Insured or Insurable?

As if it hasn't been crazy enough for lenders and mortgage brokers alike to understand the mortgage rule changes of the past two years. How are the frontline service people like Realtors supposed to answer questions presented to them from clients who are even more confused with the changes?

In Short:
Mortgages that are insured with "Mortgage Default Insurance" either through CMHC, Genworth or Canada Guaranty typically have one set of qualifying guidelines and competitive mortgage rates;

Mortgages that are not insured with "Mortgage Default Insurance" follow another set of guidelines and have corresponding mortgage rates.

In a nutshell home purchases and previously insured mortgage transfers are insured. Refinances Are Not . . . for the most part.

The Long
Most consumers and Realtors understand that regulated mortgage lenders in Canada can only lend up to 80% of a property's value. Any mortgage loan exceeding the 80% loan-to-value ratio must be insured against default through one of the 3 big insurers. This allows lenders to exceed the 80% threshold up to a maximum loan amount equal to 95% of a property's appraised value. This is also known as a High Ratio Mortgage (or high loan to value ratio).

Now what might not be common knowledge is many lenders insure their own mortgage portfolios against default and pay a required insurance premium for this service. This is true of many monoline, mortgage-only lenders, but even the banks, who use yours and my savings and deposits to securitize their mortgages need to default insure a portion of their mortgage book. What's happening now is these lenders not only have to pay their insurance premiums, they must also have more "Skin in the game" meaning more of their own capital to back (securitize) their mortgage loans according to regulators. Thus, what has evolved from the mortgage rule changes is the terms: Insured or Insurable which reference whether a mortgage is insured, i.e. high ratio mortgage insured against default through a borrower paid premium. Or Insurable, which describes a mortgage that qualifies for mortgage default insurance whether the premium is borrower paid or lender paid.

In either case, you can view both of these types of mortgages as before, High Ratio - Insured and Conventional - Insured. What does change, in addition to whether the insurance premium is lender or borrower paid is the mortgage rate that will be offered to a qualifying borrower. Believe it or not, High Ratio Insured mortgages are offered the best rates. But more so lately, borrowers with loan to value ratios of 65% or less have been offered comparable rates by the same lenders.

The big change has to do with the new term "Uninsurable" mortgage. Basically what this means is that a property that doesn't meet the guidelines as set out in the new mortgage rules does not qualify for mortgage default insurance. What does that mean? First of all, some lenders can't afford to insure and back their own mortgage portfolios so that means they can't take on any new mortgages that can not be insured. It also means a loan to value limitation of 80% of a property's appraised value.

Here's the kicker . . . the following circumstances do not qualify as an Insured or Insurable mortgage: 1) Refinances or Equity Take-out mortgages; 2) Non owner occupied rental units with only one rental; 3) Mortgages for Self Employed with non-traditional income; 4) Mortgages that don't qualify under the new "Stress Test Rate." and for all that, if you do find a lender who will lend in these cases, expect to pay a premium on the interest rate and perhaps even additional rate premiums on top of that for things like rentals, extended amortizations and non conforming income.

So what does this mean for Realtors? 

Gone are the days of traditional rate sheets or over-the-phone rate quotes. Now more than ever, Realtors need to enlist the services of a trusted mortgage professional to help them and their clients navigate the mortgage maze and provide information help focus their house hunting efforts.

by Steven Porter, Mortgage Agent - Mortgage Architects
Steven can be reached through his website at www.1800Mortgages.ca

Are you in a Variable Rate Mortgage?

If you're in a fixed rate mortgage, this news does not impact you. Mind you 'impact' is too strong a word to use for the subtle shift in the Bank of Canada rate that occurred this past Wednesday.

In Short

The math is as follows:

A payment increase of ~$13.10 per $100,000.00 of mortgage balance. (unless you are with TD or a specific Credit Union, in which case payments are fixed and change only at your specific request)

i.e. – A mortgage balance of $400,000.00 will see a payment increase of ~$54.40 per month

Personally, we are staying variable, for a variety of reasons...


The Long Version

Qualification for variable rate mortgages has been at 4.64% or higher for some time. This required a household income of greater than $70,000.00 for said $400,000.00 mortgage .

Can 99% of said households handle a payment increase of $54.40 per month? Yes.

Will 99% of households be frustrated with this added expense? Yes.

Ability and annoyance are not the same thing.

Have these households enjoyed monthly payments up to $216.80 lower than those that chose a fixed rate mortgage originally? Yes.

Are 99% still saving money over having locked into a long term fixed from day one? Yes.

Should You lock in?

A more important question is ‘why did you choose variable rate mortgage to start with’? And this may lead to a critical question ‘Is there any chance you will break your mortgage before renewal’?

The penalty to prepay a variable mortgage is ~0.50% of the mortgage balance.

The penalty to prepay a 5-year fixed mortgage can increase by ~900% to ~4.5% of the mortgage balance. A massive increase in risk.

There are many considerations before locking in, many of which your lender is unlikely to discuss with you. It’s to the lenders advantage to have you locked into a fixed rate, rarely is it to your own benefit.

At the moment decisions are being made primarily out of fear. Fear of $13.10 per month per $100,000.00


What about locking into a shorter term?

Not a bad idea, although this depends on two things:
1. Which lender you are with as policies vary.
2. How many years into the mortgage term you are.

If your net rate is now 2.95%, and have the option of a 2-year or 3-year fixed ~3.00% – this may be a better move than full 5-year commitment.

Do not forget the difference in prepayment penalties, this is significant.

Bottom line – Know your numbers, know your product, and stay cool.

These are small and manageable increases.

P.S.

It was a bit disappointing to see logic and fairness fail to enter the picture, after the last two Federal cuts to Prime in 2015 of 0.25% each the public received cuts of only 0.15% each time.

Every single lender moved in unison, not one dropped the full 0.25%.

Amazingly, not a single lender saw fit to increase rates by the exact same 0.15% on the way back up. Every lender has instead increased by 0.25% - a full 100% of the increase passed on to you, the borrower.

Not cool man, not cool at all.

We share all the pain of increases, and get only part of the pleasure of decreases.

-Dustan Woodhouse

Posted by Steven Porter. Steven is a licensed Mortgage Agent with Mortgage Architects, Certified Reverse Mortgage Specialist (CRMS); Seniors Real Estate Specialist (SRES) and Accredited Buyer Representative (ABR) and real estate broker-consultant with 30 years experience in residential real estate. Steven can be reached at 1-905-875-2582; Steven@1800Mortgages.ca or online at 1800Mortgages.ca

To Bond or Not to Bond

For decades, most home mortgage loans made in Canada were made by the big banks and other “A” lenders and guaranteed through mortgage default insurance backed by the government’s housing agency, CMHC. In late 2016, government regulators tightened the requirements for borrowers qualifying for that insurance, resulting in more people doing without it.

Approximately three-quarters of the mortgages made by federally regulated banks last year didn’t have government backed mortgage default Insurance. Nearly half the nation’s $1.5 trillion CDN home loans are now uninsured against default according to Bloomberg News. For lenders, consumers’ growing demand for loans with no government backed insurance creates a problem .... mortgage funding.

“The market has to come up with a solution. Otherwise there will be no financing available for mortgages.” says Moti Jungreis, head of global markets at Toronto-Dominion Bank’s TD Securities

Under the new Canadian mortgage rules, it could make sense for more lenders to package uninsured mortgages into bonds, which over time could become a cheaper and more reliable form of funding while giving a boost to the Mortgage bond market.

Without that backing, banks and other lenders will have to rely on deposits, asset-backed commercial paper, and other forms of funding that can be more expensive and less accessible, particularly for smaller, non-bank lenders. That’s why it could make more sense for lenders to package uninsured mortgages into bonds, which over time could become a cheaper and more reliable form of funding.

Is this an immediate Fix? “NO”. This solution will take time for both lenders and investors to learn and adapt. But there is a light at the end of the tunnel.

Adapted by Steven Porter, Mortgage Agent with Mortgage Architects.
Steven can be reached through his website at www.1800Mortgages.ca