It has become tougher to get Mortgage Default insurance through CMHC (Canada Mortgage & Housing Corp). Big banks (like TD, Scotia, RBC, BMO, etc.) and non-bank lenders alike routinely require borrowers to pay for mortgage default insurance if they have less than 20% down payment. These are referred to high-ratio mortgages (or insured mortgages).
FACT: Non-bank lenders also routinely paid for the mortgage default insurance where borrowers had more than 20% as well behind the scene. They did this for strategic reasons which allowed them to better compete against the big banks. Consumers benefited from this with more lender options and often better rates through the non-bank lenders.
As of Nov. 30th, however, more strict rules came into effect in order for mortgages to be insured through the government. The following criteria must now be met:
- Insured mortgages can only be for a purchase or transfer of an existing mortgage (with no increase to the mortgage amount)
- Purchase of primary residence up to max price $1 million only. Owner occupied rental properties with 2-4 units such as a house with basement suite(s) or triplex are ok as well.
- Maximum 25 years amortization
- Minimum credit score of 600. If score is 680 then there is a little more flexibility.
- All mortgage applications are subject to a stress-test whereby borrowers must qualify for the mortgage based on a bench-mark interest rate (currently at 4.64%). This is almost 2% higher than the typical fully discounted 5 yrs fixed rate right now at 2.69%. Because of this, borrowers on average will now have to confirm 20K more in income to qualify for the same mortgage compared to last month.
These policy changes basically took away the non-bank lenders’ ability to insure all of the mortgages that they were routinely insuring before. As a result, many non-bank lenders have either increased requirements, increased interest rates, or pulled their previous mortgage offering completely in the case of pure rental properties, amortization beyond 25 yrs, refinances where borrowers are looking to pull out additional equity, or where borrowers could only qualify without the stress test.
What does this mean for borrowers?
- They need to be informed and talk to an experienced Mortgage Broker who can offer a variety of options and help them weigh through all the different lender requirements. This is more crucial now than ever before. And they should do this early in the home shopping process.
- For pure rental properties, they must expect to pay slightly higher interest rates like 0.25% more or accept specific restrictions attached to their mortgages.
- They will have to pay slightly higher interest rates if they need/want amortizations over 25 years (ie 30 or 35 years).
- If they are looking to refinance an existing property, they should also expect to pay slightly higher rates and likely have fewer lender options than before.