The New Mortgage Rules Explained From Our Mortgage Broker – Dave Butler
How do these New Mortgage Rules affect Real Estate Investors?
So we finally saw the Canadian Government announce some rule changes with respect to our Housing Market and a couple of the changes had to do with Mortgage rules. Here’s a summary of the two main changes that affect mortgage applications:
- All INSURED Mortgage applications must qualify on the Bank of Canada 5 year POSTED rate (4.64% as of today) as of Oct. 17th, 2016.
First, let’s define an INSURED mortgage. An INSURED mortgage is any mortgage application where the down payment is less than 20%. An INSURED mortgage is also ANY mortgage done with a smaller, non-Major Bank lender such as First National, MCAP, Street Capital, etc. These smaller lenders, even at 20% down payment or more, still have to get Mortgage Insurance on the mortgage as per Government rules regarding those types of lenders in the Canadian Mortgage Market. Many people are unaware that those mortgages are even INSURED because on an Owner Occupied home the smaller lender would cover the small CMHC cost. These lenders are NOT Major Banks, but they are Major Mortgage Lenders in Canada, representing a very large portion of mortgages in our Country.
The good news is that this change really has no effect on Real Estate Investors in terms of how they qualify for mortgages. This is because as Investors we are putting in 20% down payment when we apply for a mortgage. Those mortgages, as long as they are done with a Major Bank, are not INSURED. The Big Banks do not use Mortgage insurance at 20% down payment or more.
The main group of people that are affected by this change are the ones that were looking to buy a home at LESS than 20% down payment and were getting pre-approved for a 5 year FIXED rate.
Previous to these rule changes, in order to get pre-approved for a 5 year FIXED rate, the mortgage application only had to qualify on the 5 year Discounted FIXED rate which with most Lenders as of today was around 2.39%-2.49%. So the change as of Oct. 17th is that those applications for INSURED mortgages that were pre-approved on a 5 year FIXED rate, they will now have to qualify at the 4.64% POSTED rate. This will effectively reduce the size of the home that the applicant can get approved for. Keep in mind this only effects pre-approvals for INSURED mortgages AND for just the 5 year FIXED rate.
Any other INSURED pre-approval that was done for a VARIABLE rate or 1-4 year FIXED term is NOT effected as those mortgage applications already qualified on the 4.64% POSTED rate.
For Investors that have Rent-To-Own Tenants that are coming up to their purchase dates…………these rule changes will affect a small handful of these RTO tenants. This rule change is more geared towards INCOME whereas most of our RTO Tenants have CREDIT issues, not INCOME issues. In my estimate, maybe 10% of current RTO tenants will be affected by this rule change.
In short, this change effects people buying homes at less than 20% down payment and were qualifying for a 5 year FIXED rate. Their maximum purchase price may now get reduced. It has no effect on Real Estate Investors buying homes at 20% down payment or more. It will, however, have a very small effect on Investors that have RTO’s where the Tenant is purchasing the home in the next couple years.
- All Low-Ratio Mortgage applications must be underwritten like a High-Ratio Mortgage as of Nov. 30th, 2016.
A lot of you are probably wondering what a low ratio mortgage is. Let me explain.
We know that a High-Ratio mortgage is any mortgage application where the down payment is less than 20%. These mortgages are subject to a maximum 25 year Amortization, strict debt servicing ratio’s and no allowance for REFINANCES or RENTAL properties. We also know that a Conventional mortgage is where we have 20% down payment or Equity and we get our mortgage from a Big Bank. These mortgages allow for up to a 30 year Amortization, they allow REFINANCING and they have no issue with mortgaging RENTAL properties. So what is a Low-Ratio mortgage then?
A Low-ratio mortgage is any mortgage with a Smaller Lender where the down payment is 20% or more or there is 20% equity in the home. So it’s essentially any mortgage with a lender like MCAP, First National, Street Capital, etc.. where you were putting in 20% down payment or more, or you were maybe refinancing a home with them. Now those mortgage applications with those lenders at 20% down payment/Equity or more are subject to the same underwriting guidelines as if it was a High-Ratio mortgage. This means that at 20% down payment or more these non-Major Bank lender can only allow a maximum of 25 years Amortizations and they can no longer take REFINANCE applications or finance RENTAL properties.
So how does this effect Real Estate Investors? Some of you are reading this and noticing that those smaller lenders can no longer finance rental properties.
The good news here is that I have never in my career sent a mortgage application for one of my Investors that was putting in 20% down payment for a RENTAL property to a smaller lender.
This is because the smaller lender has to INSURE the mortgage and the CMHC RENTAL Fee is 2.50% of the mortgage amount. Why would we ever finance a 20% down payment RENTAL property with a smaller lender who charges a CMHC RENTAL Fee when we could just go get the mortgage approved at a Major Bank who doesn’t charge a CMHC RENTAL Fee?
In the end, this change also has virtually no effect on Real Estate Investors that were buying homes at 20% down payment or more. This also does not affect Real Estate Investors that were planning on REFINANCING a RENTAL property.
Any mortgage for a RENTAL property where there was 20% down payment or Equity were always financed at Major Banks for my Investors and we did this to AVOID paying any CMHC RENTAL Fees.
So who is effected by this change? Well for one, the actual Smaller Lenders themselves are effected greatly. These smaller lenders like MCAP, First National, Street Capital, etc.. all can no longer finance REFINANCE applications. That is BIG!!!
I have heard some of these smaller lenders say that REFINANCES were anywhere from 50%-70% of their overall business. So if these lenders can no longer do REFINANCES will they still be able to offer the great rates that they did before? The smaller lenders were the ones that were driving down the Interest Rates on the FIXED rate side. It was the only way they could compete with the Banks, they always had to be a little bit better than the Banks on rate or the client would always choose the Bank since they knew who the Bank was from TV commercials, local Branches, etc….
These smaller lenders like MCAP, First National, etc.., will no longer be able to finance the same amount of business they have compared to the past 10-15 years, will they be able to still offer attractive interest rates that brought them the bulk of their clients? Only time will tell. Industry insiders that I speak to regularly seem to think this is going to cripple these smaller lenders and change the INSURED lending industry as a whole for years to come.
These two rule changes were the ones that directly affected Mortgages in Canada. However, as we can see, these changes really do not impact us as Real Estate Investors purchasing homes. If anything, I look at the positives to these changes.
The biggest impact of all these changes to Borrowers is that for people wanting to buy a home at 5%, 10% or 15% down payment, they may no longer qualify for the home they wanted to purchase. This means that instead of becoming a home owner now, that person will need to rent a home.
So I see the biggest rule change putting more tenants in the market place and these crazy bidding wars starting to slow down. There is definitely a small percentage of buyers that are now out of the purchase market with these changes so here’s to hoping that we can buy our next Rental property a little cheaper and have more potential tenants to choose from!!!!
Dave Butler
Butler Mortgage Inc.
