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.

Dr. Sherry Cooper

Mortgage Application Process & Required Documentation Explained

When a client is looking to get a pre-approval or doing a mortgage application for a home they just purchased the process is almost the same. Derek, Colten and I follow the same steps.

1). Get the application – The client will generally fill out our online application or meet with us in person. We collect their Names, Address, Birth Date, SIN#, Address History, Employment History, Assets & Liabilities.
2). Consent & Credit Check: We have the client sign a consent form. This allows us to check their credit and communicate their information to the lender of choice and keep their REALTOR and Lawyer informed along the process. We verify the credit score, typically we like to see a score of 620 or higher for an insured mortgage. We make sure that all payments are paid as agreed, that all credit facilities are under their limit and that any collections, judgements or other debts are paid as agreed and are reporting correctly on the client’s credit bureau.
3). Income Documentation: For employed clients we always request a letter of employment confirming the client’s start date, positions, wage/salary and GUARANTEED hours per week worked. The letter has to be on company letterhead. The letter is typically valid from 60 day from the day of issue. We will always request the clients two most recent paystubs. We verify and cross reference the information on the employment letter with the paystubs. We confirm the hours worked, the wage or salary and the year-to-date income. In some cases we will also request the two most recent years T4s. This would be to confirm overtime income or part time not guaranteed hours (we can take the lower of the most recent year or an average of the two years whichever is lower).

For self employed clients we will request the two most recent year T1 General Full Tax Returns *all pages* as well as the corresponding Notices of Assessment. We must also confirm that any income taxes owing are paid in full. If incorporated, we will require two years Accountant Prepared Financial statements (notice to reader), two years T2 Corporate tax returns and articles of incorporation and a corporate search.
4). Secondary Income Documentation: This type of income is usually Canada Child Benefit or Spousal support. For Canada Child Benefit we will request the children’s birth certificates, CCB statement and 3 months bank statements confirming the CCB deposits. For Spousal support, we will request the fully executed and notarized separation agreement and 3 months bank statements to confirm the amount deposited.
5). Down Payment Documentation: We will request 90 day bank history from any savings account, TFSA or RRSP. We verify account ownership and look for any large deposits made within the 90 day period. Typically any deposits over $2,500.00 will need to be verified or have to seed for an additional 90 days. For gifted funds we will request a gift letter from an immediate family member and confirmation of the gifted funds deposited into the client’s account. For Flex-down Mortgages, we will require a copy of the loan or credit facility used and that the funds have been deposited in the client’s account. For down payments coming from the sale of an existing home, we will require FIRM Offer to purchase, existing mortgage statement, & most recent property tax bill.
6). Existing Properties Not Being Sold – We will require and existing mortgage statement or title search and property tax bill.
The mortgage application process is simple. There is a lot of work that we have to do to make sure that the client’s are approved and won’t run into any snags. This is why we love working with our REALTORS who appreciate this process and want to make sure their clients have an amazing home buying experience.
7). Once we review all the documentation and information we perform our mortgage calculations and determine a maximum mortgage amount based on the amount of money the client is comfortable paying each month as well as a debt service ratio which typically needs to be under 44% for most borrowers. This ratio is a calculation of all of the client’s debt and housing payments divided by the clients eligible household income.
8). Once the pre-approval or approval is in place, it is very important that the clients maintain their credit standing, maintain their current employment as well as their current debt levels. This means that a client may not quit their job, change employers, buy any major purchases on credit as well as keep all their existing credit current and not miss any payments.

Please watch our video and like it on YouTube and refer to our “Documentation Checklist” for more information. Please feel free to share with your clients.
Click the link below for our YouTube video!

https://www.youtube.com/watch?v=aH3FJIIPHeE

Second Homes, Cottages and Vacation Properties

Getting a mortgage for a second home or vacation home is really quite simple.  There are two types of mortgage applications.   One for Type A properties (4 season homes, condos, single family) and type B properties (3 season cottages, seasonal access, floating foundations).  Let’s address each type.

Type A:

• 5% Down Payment for properties $500,000 or less.
• Maximum 1 unit (no duplexes under this program).
• Property must be owner occupied or occupied by an immediate family member.
• New Construction must have New Home Warranty
• Max Loan under this program for Manitoba is $600,000
• Strong Credit Bureau required.
• Down payment can be borrowed under flex-down guidelines.

Type B:

• 10% Minimum Down Payment
• Minimum credit score of 680
• Maximum Loan Amount of $350,000
• Down payment must be from client’s own resources.

This is an excellent program for clients who are looking to purchase a cottage or vacation property.  It is also wonderful for parents who are purchasing a home/condo for their children while they are going to school/university.  For a full list of type B property exceptions please contact us directly or refer to our handout.

Please watch our video and like it on YouTube and refer to our “Second & Vacation Homes” handout for more information.  Please feel free to share with your clients.

Click the link below for our YouTube video!

https://www.youtube.com/watch?v=-wS7A0mt4Rg

If you have any clients looking for a mortgage pre-approval or mortgage advice please have them visit our website or call Peter at 204.227.2744.

NEW TO CANADA PROGRAM

The New To Canada Program was designed for new Canadians  who want to purchase a house, condo or build a new home.  The clients must have:
1).  Immigrated or Relocated to Canada within the last 60months
2).  A valid work permit or permanent residency
3).  Have minimum 5% down payment
4).  Strong credit profile
5).  Obtained full-time PERMANENT employment and passed their probationary period.

If the clients do not have an established Canadian History (2 years preferred), they can submit secondary sources of credit i.e. 12 month rental receipts, cell phone bills or utility bills.  We can even request an international credit report from Equifax if available.

Should the clients have 10% down or more, they can submit a letter of reference from a recognized financial institution (In English preferably or translation costs will apply) OR 6 months of bank statements from their primary account.

Clients must have 5% down payment from their own resources, any gifted down payment funds will only be added to the clients own 5% down payment.   The exception is A down payment gran provided under a Genworth Canada approved Affordable Housing Program may be used as down payment at 95% LTV.
Please watch our video and like it on YouTube and refer to our “New To Canada Program” handout for more information.  Please feel free to share with your clients.

Click the link below for our YouTube video!

https://www.youtube.com/watch?v=IX0i7B6r6bQ