Jul 19 | Posted by Hooman

Back on February 16th, 2010, the Government of Canada announced changes to CMHC (Canadian Mortgage and Housing Corporation) guidelines, which took effect on April 19th, 2010. The changes on Government-backed insured mortgages are as follows:


The Five-Year Fixed Qualification Rates
With this new rule, borrowers will need to qualify using a five-year fixed rate, regardless of what term they choose. A borrower requesting a variable rate at prime minus .60%, for example, will need to show that they can afford payments at a higher fixed rate, like 4.39%. The Department of Finance states that, “this initiative will help Canadians prepare for higher interest rates in the future.”

In turn, it becomes difficult for borrowers to qualify for a variable-rate mortgage, although it is not much harder, it is enough to have an impact. Most lenders used a three posted rate to calculate a borrower’s debt service ratios. For many discount lenders, this means the qualifying rate will go from something like 3.50% to 4%. With a qualifying rate of 5.79% (Posted Rate) there’s a difference of almost 2%, which can be significant to some families. On the positive side, extending the amortization period will help in debt servicing.

The 90% Maximum Refinancing
As a result of this new rule, borrowers will no longer be able to refinance their home to 95% of its value, it will be a 90% refinance maximum. According to the Department of Finance Canada, he Government reasons that, “this will help ensure home ownership is a more effective way to save.” The negative side of this will be borrowers unable to pay off high-interest debt with lower-cost mortgage money. However, this rule has the positive effect of keeping equity in the home (which is quite helpful when home prices fall).

The 90% Maximum Refinancing also discourages homeowners from relying on home equity to bail themselves out when they accumulate debt, which is what the US relied so heavily on. This becomes difficult for people who need to restructure debt in an effort to pay more principal and less interest. On the other hand, a 90% refinance limit is beneficial in that it deters people from racking up debt and using their homes as ATM machines.

The 80% Maximum Insured Financing On Rentals
People buying non-owner occupied rental properties will need to put down 20% to get an insured mortgage, versus the previous 5%. The Government’s reasoning behind this is to reduce speculation. This will cause the number of investors creating rental housing to drop considerably. Investors will need to borrow down-payment funds elsewhere (which they will need to disclose), or use non-conforming high ratio lenders which come with a higher interest rate and fees. This is where private investors can invest in a product, which was not previously attainable due to a high interest rate. Note: This rule does not apply to multi-unit owner-occupied homes with rental units (like duplexes and triplexes).

The intent is understandable, but the government could have increased net worth requirements, increased Beacon minimums, tightened debt servicing guidelines, or limited the number of insured rental mortgages a person can qualify for. Instead, the solutions was so drastic that it will definitely have a negative effect on the rental stock in Canada. What will the impact be on rent? At the moment it’s difficult to say, but it will certainly decrease a significant amount of business.

The Self-Employed Changes
Self-employed borrowers who choose to apply under this program, and not verify their income using traditional means, will have to put down 10% when purchasing a home (instead of 5%). According to the Department of Finance Canada, the Government’s reasoning is that the self-employed program is intended for self-employed borrowers “who have difficulty providing documentation for their current income level.” These are often individuals who’ve only recently begun to work for themselves.

Self-employed borrowers, who have been in the same business for over three years, will no longer be eligible for approval without traditional proof of income. A business license, GST license, or articles of incorporation will be required to validate the applicant’s length of self-employment. Commissioned employees are no longer eligible for approval under the self-employed program. Self-employed borrowers, with hard-to-document income, will pay notably higher interest rates and fees as a result of using such programs. Self-employed borrowers that have been established for more than three years will no longer qualify and must then provide traditional means of income verification to qualify. Therefore, once you have established your business it will become very difficult to qualify. We still have both Genworth and Canada Guaranty that still hold some of the guidelines which have not been changed, however; it has become more difficult to get self-employed borrowers approved due to tighter standards in underwriting not tighter guidelines.

Source: Department of Finance Canada