A summary of the intervention into the Canadian mortgage market

by Andrew Furino – Radius Financial

Maximum Affordability Assumptions: $80k family income, heating costs $100, property taxes 4000
GDS 34 / TDS 42 at 3.0% – no other debt obligations

Refinance $300k property value and same criteria above

A summary of the Federal Governments intervention in the Residential Mortgage Market:

Prior to First Intervention:

• No down payment needed – finance 100%
• Maximum amortization was 40 years (max affordable $476,304)
• Refinance transaction could go to 95% LTV (maximum refinance amount $285,000)
• With Beacon score above 680 there was no GDS and 49% TDS – minimum beacon score at CMHC was 580

October 2008:

• Removal of the 100% financing mortgage option offered by lenders (still had c/back & free down)
• Reduction of the maximum amortization from 40 years to 35 years (maximum affordable reduces to $442,922 )
• Introduction of a maximum TDSR of 45%
• Introduction of a minimum beacon score for high ratio mortgages of 620

April 2010

• Introduction of a Mortgage Qualifying Rate (Benchmark Rate) for insured mortgages on all variable and fixed terms of 4 years or less (Benchmark rate today at 4.69%) ( maximum affordable insured mortgage reduces to $352,503 – no affect on uninsured mortgages )
• Reduction of the loan to value on refinances (equity take out) from 95% to 90% (maximum refinance reduces to $270,000)
• Reduction from 80% to 50% the amount of rental income eligible to be used on the subject property
• Increased the minimum down payment for non-owner occupied rental properties to 20% (remove speculation and property inflation by investor – condos – always have been viewed at higher risk)

March 2011

• Removal of high ratio home equity lines of credit
• Maximum amortization reduced 35yr to 30yrs (maximum affordable reduces to $404,181 )
• Reduction of the loan to value on refinances (equity take out) form 90% to 85% (r maximum refinance reduces to $255,000)

June 2012

• Maximum amortization period reduced from 30 yrs to 25yrs for insured mortgages only (we are assuming a 5 year term to avoid the Benchmark rate) (maximum affordable reduces to $359,221 creating a total erosion of $117,083 )
• Reduction of the loan to value on refinances (equity take out) from 85% to 80% (maximum refinance reduces to $240,000 creating a total erosion of $45,000)
• Maximum purchase price for insured (high ratio) mortgages set at $1million
• Introduction of a maximum GDSR of 39%

OSFI mortgage underwriting guidelines B-20 implemented Oct 2012 to Mar 2013:

• A new maximum loan to value for home equity lines of credit of 65% of the home’s value
• Adopting the Mortgage Qualifying Rate (Benchmark Rate) for all variable or fixed rate terms of 4 year or less for all conventional mortgages (maximum affordable mortgages reduces to $329,887 when taking variable or term less than 5 years – creates a total erosion of $146,417 )
• All federally regulated financial institutions must now require self-employed borrowers to provide reasonable income verification (Notice of Assessments)
• Mortgages that offered cash back can no longer consider these funds as part of the down payment (FRFI) OSFI mortgage insurer guidelines B-21 to be implemented by Dec 31, 2014:
• Insurers now require lenders to calculate payments on secured lines of credit based on the 5 year Benchmark rate with a 25 year amortization versus interest only
• Removal of all interest only payments on unsecured lines of credit – increased to 3% of the balance: on a $20,000 line of credit the payment used when qualifying for a mortgage increased from roughly $85.00 to $600.00 monthly

June 2015

• Mortgage Insurers increase the insurance premium on all insured mortgages with loan to values form 90.01% to 95% from 3.15% to 3.60%
• Increase cost of mortgage insurance on the $329,887 maximum affordable mortgage from $10,391 to $11,876. An increase cost to the consumer of $1,485.00

February 2016

• The minimum down payment increased from 5% to 10% for amounts between $500,000 and $999,999
• The resulting increase in required down payment ranges from nothing if the purchase price is below $500,000 to an additional down payment of $24,995 at a purchase price of $999,999

SUMMARY….

September 2008 maximum affordable mortgage $476,304
March 2013 maximum affordable insured mortgage with 5 year term $359,221
March 2013 maximum affordable insured mortgage for other than 5 year term $301,373
March 2013 maximum affordable conventional mortgage 5 year term $404,181
March 2013 maximum affordable conventional mortgage for other than 5 year term $329,887
Biggest overall reduction is restricting insured mortgage to 25yrs and using benchmark for other than 5 year term. A total erosion of $174,931