In case you thought a higher qualifying rate was the worst of the mortgage changes...
Posted on Oct 5, 2016 in Mortgage Market Updates and News
Are you just starting to take in the fact that you're going to be able to qualify for 22% less of a mortgage come October 17th? Well, unfortunately that's not the worst of it. Another set of changes, announced at the same time this past Monday, have gotten much less media attention, but will potentially have even more of an impact.
Beginning November 30th (but in reality effective immediately with a lot of lenders) a major set of changes is going to take effect with low ratio mortgages (mortgages where the loan to value is less than 80% - ie safer mortgages with at least 20% equity). Let me back up a bit before I explain this change because there's a whole world of mortgage process that the average consumer likely does not know exists.
Here's the basics that most people are aware of. If you purchase a home with less than 20% down, you pay CMHC default insurance to protect your lender if you default, this is a requirement. In most cases, if you put a 20% or larger down payment, you don't pay CMHC. It makes sense, you put a larger down payment so your mortgage is safer to the lender, right? Here's the kicker that most people are unaware of though, your mortgage (more often than not) is still CMHC insured. You're just not paying the fee; your lender is. The majority of mortgages in Canada are insured this way, it's called portfolio or bulk insurance.
Okay, so you've got the very basics around bulk insurance now; fast forward to last Monday. The government announced a sweeping set of changes to low ratio CMHC insured (bulk insured) mortgages that most people have not heard about. Effective November 30th, bulk insurance will no longer offer the following:
- Rental properties
- 30 year amortizations
What this means is that the lenders who operate exclusively with bulk insurance, will no longer offer these services. This may not sound like a big deal, but you'd probably be surprised how many lenders bulk insure 100% of their business. Those lenders are also the most competitive typically in terms of rates, product flexibility, penalties to break a mortgage, etc. To be perfectly honest, these lenders who operate exclusively on bulk insurance are the lenders I do about 75% of my mortgages with, because they offer the best rates and products for clients.
Once these changes take effect, a huge portion of business is going to be unavailable to these lenders. That means if you want the lowest rates, best products, and penalties that wont crush you financially if you need to break your mortgage early, you need to be purchasing an owner occupied property. Not refinancing, not pulling extra funds to renovate, not purchasing a rental property. It means that it's more important now than ever before to make sure you are with a competitive lender now, because your opportunity to switch later will be very limited.
These changes are going to crush competition, force people to mortgage with banks and credit unions and create monopolies that will likely result in higher costs of borrowing, reduce rental availability by making it more difficult and less affordable for rental properties to be purchased and put on the market, and make rentals more expensive for the people who can no longer afford to buy due to the last set of mortgage changes (see Mortgage changes will have huge impact). Many lenders have already announced higher rates for refinances, discontinuation of rental property programs or higher rates for rentals, effective either immediately or mid next month.
These changes are going to give banks and credit unions (who represent a very small portion of our lender options) a monopoly over certain types of lending. Lack of competition leads to higher costs to consumers and more profits for big banks. Certainly not the result we were promised by the Federal Government. Given that I'm in government as a City Councillor in Port Alberni, I'm not one to believe in government conspiracies to benefit banks as many are suggesting this set of changes is. What I believe this is, is a huge oversight by our federal government that comes with some very concerning unintended consequences. I will be doing all I can to convince the government to reconsider. Please do the same. Call your local MP today.
TMG The Mortgage Group Canada Inc.