Just eight months ago it was easy to quote a mortgage rate on any given day and be confident that’s the rate our client would pay. But that all changed when the federal government’s latest mortgage rules came into effect in October 2016.
Previously, multiple lenders would advertise their rates and we could shop for our clients. It was a straightforward starting point. But now there’s a new reality.
Because of the newest mortgage rule changes, fewer mortgages these days are able to qualify for mortgage default insurance – through Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada or Canada Guaranty – and rates can fluctuate quite a bit based on a number of factors.
Mortgage default insurance reduces the risk to lenders and enables them to sell insured mortgages to investors which, in turn, makes the lender’s costs more straightforward across the board.
Mortgage default insurance is mandatory for all borrowers who have less than a 20% down payment.
CMHC alone reports its total insured volumes fell a whopping 41% in the first quarter of 2017, including a 23% drop in homeowner insurance volumes and an 87% decline in the volume of portfolio insurance, which is bulk insurance purchased by financial institutions for their portfolios of uninsured mortgages.
Among the changes in October, the government increased “stress testing” standards for people taking out fixed-rate mortgages of five years or longer to ensure they could still afford their mortgages at higher interest rates than they’re currently paying, as rates have been at historic lows for several years.
While you may qualify for a fantastic five-year fixed mortgage rate from a lender when we’re shopping your mortgage for the best fit (2.94%, for example), the new rules use the Bank of Canada’s five-year fixed mortgage rate (currently 4.64%) to determine whether you can afford your mortgage payments.
A larger down payment will almost certainly result in a higher mortgage rate. This is because there is now an optimum combination of factors where a mortgage will best qualify for default insurance. Beyond that, mortgage insurance may not be available and, therefore, it costs lenders more to offer you a mortgage.
Comparing different mortgage types
Following is a list of different insurable and uninsurable mortgage options and criteria that ultimately determine the interest rate you’ll pay on your mortgage.
High-Ratio Insurable – The property value is under $1 million and the down payment is less than 20% of the home’s value. This is qualified at the stress-test rate of 4.64%. The maximum amortization is 25 years. Client insurance premiums are paid. This is where you’ll receive the very best mortgage rates.
Conventional Insurable – The property value is under $1 million and the down payment or equity is 20% or higher. This is qualified at the stress-test rate of 4.64%. The maximum amortization is 25 years. Possible client insurance premiums to be paid. The interest rate is tiered depending on the loan to value (LTV) – the total amount of the mortgage loan compared to the property value.
Uninsurable – This applies to purchases and refinances with down payments that are 20% or greater. Property values can exceed $1 million and amortizations up to 30 years are available. The interest rate is tiered depending on the LTV.
One thing is certain, now more than ever before, it’s important to work with a trusted mortgage broker who can clearly explain all your options and work in your best interest to ensure you’re matched with the mortgage product and rate that meets your specific needs.