because they use the Posted Rate in calculating the penalty.  In fact there is a class-action lawsuit winding its way through B.C. courts now on this very issue Class-action lawsuit against CIBC for mortgage penalties

Read on here for the skinny on this subject in this Financial Post article Why you should care about the banks’ posted rates on mortgages


19 Jul

Understanding what drives Variable rates and Fixed rates


Posted by: Garth Chapman

Your Variable Mortgage Rates are driven by your bank’s Prime Rate which is set individually by each Bank. They normally (but not always) move in sync with changes in the Overnight Rate, which is set by the Bank of Canada (BoC) and is used as a basis for one-day (or “overnight”) borrowing between the major lenders and financial institutions.

The BoC is responsible for monetary policy, the goal of which is to keep inflation near the mid-point of a 1 to 3 per cent target range, ideally 2%. The BoC is equally concerned with significant movements in the inflation rate, both above the 2% mid-point and below it. When demand is strong, it can push the economy against the limits of its capacity to produce. This tends to raise inflation above the midpoint, so the BoC will raise interest rates to cool off the economy. When demand is weak, inflationary pressures are likely to ease. The BoC will then lower interest rates to stimulate the economy and absorb economic slack.

So when the economy heats up and there is a threat that inflation could get beyond the 1 to 3 per cent target the BoC may increase the overnight rate, which drives the Prime Rate. The schedule of dates when the BoC reviews and sets the Overnight Rate is found here http://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/

Fixed Mortgage Rates are driven by the Bond markets. Typically, when bond rates (also known as the bond yield) go up, interest rates go up as well. And vice versa. Don’t confuse this with bond prices, which have an inverse relationship with interest rates.

Investors turn to bonds as a safe investment when the economic outlook is poor. When purchases of bonds increase, the associated yield falls, and so do mortgage rates. But when the economy is expected to do well, investors jump into stocks, forcing bond prices lower and pushing the yield (and mortgage rates) higher.

The spread between 5-year Government of Canada Bonds and 5-year mortgage rates varies within a range that has fluctuated in recent years. You can follow the 5-year Bond Yield in Canada on the BoC website here and you will notice that a period of Bond yield increases or drops will almost always be followed by a corresponding change in fixed rates for mortgages.