Significant changes to mortgage lending rules in Canada
You have likely heard that Finance Minister Jim Flaherty and the Department of Finance have
recently announced significant changes to mortgage lending rules in Canada. Some of these
guidelines come into effect April 9th with all changes to be in place by April 19th. In this email, we
present the upcoming changes and highlight impacts so you can plan accordingly:
1. Benchmark Qualifying Rate – Starting April 19th the Bank of Canada will set the qualifying
rate for all insured mortgages (if down payment is less than 20%) when the mortgage term is
less than 5 years. Terms of 5 years or longer will be qualified at the actual contract rate.
Impact – The 5 year benchmark qualifying rate is 5.39% today. If we assume an average
family income of $70,000 per annum, and a 35 year amortization, in qualifying for a term of
less than 5 years, the new rule will reduce maximum borrowing from $390,000 to $340,000.
If more mortgage funds are required, we could place you in a 5 year term and use the actual
contract rate to qualify. The 5 year contract rate will always be lower than the 5 year
benchmark qualifying rate as the contract rate is a discounted rate OAC. Today the actual
contract rate for most 5 year terms is 3.89%.
2. Insured Rental Loans Abolished – Starting April 19th the Department of Finance has
eliminated the ability for Canadian lenders to insure rental mortgages.
Impact – Real estate investors will need 20% or more down to acquire a revenue property.
We anticipate this impact will be minimal as most investors want properties to cash flow. The
more relevant impact will be when clients get caught buying before selling and must complete
on their purchase while still holding their other property. Under old guidelines, we could
bridge these clients by arranging a high ratio re-finance and treating the new purchase as a
high-ratio rental using offset of rents to qualify. Under new rules the bridge loan is limited
to 80% of value unless you have sufficient income to carry both mortgages without reliance
on rental income. This leaves less of a cushion for those who get caught.
3. Mortgage Helpers – Effective April 19th CMHC insured mortgages will add only 50% of suite rental income to a borrower’s qualifying income. This means income from a basement suite can no longer be ‘offset’ against the mortgage payment.
Impact – Next to the 5 year benchmark qualifying rate this policy will have the greatest impact on our clients’ ability to borrow.
With eco-density initiatives like the Secondary Suite Program and Vancouver’s Laneway
Housing initiative, CHMC’s new rental guidelines will limit the effectiveness of suite income. If
we consider housing cost as a percentage of gross income and add 50% of a $1000 suite to
qualifying income, we only add $175/month of additional borrowing power based on 35% of
gross income allowed for our housing costs. The rental income adds approximately $40,000
of mortgage potential. For homeowners with more than 20% home equity who fall under
conventional guidelines the same $1000/mo in suite income adds approximately $160,000 of
mortgage potential which easily covers the cost of building a basement suite or perhaps even
a laneway home.
4. Maximum Insured Refinance Now 90% - Effective April 19th the maximum refinance will be
capped at 90% of an existing owner occupied home’s value. Purchases can still have
mortgages set-up for 95% of the property’s value but for those who are looking to withdraw
equity from their home, the limit is now 90% of current market value.
Impact – Minimal to the market.
5. CMHC’s Stated Income Program Dramatically Changed – Effective April 9th CMHC will
no longer allow their stated income program to be used for those who have been in
business for more than 3 years. Commissioned sales people will no longer qualify under
this program regardless of their time on the job. Maximum financing is 90% for purchase
and 85% for a refinance under this revised program.
Impact – This will have a definite impact for self employed individuals who have been
established for more than 3 years and claim minimal personal income for tax reasons.
Those with established businesses they may need to consider drawing more personal
income to qualify for low down payment financing, or ensure they are looking at
conventional financing where lenders can consider add backs and apply common sense.
Conventional Stated Income programs offered today fall between 65% and 75% financing.