As a result of the recent mortgage rule changes announced by the federal government borrowers will now be seeing a variety of mortgage rate categories based on percentage of down payment, maximum amortization, insurability, owner occupied vs. rental etc.
If a homebuyer has less than 20% down payment, they are required to obtain default insurance from one of Canada’s three default insurers – CMHC, Genworth Canada or Canada Guaranty. It is important to note that not all lenders have access to all three insurers. This means that if your clients’ bank only uses CMHC, and the application is declined, your client has no other option with that bank.
Homebuyers in Canada can obtain a mortgage from a bank, credit union, or non-bank (mono-line) lender. A mono-line lender has one line of business – mortgages. Mono-line lenders operate with lower overhead so offer better pre-payment options, lower penalty calculations and lower rates than the banks and credit unions often making them an attractive mortgage provider for borrowers. Most mono-line lenders insure their mortgages for securitization. Securitization is when lenders pool their mortgages, back-end insure the pool, then sell off to investors to raise more capital to provide new mortgages.
Lenders pay for and obtain default insurance on low-ratio mortgages (more than 20% down payment). An insured mortgage is more attractive to an investor because if the borrower defaults the insurer guarantees the lender will not be at a loss. The borrower never knows their mortgage has been insured and sold to an investor.
Why did rates go up?
All lenders have experienced increased costs as a direct result of the new mortgage rules. Lenders are now required to use a higher qualifying rate (4.64% today) instead of the contract rate for all insured mortgages which means that borrowers will qualify for approximately 20% lower mortgage amount. Also effective November 30, 2016 all insured mortgages with more than 20% down payment/equity fall under the same approval guidelines as those with less than 20% down payment/equity.
Therefore default insurers will not be insuring as many mortgages going forward which means that the lenders’ costs have increased because they will not be able to sell off as many mortgages. The increased lender costs are being passed onto the borrower via a new tiered mortgage rate system.
New Mortgage Rate Tiers Announced By All Lenders (including banks)
Tier #1 – lowest rates – client pays insurer premium
Purchase property with less than 20% down
Property purchase price under $1M
Minimum credit score of 600
Maximum amortization of 25 years
Owner occupied or second homes
Tier #2 – rate plus 0.10% to 0.15% - lender pays insurer premium and passes cost to borrower
Amortization over 25 years
Purchase property with more than 20% down
Refinance or equity take-out of existing property
Tier#3 – rate plus .15%-.25% - not insurable
Rental property mortgage
As you can see from the above it will become more difficult for a buyer to compare Lender A’s mortgage rate with Lender B’s mortgage rate.
Now it is more important than ever to use the FREE services of a Mortgage Advisor who has access to multiple lenders, mortgage products and provide expert advice to you. I would be happy to put you contact with my Mortgage Specialist to answer any of your questions.
*All above information provided by Sheryl Elsom of Dominion Lending Centres