New OFSI Rules

General Katherine McIntyre 1 Nov

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OSFI has implemented 3 new mortgage rule changes starting January 1, 2018:

Non insured mortgage consumers (buyers with a 20% or greater down payment) must now qualify using a new minimum qualifying rate.
The minimum rate will be the greater of the ve-year benchmark rate published by the Bank of Canada OR the lender contractual mortgage rate +2.0%.

How does this a ect the mortgage consumer with a down payment of 20% or more?

The biggest impact will be on the amount in which the homebuyer will be able to qualify. Previously, the homebuyer quali ed at the rate offered by the lender. Now, the homebuyer must qualify at the benchmark rate which is the higher of the Bank of Canada Rate (currently 4.99%) OR the rate from the lender plus 2%. This applies to all terms, xed and variable rates.

The stress test for non-insured mortgages applies to both x rate and variable rate mortgages. On variable rate mortgages, the rate at time of funding is based on Canada’s prime rate (presently 3.20%) +/- a given mar- gin. Today’s average variable rate is prime – .45% (3.20% is prime – 0.45%) = 2.75%. So applying the stress test of the greater of the two qualifying rates; Bank of Canada is 4.99% and the actual rate of 2.75% + 2% = 4.75% thus the BOC would be the qualifying rate to use since its higher.

For example:

Do I still have the option to re nance my home?

Yes, homebuyers will still have the ability
to re nance up to 80% of the value of their property. You will have to pass the same stress test which is the higher of the Bank of Canada Rate (currently 4.99%) OR the rate from the lender plus 2%.

If my contract was written prior to Oct. 17, 2017 or prior to Jan. 1 , 2018, will I qualify using the old or new benchmark rules?

This depends on the lender. Some lenders will use current rules up to Jan. 1, 2018. Likely there’ll be a submission deadline around Dec. 28., 2017. DLC will continue to update as more information arises.

When the stress test for HIGH RATIO (less than 20%, insured deals) was introduced in 2016, consumers were grandfathered under the old rules (no stress test) if the real estate contact date was written before the start of the stress test rule.

Mortgage Amount $400,000

If Your Contract Rate is 3.44%

Benchmark Rate 5.44% (3.44% + 2% > BOC)

Monthly Payment

$1,985.00

$2,427.00

Minimum Income*

$70,000

$85,000

Mortgage Amount $400,000

If Your Contract Rate is 2.7%**

Benchmark Rate 4.99% (2.7% + 2% < BOC)

Monthly Payment

$1,832.00

$2,324.00

Minimum Income*

$65,000

$81,500

*The chart above is based on 35% GDS RATIO (Gross Debt Service Ratio) and a 25 year amortization. **In order to qualify for any variable rate, as in the past, you must qualify at the BOC rate.

STRESS TEST SUMMARY

UNINSURED MORTGAGES

Homebuyers/owners qualify for a mortgage using the benchmark rate, which is the Bank of Canada rate (Now 4.99%) OR the lender rate +2%, whichever is greater.

INSURED MORTGAGES

You must qualify for a mortgage at the Bank of Canada rate (currently 4.99%).

TO CLARIFY

The new stress test – the greater of BOC rate OR actual lender rate +2% – only pertains to uninsured mortgages where your equity is 20% or greater.

DOES THIS AFFECT AMORTIZATION?

This new policy from OSFI does NOT have an amortization component. The lender can still set the qualifying amortization to their own speci c policy (eg, 25, 30 or 35 years).

CHANGE 1:

QUALIFYING RATE STRESS TEST TO ALL NON INSURED MORTGAGES

Stress test rules passed down from OSFI only pertain to residential mortgages (dwellings with
1 -4 dwellings under one legal description: houses, duplexes, tri-plex and four-plex). Any complex over four units is considered commercial and the stress test does NOT apply.

What if I don’t qualify at best rate lenders?

The qualifying stress test rule will also apply to alternative lenders (also know as B lenders) who are governed by OSFI. Any federally regulated lender will have to adhere to the stress test ruling. This will be all mortgage lenders in Canada excluding private lenders and Credit Unions.

To counter this much higher qualifying rate, these alternative lenders will have the discretion to revisit their own income-to- debt-ratio (TDS) calculation policies. For example, presently these alternative lenders have the ability to approve mortgages with a 50% TDS (banks are more like 42% on average). Under the new stress test rules, alternative lenders will most likely have to increase the TDS policy to a higher gure to offset the higher qualifying mortgage payment under the stress test rate calculation. DLC will communicate to our network as soon as lenders are able to communicate their decision.

Mortgage lenders (excluding credit unions and private lenders) must establish and adhere to appropriate LTV ratio limits that are re ective of risk and updated as housing markets and the economic environment evolve. We are awaiting more details on this policy from lenders. As we have new information, we will update this document.

What does this mean?

OSFI directs lenders (excluding credit unions and private lenders) to have internal risk management protocols in higher priced markets (sometimes called “hot real estate markets” like Toronto and Vancouver). This is a continuation of a policy already in place. Many mortgage lenders have been following the principles of the policy for the last 10 to 12 months.

Mortgage lenders (excluding credit unions and private lenders) are prohibited from arranging with another lender: a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law. This is often referred to as “bundling” or “bundle partnership”.

What does this mean?

For example: a consumer applies for 80% LTV mortgage and the lender can only approve 65%. The lender then partners with a second lender for the additional 15%. The original lender then “bundles” the 15% LTV mortgage with the original 65% mortgage to form the complete 80% LTV loan. This is no longer permitted as per OSFI.

OCTOBER 30TH 2017

CHANGE 2:

LENDERS WILL BE REQUIRED TO ENHANCE THEIR LOAN TO VALUE (LTV) MEASUREMENT AND LIMITS TO ENSURE RISK RESPONSIVENESS

CHANGE 3:

RESTRICTIONS WILL BE PLACED ON CERTAIN LENDING ARRANGEMENTS THAT ARE DESIGNED, OR APPEAR DESIGNED TO AVOID LTV LIMITS

HOW CAN DOMINION LENDING CENTRES HELP?

Now, more than ever, new homebuyers and existing homeowners are going to rely on mortgage brokers for their guidance and expertise in navigating through these regulatory changes.

There are di erences amongst the many lenders that we have access to and the greatest value a broker can provide is the knowledge of the lending environment and in choosing which lender is best suited for your needs.

Dominion Lending Centres will continue to educate our mortgage professionals as new data arises. This way you can be kept up to date with all of the latest information. The content in this document is current as of the date at the top of page 1.

YES, WE’VE GOT A MORTGAGE FOR THAT!TM

Banks, Credit Unions and Monolines – Oh My! London Ontario Mortgages

General Katherine McIntyre 3 Apr

We are all familiar with the banks and local credit unions, but what are monoline lenders and why are they in the market?

Mono, meaning alone, single or one, these lenders simply provide a single yet refined service: to fulfill mortgage financing as requested. Banks and credit unions, on the other hand, offer an array of other products and services as well as mortgages.

The monoline lenders do not cross-sell you on chequing/savings account, RRSPs, RESPs, GICs or anything else. They don’t even have these products and services available.

Monolines are very reputable, and many have been around for decades. In fact, Canada’s second-largest mortgage lender through the broker channel is a monoline lender. Many of the monoline lenders source their funds from the big banks in Canada, as these banks are looking to diversify their portfolios and they ultimately seek to make money for their shareholders through alternative channels.

Monolines are sometimes referred to as security-backed investment lenders. All monolines secure their mortgages with back-end mortgage insurance provided by one of the three insurers in Canada.

Monoline lenders can only be accessed by mortgage brokers at the time of origination, refinance or renewal. Upon servicing the mortgage, you cannot by find them next to the gas station or at the local strip mall near your favorite coffee shop. Again, the mortgage can only be secured through a licensed mortgage broker, but once the loan completes you simply picking up your smartphone to call or send them an email with any servicing questions. There are no locations to walk into. This saves on overhead which in turn saves you money.

The major difference between a bank and monoline is the exit penalty structure for fixed mortgages. With a monoline lender the exit penalty is far lower. That is because the banks and monoline lenders calculate the Interest Rate Differential (IRD) penalty differently. The banks utilize a calculation called the posted-rate IRD and the monolines use an IRD calculation called unpublished rate.

In Canada, 60% (or 6 out of every 10) households break their existing 5-year fixed term at the 38 months. This leaves an average 22 months’ penalty against the outstanding balance. With the average mortgage in BC being $300,000, the penalty would amount to approximately $14,000 from a bank. The very same mortgage with a monoline lender would be $2,600. So, in this case the monoline exit penalty is $11,400 less.

Once clients hear about this difference, many are happy to get a mortgage from a company they have never heard of. But some clients want to stick with their existing bank or credit union to exercise their established relationship or to start fostering a new one. Some borrowers just elect to go with a different lender for diversification purposes. (This brings up a whole other topic of collateral charge mortgages, one that I will venture into with another blog post.)

There is a time and a place for banks, credit unions and monoline lenders. I am a prime example. I have recently switched from a large national monoline to a bank, simply for access to a different mortgage product for long-term planning purposes.

My job is to show you your approval options from all sources, and let you choose where you’d like to have your mortgage.  Call me today with any questions, 519-719-9415.

 

Adapted from Michael Hallett, DLC

How Your Credit Score Affects Your Purchase

General Katherine McIntyre 13 Mar

Your Credit Score that the lenders use, not to be mistaken by the Credit Risk Score you see when you check your own credit, is one aspect of determining your borrowing power. The better your score, the length of established credit and your payment history the better when it comes to mortgage financing.

Let’s assume that all parts of an application are equal (available down payment, income, monthly liability payments etc.) except for the Credit Score. Established credit in this case would be any credit report that has at least 2 accounts reporting with a limit of $2,000 for 2 Years.

Comparing the credit profiles of Jane and John both who make a gross annual income of $50,000 the following would apply:

First Gross Debt Service Ratio (GDS) is the combined shelter expenses (heat, property tax, half of condo fees & mortgage payment) in relation to the borrowers gross income. And Total Debt Service Ratio (TDS) is the GDS plus all other monthly debt liabilities in relation to the borrowers gross income.

Jane has a Credit Score over 680

GDS allowed is 39%
TDS allowed is 44%

John has a Credit Score between 600-679

GDS allowed is 35%
TDS allowed is 42%
Each year Jane may allocate $19,500 towards GDS and $22,000 towards TDS.

And each year John may allocate $17,500 towards GDS and $21,000 towards TDS.

Lets assume heat and property tax combined are $300/month. This means that Jane with her excellent credit can allocate $1,325 towards her mortgage payment and John can allocate $1,158 toward his mortgage payment.

Using the current Benchmark Qualifying Rate of 4.64% to qualify Jane may qualify for a mortgage of $236,066 and John may qualify for a mortgage of $206,313, a difference of$29,735.

As you can see there is quite the difference in mortgage amounts allowed under each credit rating. If you’re thinking of buying it’s best to consult a Dominion Lending Centres mortgage broker who will check your credit, help you determine your maximum mortgage amounts and if necessary help you make credit decisions that may improve your credit score and buying power.

By Kathleen Dediluke