Blog Post

New Stress Test On Insured Mortgages

Team Gill • Feb 18, 2020

Minister Morneau Announces New Benchmark Rate for Qualifying For Insured Mortgages

The new qualifying rate will be the mortgage contract rate or a newly created benchmark very close to it plus 200 basis points, in either case. The News Release from the Department of Finance Canada states, “the Government of Canada has introduced measures to help more Canadians achieve their housing needs while also taking measured actions to contain risks in the housing market. A stable and healthy housing market is part of a strong economy, which is vital to building and supporting a strong middle class.”

These changes will come into effect on April 6, 2020. The new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.This follows a recent review by federal financial agencies, which concluded that the minimum qualifying rate should be more dynamic to reflect the evolution of market conditions better. Overall, the review concluded that the mortgage stress test is working to ensure that home buyers are able to afford their homes even if interest rates rise, incomes change, or families are faced with unforeseen expenses.

This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions.

The Office of the Superintendent of Financial Institutions (OSFI) also announced today that it is considering the same new benchmark rate to determine the minimum qualifying rate for uninsured mortgages.

The existing qualification rule, which was introduced in 2016 for insured mortgages and in 2018 for uninsured mortgages, wasn’t responsive enough to the recent drop in lending interest rates — effectively making the stress test too tight. The earlier rule established the big-six bank posted rate plus 2 percentage points as the qualifying rate. Banks have increasingly held back from adjusting their posted rates when 5-year market yields moved downward. With rates falling sharply in recent weeks, especially since the coronavirus scare, the gap between posted and contract mortgage rates has widened even more than what was already evident in the past two years.

This move, effective April 6, should reduce the qualifying rate by about 30 basis points if contract rates remain at roughly today’s levels. According to a Department of Finance official, “As of February 18, 2020, based on the weekly median 5-year fixed insured mortgage rate from insured mortgage applications received by the Canada Mortgage and Housing Corporation, the new benchmark rate would be roughly 4.89%.” That’s 30 basis points less than today’s benchmark rate of 5.19%.

The   Bank of Canada will calculate this new benchmark weekly, based on actual rates from  mortgage insurance  applications, as underwritten by Canada’s three default insurers.

OSFI confirmed today that it, too, is considering the new benchmark rate for its minimum stress test rate on uninsured mortgages (mortgages with at least 20% equity).

“The proposed new benchmark for uninsured mortgages is based on rates from mortgage applications submitted by a wide variety of lenders, which makes it more representative of both the broader market and fluctuations in actual contract rates,” OSFI said in its  release.

“In addition to introducing a more accurate floor, OSFI’s proposal maintains cohesion between the benchmarks used to qualify both uninsured and insured mortgages.” (Thank goodness, as the last thing the mortgage market needs is more complexity.)

The new rules will certainly add to what was already likely to be a buoyant spring housing market. While it might boost buying power by just 3% (depending on what the new benchmark turns out to be on April 6), the psychological boost will be positive. Homebuyers—particularly first-time buyers—are already worried about affordability, given the double-digit gains of the last 12 months.

This article was written by Dr. Sherry Cooper DLC’s Chief Economist.

Share

Sign up to to our newsletter to hear weekly updates on market news, timely buyer/seller tips, and up to date rates

SIGN UP
Mick & Sheila Gill
CANADIAN MORTGAGE EXPERTS
RECENT POSTS 

How To Get A Mortgage After Bankruptcy

By Team Gill • 23 Apr, 2024
Sometimes life throws you a financial curveball. Bankruptcy and consumer proposals happen. It doesn’t mean your life is over, and it doesn’t mean you won’t ever qualify for a mortgage again. The key to financial success here is getting things under control as quickly as possible. You must demonstrate to the potential lenders that what happened in the past won’t happen again in the future. So if you’re thinking about getting a mortgage post-bankruptcy, lenders will want answers to the following questions: How long have you been discharged? Securing a mortgage will be dependent on how long it has been since you were discharged from your bankruptcy or consumer proposal. Most lenders consider the discharge date on both to be your new ground zero. And while there is no legally defined waiting period for when you can apply for a new mortgage post-bankruptcy, what lenders will assess is how you’re managing your finances after your financial troubles. Have you established new credit? You can show lenders that they can trust you after bankruptcy by establishing new credit and managing that credit flawlessly. So as soon as you’ve been discharged, it’s a good idea to get a secured credit card and start rebuilding your credit score. To be considered completely established, you’ll want to have two years of credit history on two trade lines with a credit limit of $2500 on each trade line. You’ll also want to make sure that you have no late or missed payments. How much do you have available for a downpayment? The more money you have to put towards purchasing a property, or the more equity you have in your property in the case of a refinance, the better your chances of getting a mortgage. The more money you bring to the table, the more comfortable a lender will feel about the risk they take of losing their investment should you run into future financial difficulty. What is your total debt service ratio? Another consideration lenders will look at is how much money you make compared to the cost of making your mortgage payments. So it probably goes without saying that the more money you make compared to the amount you want to borrow, the better. Conventional or insured financing. If you’re looking to get the best mortgage products available, here are some of the things a lender will want to see: You’ve been discharged for at least two years plus a day. You’ve established your credit (as listed above). You have at least 5% down for the first $500k of the purchase and 10% down for anything over $500k. If you don’t have a 20% downpayment, you will be required to secure mortgage insurance through CMHC, Sagen (formerly Genworth), or Canada Guaranty. The cost to service the property and all your debts don’t exceed 44% of your gross income. Alternative lending As independent mortgage professionals, our job is to provide solutions and strategies for our clients. As such, in addition to dealing with many traditional lending institutions, we also have access to lenders who specialize in working with clients whose financial situation isn't all that straightforward. These private lenders offer alternative lending solutions that consider the overall strength of your mortgage application. While you won’t qualify for the best rates and terms on the market by going with an alternative lender, if you’re looking for options, you might find that alternative lending is a very reasonable solution for you. Alternative lending isn’t for everyone, but it’s an excellent solution for some, especially if you’ve gone through a bankruptcy or consumer proposal and need a mortgage before fully establishing your credit. Get in touch anytime. So whether you’re looking for a plan to help you qualify for a mortgage with the most favourable terms or if you need something more immediate. Please connect anytime. It would be a pleasure to outline your options and work on a plan to get you a mortgage.

Understanding the Recent Housing Affordability Measures in Canada

By Team Gill • 18 Apr, 2024
In recent years, housing affordability has become a significant concern for many Canadians, particularly for first-time homebuyers facing soaring prices and strict mortgage qualification criteria. To address these challenges, the Canadian government has introduced several housing affordability measures. In this blog post, we'll examine these measures and their potential implications for homebuyers. Increased Home Buyer's Plan (HBP) Withdrawal Limit Effective April 16, the Home Buyer's Plan (HBP) withdrawal limit will be raised from $35,000 to $60,000. The HBP allows first-time homebuyers to withdraw funds from their Registered Retirement Savings Plan (RRSP) to use towards a down payment on a home. By increasing the withdrawal limit, the government aims to provide young Canadians with more flexibility in saving for their down payments, recognizing the growing challenges of entering the housing market. Extended Repayment Period for HBP Withdrawals In addition to increasing the withdrawal limit, the government has extended the repayment period for HBP withdrawals. Individuals who made withdrawals between January 1, 2022, and December 31, 2025, will now have five years instead of two to begin repayment. This extension provides borrowers with more time to manage their finances and repay the withdrawn amounts, alleviating some of the immediate financial pressures associated with using RRSP funds for a down payment. 30-Year Mortgage Amortizations for Newly Built Homes Starting August 1, 2024, first-time homebuyers purchasing newly built homes will be eligible for 30-year mortgage amortizations. This change extends the maximum mortgage repayment period from 25 years to 30 years, resulting in lower monthly mortgage payments. By offering longer amortization periods, the government aims to increase affordability and assist homebuyers in managing their housing expenses more effectively. Changes to the Canadian Mortgage Charter The government has also introduced changes to the Canadian Mortgage Charter to provide relief to homeowners facing financial challenges. These changes include early mortgage renewal notifications and permanent amortization relief for eligible homeowners. By implementing these measures, the government seeks to support homeowners in maintaining affordable mortgage payments and mitigating the risk of default during times of financial hardship. The recent housing affordability measures announced by the Canadian government are aimed at addressing the challenges faced by homebuyers in today's market. These measures include increasing withdrawal limits, extending repayment periods, and offering longer mortgage amortizations. The goal is to make homeownership more accessible and affordable for Canadians across the country. As these measures come into effect, it's crucial for homebuyers to stay informed about the changes and their implications. Consulting with a mortgage professional can help individuals explore their options and make informed decisions about their housing finances. If you're interested in learning more about these changes and how they may affect you, please don't hesitate to connect with us. We're here to walk you through the process and help you consider all your options and find the one that makes the most sense for you.
Share by: