Untangling the New Mortgage Rules

Mortgage FinancingThe Federal Government has made two recent changes to the eligibility rules for government-backed insured mortgages:

  1. Effective October 17, all borrowers seeking high ratio (less than 20% down payment) mortgages must qualify based upon the Bank of Canada’s five year fixed posted rate (also known as the ‘Mortgage Qualification Rate’ or MQR). Presently the MQR is 4.64%, or roughly double the best available five year fixed rate.
  2. Effective November 30, all low ratio (more than 20% down payment) mortgages that have government-backed insurance will be subject to the same eligibility requirements as high ratio mortgages.

The impact of the first change is simple but painful: buyers with less than 20% down will have to qualify as if they were paying the MQR, even though they can negotiate a much lower rate. The maximum price they can afford is, therefore, significantly reduced.

The second change is less well understood. Most people don’t realize that about 35% of low ratio mortgages are already being insured by the banks using portfolio insurance. Because the bank pays the insurance premium, the borrower usually doesn’t know that his mortgage is insured. With the new rules effective November 30, insured low ratio mortgages will be subject to all the same restrictions as high ratio mortgages, namely:

  • Insurance will not be available where the property value is higher than $1,000,000;
  • Insurance will not be available for rental properties;
  • Maximum amortization is 25 years; and
  • The borrower will have to qualify at the MQR.

Uninsured mortgages will still be available to borrowers who do not meet the above criteria, however, the selection of lenders may be reduced, qualification may be more difficult, and lenders will likely charge a higher interest rate to compensate for the lack of insurance. At this point, it’s hard to predict exactly how much these changes will impact the market, though it’s clear the effect on sales and prices will be negative to some degree. Because the market slows down seasonally in December and January, we probably won’t know for 2-3 months whether this will be a minor blip or a more significant correction. Stay tuned.