Here we are again on the brink of more mortgage rule changes. Federal regime after federal regime has been tightening our mortgage rules for about 10 years. Granted, it is worth noting that previous mortgage qualification rules were arguably loosey-goosey and some prudent changes were necessary. Now they are becoming almost impossible and some may say elitist. I would like an opportunity to recap the rule changes over the last decade.
Prior to the first rule change:
– No down payment required – finance 100%
– Maximum amortization was 40 years.
– Refinance up to 95% the value of your home.
– With excellent credit scores 680+, you could have a Total Debt Service Ratio (TDSR) of
– Minimum credit score for CMHC was 580.
– Reduction of maximum amortization from 40 years to 35 years.
– Introduction of a minimum score for Insured mortgages of 620 (But lower scores were
considered on an exception basis).
– 100% financing was eliminated. (However, you could still use a Cash Back Mortgage for
– Maximum TDSR lowered to 45%.
– Stricter rental property guidelines. The amount of rent for income/debt servicing
purposes was reduced from 80% to 50%.
– A Mortgage Qualifying Rate was introduced for all insured mortgages on all variable
terms and all fixed rate mortgage terms 4 years and less. (5-year fixed rate mortgages
were still allowed to qualify at the contract rate).
– Rental Mortgage down payment minimum was raised from 10% to 20%.
– Insured refinances reduced from 95% Loan to Value to 90%.
– Insured Home Equity Lines of Credit discontinued.
– Insured refinances further reduced from 90% Loan to value to 85%
– Maximum amortizations lowered further from 35 years to 30 years.
– Implementation of a New Gross Debt Service Ratio maximum of 39%
– Refinance loan to value reduced further from 85% to 80%
– Maximum amortization reduced from 30 years to 25 years for insured mortgages.
Not bad for 4 years worth of work. Now the OSFI (Office of the Superintendent of Financial Institutions) changes begin with the B-20 and B-21 Legislation. This occurred between fall 2012 and spring 2013.
OSFI B20 – 2012-2013:
– A new maximum Loan to Value for Home Equity Lines of Credit of 65%, down from 80%.
– The Bank of Canada’s qualifying rate is now applied to all variable and fixed rate
mortgage terms of 4 years or less for conventional mortgages.
– Self-employed borrowers are mandated to provide reasonable income verification. Stated
Income Programs disappear.
– Cashback mortgages are no longer permitted to be used for down payment.
OSFI B21 – Winter 2014:
– Tighter regulations around how to calculate payments on Secured and Home Equity Secured
Lines of Credit.
– All revolving credit payments for debt servicing are now calculated at 3% of the
outstanding balance instead of the interest-only payments. For example, a $10,000 credit
card balance would now have a qualifying payment $300/month up from about $45/month.
Are you feeling a little mad, disappointed or discouraged yet? Now for the greed. For
the next part of this article, remember that default rates in Canada have almost always
been below 0.5%.
– Default Mortgage Insurers increase premiums. At a 90.1% – 95% Loan to Value the premium
increased from 3.15% to 3.6%. This cost to consumers would be an additional $1,350 of
default insurance on a $300,000 mortgage.
New Year 2016:
– Increase to the minimum down payments for mortgage amounts between $500,000 and
– Mortgage Insurance limited to purchase prices not exceeding $999,999
– Insured refinances were eliminated altogether.
– To avoid the abuse of capital gains exemptions, foreign property owners need to prove
that they are selling a primary residence.
– The mortgage stress test expands to 5-year term mortgages but excluded uninsured
Happy New Year’s 2017:
– Insurers realized revenues are down from all the previous changes and increase premiums
AGAIN! With a 5% down payment, the mortgage insurance premium jumped from 3.6% to a
WHOPPING 4%. This means that you as a homeowner would have a mere 1% equity interest in
– It is announced that in January 2018 that all conventional mortgages will need to
qualify with their own stress test which will be the contract rate +2.0%. So that means
that if the 5-year fixed rate is 3.49%, you would have to qualify at a rate of 5.49%.
Now to get to the main issue. HOW IS THIS AFFECTING CANADIANS? These mortgage rule changes started out as a prudent measure to ensure that Canada wouldn’t fall victim to a US-style housing market crash. In the beginning, the changes made sense, and the markets and economy started to recover after 2007/2008. However, the changes kept coming and many would say that they snowballed out of control. We repeatedly kept hearing that Canadians’ Debt-to-Income ratios were out of control – 150%, 160%, and even 170% depending on who was talking and the criteria they used. So instead of limiting the real culprits of this phenomenon (Credit card companies and other unsecured lenders who charge up to 39.9% interest), the Canadian government took aim at home buyers, homeowners and the mortgage industry instead of the lending practices of these high-interest rate lenders. It is my opinion that the recent steps taken by OSFI and the Canadian Government are like “curing the disease by killing the patient”.
Let’s take a look at one of our clients, Jane. Jane purchased her home in 2013. She purchased a beautiful small home in one of Winnipeg’s up and coming neighbourhoods. She was an excellent, hardworking borrower with excellent credit. Now in 2017, she has a HUGE problem. She would like to refinance to do some upgrades and necessary repairs. Is she able to refinance her mortgage to accomplish her goals? NO. When the Canadian government/OSFI mandated that the insurers were no longer able to provide default insurance for refinances, this put people like Jane in a terrible spot. Unfortunately for her, the neighbourhood in which she lived was designated a “RED ZONE” by most lenders. This means that lenders would not lend in the neighbourhood without mortgage default Insurance. The lenders who would lend in the area, have implemented square footage minimums as high as 750sqft. In fact, Jane’s own bank who already holds the mortgage decided to decline her application based on these criteria alone. So, what is she to do? Take out a high interest and expensive 2nd mortgage? Sell her home? Or get a separate loan with high payments? We don’t really know the answers to these questions. However, we do know that bad policy is devastating the middle class.
What will happen to the thousands of other people that are in a similar situation? What is going to happen to the up and coming and gentrifying Canadian neighbourhoods? Will new policies be created to fill this very serious gap? Will the Canadian government admit to these alleged errors and that they may have gone too far? Will they take the steps to limit the predatory unsecured and credit card lending? Are these policies going to be the death of the Canadian homeownership dream? If Canadians are unable to look after their homes properly, are we headed to American style slums?
Only time will time will tell. I’m sure that if the government has gone too far that they will pay for it in the polls.
If you are seeking mortgage advice or require a 2nd opinion, please contact me.