November Mortgage Rule Changes
The result of the November, 2016 change is that many non-bank lenders have already cancelled the mortgage products available for rental properties and refinances. The impact for Cornwall borrowers is already significant. As a small market with a large rental portfolio, Cornwall borrowers looking to get refinance mortgages on their rental properties are limited to major banks. When rental property owners are approved by the Bank, the changes have made rental mortgage products more risky, so there is now a premium on mortgages for rental properties.
Also, single family home rentals are now not accepted by most lenders. Self employed clients have fewer choices to obtain a mortgage. Owner occupied home owners in our area have been forced to use Bank lenders. Unfortunately, many property owners do not meet the stringent rules of major Banks. With the loss of the smaller lenders, Banks will not have the competition we have established in the Canadian mortgage market. Loss of this competition will allow Banks to increase mortgage rates at the cost of the Canadian consumer.
Traditionally, many lenders have been hesitant to lend in Cornwall and with these changes, we have lost even more lending options. The result I have seen in Cornwall already is that private lender mortgages are needed more than before. These mortgages are very expensive and should be used as a short term solution. These changes leave the borrower in these high rate mortgages for longer terms.
Qualifying Rate Change:
On October 17, 2016, the government made the changes to control the housing markets in Vancouver and Toronto but we are all affected by the decision. Unfortunately for the smaller lenders, big banks can still choose to qualify the mortgage at the contract rate while the smaller lenders do not have the option. This gives the Banks an unfair advantage.
Basically, until now, when you apply for a 5 year fixed mortgage, your ability to pay for the mortgage was calculated on the actual rate you would pay (around 2.49%). If the amount of your total debt came in around 44% or less compared to your gross income (depending on your credit score and the lender you were working with), you would likely be approved for the mortgage. With this change, you will still pay 2.49% interest but in order to qualify how much your mortgage payments will cost you, the payments are calculated at the posted rate (currently 4.64%). The posted rate has been used to qualify variable rate mortgages, Home Equity Lines of Credit and 1-4 year term mortgages for years. This change now requires 5 year fixed mortgage terms to be included as well.
That may not seem significant but let’s look at a specific situation:
You want a mortgage of $200,000. With a 25 year amortization at a 2.49% interest rate for the 5 year term, the payments would be about $894.94. That amount is added to your other monthly debts and your ratio has to come in under 44% compared to your gross income. The new rule means, even though in real life you will be paying $894.94 each month for the next 5 years on your mortgage, the application will have to show you will be paying $1,122.96 each month for the next 5 years and still calculate under 44% compared to your gross income. That’s an extra $228.02 per month added to your total debts. It can make the difference between an approval or decline if your credit card debts are fairly high. You may not qualify for the full $200,000 anymore.
If you are in the middle of purchasing or refinancing your home, please contact me and we can go over your particular situation to see if this change will affect your ability to get the mortgage you are looking for.
Dominion Lending Centres The Mortgage Source