With the newest stress test coming into effect on January 1, 2018, the lending environment has become – once again – a little more complicated. Interest rates for what seem to be the same product can not only vary from lender to lender, but also with the same lender. The three categories below should provide some insight with regards to how lenders are qualifying and pricing mortgages.  These do not cover every option or scenario, please speak to your mortgage professional for personalized advice.

Buyers with less than 20% down payment – high ratio mortgages:

– Under government regulation these mortgages must be insured by CMHC, Canada Guarantee or Genworth.

– These loans must meet both lender and insurer guidelines.

– The mortgage loan insurance premium is added to the mortgage (see chart on next page)

– Qualification is based on maximum amortization of up to 25 years.

– Borrowers must qualify at a government-controlled rate – benchmark rate – currently 5.34% (June 18, 2018)

– As these loans are insured, they carry the lowest risk to the lender and investors purchasing mortgage backed securities.

– Due to the lower risk, these mortgages usually offer the best interest rate.

– The purchase price must be under $1,000,000

Buyers with 20% or more down payment –  conventional mortgages:

– The maximum amortization is usually 30 years

– Qualification is based on amortization up to 30 years

– Borrowers must qualify at the actual rate plus 2% or the benchmark rate (whichever is higher)

– The risk of default is usually carried by the lender and therefore these mortgages are seen as higher risk than high ratio mortgages.

– Due to higher risk, the interest rates are usually less competitive than high ratio or insurable mortgages.

Buyers with more than 20% down payment and the mortgage is “insurable”:

– These mortgages must meet both lender and insurance guidelines

– The maximum amortization is 25 years

– Qualification is based on amortization of up to 25 years

– Borrowers must qualify using the benchmark rate

– The purchase price must be under $1,000,000

– The insurance premium is usually paid by the lender behind the scenes, resulting in a lower risk mortgage than a standard conventional mortgage.

– Due to the cost of the insurance premium, the interest rates are usually between conventional mortgages and high ratio mortgages and often vary depending on how much down payment is made.

How is Basement Suite Income viewed?

There are several ways basement suite rent is viewed. The most common two are below:

Rents added to personal income.  There are usually two percentages used 50% (most common) and 100%.  As the rent is being added to personal income, the actual amount of rent offsetting your mortgage cost works out to about 20% to 40% of the actual rents.  This is because lenders generally use between 35% – 39% of income towards housing costs. As a best-case example, $1,000 in basement suite rent would cover $195 in mortgage payments at 50% added to income ($1,000*50%*39%).  With 100%, the amount would double to $390.

Another method that utilizes a higher amount of the rent for qualification takes a percentage of the rent offset against the cost of borrowing.  For example, some lenders use 75% to 90% of the basement rent offset against the cost of borrowing during qualification.  In this case, $1,000 would cover $750 of the housing costs when qualifying using 75% offset.  This calculation requires the mortgage to be conventional and is less commonly used.

Qualification Guide:

Benchmark qualifying rate of 5.34% over 25 years was used to generate qualification income on mortgages with less than 20% down and 5.74% over 30 years for mortgages with more than 20% down.  We have used a conservative qualification guideline of 35% of total income for housing costs.   Please use this as a guide only as with good credit and low liabilities, you will likely qualify for more. Actual payments use a rate of 3.34% for less than 20% and 3.74% for more than 20% down payment. Please check current rates for actual numbers. 

Mortgage Insurance:

Mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price. Mortgage loan insurance helps protect lenders against mortgage default, and enables consumers to purchase homes with a minimum 5% down.

Premiums are calculated as a percentage of the mortgage amount and depend on the down payment relative to the total purchase price; the lower the down payment, the larger the premium. The premium is usually added to the loan amount. Higher premiums may apply.

Minimum Down Payment Guide

– For a purchase price under $500,000 > 5%

– For a purchase price over $500,000, the first $500,000 remain at 5%.  For the amount over $500,000, 10% is required.

– For a purchase price over 1 million, a minimum 20% is required for the entire value.

For example, a home costing $700,000 would require a $45,000 down payment – 5% down payment on the first $500,000, added to a 10% down payment on the remaining $200,000.

Effective January 1, 2018, people with 20% or more down payment will be qualified at a rate 2% above the actual rate or the benchmark rate set by the government of Canada – whichever is greater.  We believe the amortization will remain at 30 years.  The full guidelines have not been released – please note that the the information below is based on how we believe things will unfold.   Currently the benchmark rate is 4.99%.

People with less than 20% down will continue to be require to qualify at the benchmark rate.  As the maximum amortization is set at 25 years, the qualification is still slightly less than those with 20% down.

Below is how one lender will be handling the change to the new rules.  We expect others to be similar.

–  If an approval on a legally binding purchase and sale agreement is issued before January 1 2018, the customer will qualify under the old rules.

– If an approval on a legally binding purchase and sale agreement is issued after January 1, 2018, the new rules will apply.

– Lender commitments are usually valid for a maximum of 120 days after the date an approval is issues or after a rate has been held.

The numbers below use 35% of total family income to qualify for a mortgage.  With excellent credit and low liabilities, lenders will often allow up to 39% of family income to be used for housing.  In the chart below, the qualifying payment is ONLY for qualification – actual payment will be Monthly payment.

• Monthly payments are using a rate of 3.34% with 30 year amortization
• Qualifying payment for approvals after Jan 1, 2018 is 5.34% (3.34% plus 2%) with 30 year amortization
• Qualifying payment for less than 20% down payment is 4.99% with 25 year amortization.
• Numbers to be used as a GUIDE ONLY. No guarantees to accuracy.  Verify with your mortgage professional.

CMHC is increasing its homeowner mortgage loan insurance premiums effective March 17, 2017. For the average CMHC-insured homebuyer, the higher premium will result in an increase of approximately $5 to their monthly mortgage payment.

“We do not expect the higher premiums to have a significant impact on the ability of Canadians to buy a home,” said Steven Mennill, Senior Vice-President, Insurance. “Overall, the changes will preserve competition in the mortgage loan insurance industry and contribute to financial stability.”

Capital requirements are an important factor in determining mortgage insurance premiums. The changes reflect OSFI’s new capital requirements that came into effect on January 1^st of this year that require mortgage insurers to hold additional capital. Capital holdings create a buffer against potential losses, helping to ensure the long term stability of the financial system.

During the first nine months of 2016:

• The average CMHC-insured loan was approximately $245,000.
• The average down payment was approximately 8%.
• The average gross debt service ratio (GDS) was 25.6%. To qualify for CMHC insurance, a homebuyer’s GDS should not exceed 32% of their total monthly household income.

Based on a 5 year term @ 2.94% and a 25 year amortization 

*Premiums in Manitoba, Ontario and Quebec are subject to provincial sales tax — the sales tax cannot be added to the loan amount.

Premiums are calculated based on the loan-to-value ratio of the mortgage being insured. The premium can be paid in a single lump sum but more frequently is added to the mortgage principal and repaid over the life of the mortgage as part of regular mortgage payments. Additional details and scenarios are included in the backgrounder below.

CMHC regularly reviews its premiums and sets them at a level to cover related claims and expenses while also reflecting the regulatory capital requirements.

CMHC is Canada’s most experienced mortgage loan insurer. Our mortgage loan insurance enables Canadians to buy a home with a minimum down payment starting at 5%. As a Crown corporation, CMHC is the only mortgage insurer whose proceeds benefit all Canadians.

As Canada’s authority on housing, CMHC contributes to the stability of the housing market and financial system, provides support for Canadians in housing need and offers objective housing research and information to Canadian governments, consumers and the housing industry.

For additional highlights please see the attached backgrounder.

A B.C. budget move designed to open up the Vancouver housing market could stimulate homebuilding in Victoria and improve affordability for buyers.

The province announced changes Tuesday to the property transfer tax, including an exemption from the tax when buying new homes worth up to $750,000.

That change was designed to stimulate the supply side of the housing equation and establish more options, especially in places like Vancouver, which, according to budget documents, has seen single-family homes increase in price between 45 per cent and 70 per cent over the last five years.

The current property transfer tax is set at one per cent on the first $200,000 and two per cent on the remaining price. Buyers of older homes will continue to pay the property purchase tax at current rates.

In Victoria, the effect of the change is likely to be less pronounced, though it should mean an increase in homebuilding activity and easier access to new homes, said Casey Edge, executive director of the Victoria Residential Builders Association.

“This will be a significant improvement in housing affordability,” said Edge. “B.C. has the highest average price in Canada for a home by more than $200,000 so housing affordability is a critical issue. The property transfer tax has been a significant hurdle so a reduction is an improvement.”

A survey of member builders last year pegged the cost of a small basic new home at $562,000 on the West Shore.

Victoria Real Estate Board president Wendy Moreton said the new rules appeared to be aimed at the Vancouver market.

“This will help some buyers but it would have been nice to see some adjustment to the property transfer tax on existing home sales, that’s what we were hoping to see,” she said. “But we can hope that now they’ve made a change, they could make future changes.”

Finance Minister Mike de Jong told reporters he hoped the changes to the property transfer tax will stimulate building and provide more opportunity for first-time buyers to get into the housing market.

A purchaser of a new home worth $400,000 would save $6,000 in property transfer tax, while the exemption means a savings of $13,000 in tax on a new home or condo priced at $750,000.

To get the full exemption, a purchaser must live in the home as a principal residence for one year.

B.C. Real Estate Association chief economist Cameron Muir said the changes were positive, but cautioned it could take some time to see the effect. “It will likely stimulate some new construction, but, unfortunately, for places like Vancouver, major condo projects take many years from inception to completion so the impact of that supply will not be immediate.”

Gord Stewart, senior vice-president of the Independent Contractors and Businesses Association, suggested buyers, scared off by an over-heated market, might start to look at jumping in. “We think [government] has done exactly the right thing. It’s a market-based approach and reducing the cost of a new house is going to encourage more people to get into the market and it will bring some supply on.”

The measure means the province could lose an estimated $75 million in tax revenue. That money is expected to be offset with the addition of a third tier to the property transfer tax — the rate of tax applied to sales of properties valued at more than $2 million will increase to three per cent from the current two per cent.

The government also announced it will collect information to determine who is buying property in B.C. and if foreign buyers are having an inflationary effect. Starting this year, people who buy property will have to identify themselves as Canadian citizens or permanent residents, and if they are not they will need to divulge their citizenship and country of residence. The government stopped collecting that data in 1998.

De Jong would not get into details of what the government might do if the information shows high levels of foreign ownership. It is about getting more information to help explain the sharp rise in prices in some areas of the province, he said.

– See more at: http://www.timescolonist.com/news/local/b-c-budget-new-homes-get-transfer-tax-cut-1.2174489#sthash.4vYt9g6t.dpuf

(Reuters) – Canadian home prices are set to rise a little over 5 percent this year and 2 percent in 2016 despite a slowdown in activity as the economy weakens, a Reuters poll found.

Canada’s economy shrank in the first three months of the year and quite possibly between April-June as well owing in part to slumping oil prices. House prices have defied this weakness so far and have kept climbing.

The Reuters survey of over 20 analysts predicted home prices would rise 5.2 percent this year, up sharply from a forecast of 3.4 percent in June’s survey.
The latest expectations for 2016 and 2017 have also been revised upwards, to 2.0 and 2.3 percent from 1.3 and 1.7 percent respectively. Canada’s Teranet–National Bank House Price Index was up 1.2 percent in July.

Calling the Canadian housing market “bullet-proof”, Mark Hopkins, senior economist at Moody’s Analytics said: “It seems to not only be defying the odds in terms of surviving the large downturn in the global economy, but even now with gross domestic product contracting, it seems as though existing home prices have accelerated which is a bit strange and counterintuitive.”

A majority of analysts predict a slowdown in home buying despite two rate reductions by the Bank of Canada this year.

“Even though the Bank of Canada is lowering rates, we are going to see a slowdown starting as people find that it is more expensive to buy stuff, and the home renovation activity will begin to slow down,” said David Watt, chief economist at HSBC.

In recent years, the housing market has been an important driver of the Canadian economy. It went in the opposite direction to the U.S. housing market crash and helped Canada brave the worst of the global financial crisis.

While home prices in the United States have begun to recover, in Canada they have been rising unabated ever since and several economists – although not a majority – have long warned of potential correction.

Average home prices have doubled over the past decade fueled by cheap debt, but 13 of 19 respondents said the housing market remained affordable – at least on a national basis, because low interest rates have kept debt service costs under control.

The Bank of Canada estimates the housing market is about 30 percent overvalued and has said it poses a significant risk to consumers overexposed to mortgage debt, especially in the oil-extraction part of the country where last year’s oil price shock and persistent weakness has hit the job market hard.

In July, the Bank brought its benchmark interest rates down to 0.50 percent to dull the sting of plummeting oil prices and prevent a housing market crash.
But that rate cut likely has fueled further house price rises in the already-stretched cities of Toronto and Vancouver.

Poll respondents said both these urban markets have surpassed affordability limits of the average Canadian homebuyer, outside of the condominium sector, where there are vast amounts of new supply still being built.

Some analysts fear a risk of correction, but particularly in these two urban markets, Toronto and Vancouver. Once the U.S. Federal Reserve begins to tighten policy this year, which may take Canadian mortgage rates higher.

“The (Fed) rate hike is clearly going to have an impact on the (Canadian) housing market. That’s guaranteed,” Moodys’ Hopkins said.
“But as long as the Fed continues to be the cautious agent that it is now in moving very slowly, I don’t think there will be any surprises.”
The Reuters poll also showed home building in Canada is expected to remain robust over the next year and average around 180,000 units.

by RICHARD MOXLEY Contributed to The Globe and Mail –

Excerpted with permission from The Nine Rules of Credit: What Everyone Needs to Know by Richard Moxley, Published by Self-Counsel Press.

Your mortgage payment doesn’t always show up on your credit report, but if you are late on multiple payments, it could affect the interest rate you’re offered from the bank when your mortgage comes up for renewal again.

If you miss three consecutive payments or more in a row, it will lead to foreclosure proceedings, which is when the bank or lender starts the process of legally taking ownership of your property due to the lack of payments. Banks or lenders don’t want to own your home, but if the lender isn’t getting paid, it will try and sell the property in order to reduce its losses. Foreclosure shows up under the public record portion of your credit report.

You may assume that bankruptcy is the worst thing you can do for your credit; however, if you are applying for mortgage financing, going through a foreclosure is the absolute worst thing you can do for your credit. Bad credit can be rebuilt fairly quickly, but very few lenders will look at providing financing for you if you have a previous foreclosure showing up on your credit report, regardless how strong your current credit is.

If you find yourself in a situation where you may not be able to make your mortgage payments, contact your mortgage lender or mortgage agent to find out what can be done. The same thing is true with any creditor.

If you don’t think you’ll be able to make a payment to any one of your creditors, it is a good rule of thumb to contact them to see if something can be worked out, especially if you contact them before the due date. I’ve never seen the attitude of pretending it will all go away actually work for anyone.

I understand that despite your best efforts, an emergency may come up, preventing you from being able to make a payment. However, the banks still feel that it is your responsibility to keep track of your accounts and pay your bills on time. Get your head around this rule and you will have a great foundation to always have amazing credit.

article by ROBERT MCLISTER Special to The Globe and Mail –

Anyone with a mortgage wants the lowest possible rate. But there’s an array of requirements for snagging the best all-around deal, and some of them are counter-intuitive.

Once people have chosen the term and rate type for their mortgage, they often find that rates for that same term can vary by a percentage point or more. Countless factors can keep borrowers from getting a rock-star deal. Here are 10 of them:

1. Rates vary by province

Ontario usually has the most competitive rates in Canada, partly because it has the greatest number of competitors. People living in the Prairies or the East Coast, for example, often pay one-tenth to two-tenths of a percentage point more than folks in Ontario. Other examples: Home owners in Alberta sometimes have to put down more equity to get the lowest available rates (thanks to larger default risks in that province); borrowers in Manitoba have the cheapest six-month rates; borrowers in Quebec have some of the best 10-year rates.

2. A long rate hold

The further into the future your closing date, the longer the rate guarantee you’ll need. In turn, the higher a lender’s rate hedging costs and the higher your interest rate. The cheapest rates in the market are generally for “quick closes.” That typically means you must complete the mortgage in 30 to 45 days from applying. Applying one month from closing can shave off one-tenth to two-tenths of a percentage point from your rate, but the risk is that rates jump even more while you’re waiting.

3. You’re refinancing

Lenders love to finance purchases. So mortgages for new buyers sometimes have lower rates than mortgages for refinances. What’s more, refinances, which essentially require a whole new mortgage, often have lower rates than mortgage transfers, where you’re switching lenders but the key mortgage terms stay the same.

4. You’ve got an apartment condo or atypical property

Some lenders charge more for high-rise condos, especially in cities where condo markets are arguably overextended. The same goes for cottages, co-ops, hotel condos, former grow-ops, larger multiunit residences and other non-standard structures, which lenders view as higher risk.

5. The property isn’t your full-time dwelling

The cheapest rates in the country rarely apply to income-generating properties that the owner doesn’t live in. These deals are statistically a higher risk for lenders and investors, so expect a higher interest rate.

6. Your credit score isn’t high enough

The magic number is 680. That’s the most common minimum credit score to qualify for the best rates, especially if you have a higher debt ratio or a smaller down payment. But one number isn’t everything. To qualify for the best pricing you also need a two-year track record of managing your credit with no serious delinquencies.

7. You want flexibility

Some of the nation’s lowest rates come with strings attached, such as below-average prepayment privileges. This limits your ability to save interest by making lump-sum extra payments. Instead of prepaying 15 per cent to 30 per cent annually (which few people do anyway) a “no frills” rate might limit you to prepaying 5 per cent or 10 per cent. Restricted mortgages can also impose painful penalties, prohibit you from refinancing elsewhere before your term is up and prevent you from increasing your mortgage without penalty – useful if you buy a new house.

8. Your mortgage is not insured

In many cases, people with smaller down payments – less than 20 per cent – get better rates. That’s because their mortgage must generally be insured. Lenders like insured mortgages because someone else shares the risk of the borrower defaulting.

9. Your mortgage is too big

For lenders, bigger mortgages mean potentially bigger losses on default. This added risk results in rate premiums and stricter lending limits, especially on million-dollar mortgages without at least 25-per-cent to 35-per-cent down payments.

10. Your income is too low

If you’ve just become self-employed, are on probation or you can’t prove one to two years’ worth of stable salaried income, it can cost you. You may also need a bigger down payment. Lenders want less than 40 per cent to 44 per cent of your provable income to go toward debt.

In looking at this list, you may surmise you’ll get the best deal if you have pristine credit, don’t care about mortgage restrictions and are buying a detached urban home in Ontario that’s closing in 30 days.

That all helps, but there’s plenty more that governs mortgage pricing. Step one is knowing how well qualified you are. The stronger you are as a borrower, the more likely you’ll find exceptions to the rate “rules” above.

The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada.

Inflation has remained close to the 2 per cent target in recent quarters. Core inflation has been temporarily boosted by sector-specific factors and the pass-through effects of the lower Canadian dollar, which are offsetting disinflationary pressures from slack in the economy and competition in the retail sector. Total CPI inflation is starting to reflect the fall in oil prices.

Oil’s sharp decline in the past six months is expected to boost global economic growth, especially in the United States, while widening the divergences among economies. Persistent headwinds from deleveraging and lingering uncertainty will influence the extent to which some oil-importing countries benefit from lower prices. The Bank’s base-case projection assumes oil prices around US$60 per barrel. Prices are currently lower but our belief is that prices over the medium term are likely to be higher.

The oil price shock is occurring against a backdrop of solid and more broadly-based growth in Canada in recent quarters. Outside the energy sector, we are beginning to see the anticipated sequence of increased foreign demand, stronger exports, improved business confidence and investment, and employment growth. However, there is considerable uncertainty about the speed with which this sequence will evolve and how it will be affected by the drop in oil prices. Business investment in the energy-producing sector will decline. Canada’s weaker terms of trade will have an adverse impact on incomes and wealth, reducing domestic demand growth.

Although there is considerable uncertainty around the outlook, the Bank is projecting real GDP growth will slow to about 1 1/2 per cent and the output gap to widen in the first half of 2015. The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and the Bank’s monetary policy response. The Bank expects Canada’s economy to gradually strengthen in the second half of this year, with real GDP growth averaging 2.1 per cent in 2015 and 2.4 per cent in 2016. The economy is expected to return to full capacity around the end of 2016, a little later than was expected in October.

Weaker oil prices will pull down the inflation profile. Total CPI inflation is projected to be temporarily below the inflation-control range during 2015, moving back up to target the following year. Underlying inflation will ease in the near term but then return gradually to 2 per cent over the projection horizon.

The oil price shock increases both downside risks to the inflation profile and financial stability risks. The Bank’s policy action is intended to provide insurance against these risks, support the sectoral adjustment needed to strengthen investment and growth, and bring the Canadian economy back to full capacity and inflation to target within the projection horizon.