Mortgages as we knew it pre - October 2017, we’re identified by High Ratio (less than 20% down) or Conventional (more than 20% down).
Today, there are three classes. Insured, Insurable and Uninsurable.
To keep things simple, lets focus on what is versus what was. Here is the description of each category and how it affects your mortgage.
Insured Mortgage – Down payment of less than 20% and the client pays any CMHC fees. The property must be valued below $1 Million dollars, max 25-year amortization and cannot be a rental property. The qualifying rate is the greater of the Bank of Canada rate or the contract rate of the mortgage you are obtaining + 2%, thanks to the new Stress-Test.
Insurable Mortgage – Fits all the same guidelines as an insured mortgage but the borrower has more than 20% for a down payment. There will be no insurance paid by the borrower but the lender will likely insure the mortgage themselves. The property must be valued below $1 Million dollars, max 25-year amortization and cannot be a rental property. The qualifying rate is the greater of the Bank of Canada rate or the contract rate of the mortgage you are obtaining + 2%, thanks to the new Stress-Test.
Uninsurable Mortgage – All mortgages that can’t be insured. This is now classified as purchases of more than 20% down payment, all refinances or equity-take-outs and properties valued over $1 Million dollars. The amortization is up to 30 years and the same Stress-Test qualifying rules apply.
*At the time of publishing, there are a select few Credit Unions that are not imposing the B20 regulations and stress-testing uninsurable mortgages. Though we expect this to change in the near future.
HOW DOES THIS AFFECT YOUR INTEREST RATE?
There are two ways this now affects your mortgage. New mortgage class system + Stress-Test.
New Class System - and offered mortgage rates.
The difference between interest rates varies greatly depending on what type of mortgage you have. The order of best rates are:
Insured Mortgages – lowest interest rates
Insurable Mortgages – slightly higher than insured rates
Uninsurable Mortgages – highest rates
Although we have a national foreclosure rate of less than 2%, the government says lenders need insurance to protect themselves from foreclosures, fraudulent activities and property value decline. The insured and insurable mortgages have insurance and the uninsurable mortgages don’t.
Today, you are now rather penalized for saving up and putting more down payment into the purchase directly by not obtaining the best mortgage rates. Consequently, if you put less than 20% down then you incur the default mortgage premiums imposed on you.
Never before has your mortgage required finesse and mathematical equations around which scenario works best for you.
Purchase Power - Stress Test Implications.
Previously, if you didn’t qualify for a variable rate mortgage (using the Bank of Canada posted rate) then you would resort to elected a 5 year fixed product (hopefully with a mono lender or credit union to avoid large potential penalties when breaking the term, in a deflating bond market environment) and be on your way.
Now, that’s no longer. You have to qualify at the Bank of Canada rate or 2% higher than the offered contract rate. That means a minimum of the Bank of Canada rate.
To give you a general statement, this is equivalent to losing up to 20% in purchase power.
Before Jan 1, 2018, if you were approved for a $500,000 purchase, you would now only qualify for $400,000. This is not an exact translation but illustrated for impact and understanding.
Mortgages are now complex and require planning and forecasting. Because of this, find an educated, trained professional you like and stay with them.
The fruits of the labour come into effort long in the future as your trusted mortgage professional learns you and what plans you have. It’s a constantly changing mortgage environment and we too change over time.
The value of a great mortgage professional you like can be worth hundreds - millions of dollars in your pocket.