Since the market crash of 2008 the government has introduced many mortgage rule changes to tighten up lending and to contain home prices. During this time period they have failed to address the ease with which consumers can obtain unsecured debt which is the real problem that ultimately hurts consumers.
This fall they are set to come down with the biggest mortgage rule change yet to further try and dampen the housing market. Before we get into that we have come up with a short list here of all of the changes that have gone on over the last 8 years. If you feel like it is harder than ever to borrow money against a house then you are right. Take a look at this list below.
- Elimination of 100% financing on mortgages. You used to be able to obtain a mortgage for the full 100% price of the home you were purchasing. Now you can get the mortgage for 95% of the price and you then need to get a separate loan for the 5% difference.
- Elimination of high ratio rental property purchases. Financing used to be available to purchase rental properties up to 95%. Now this is restricted to 80% maximum.
- Reduction in refinances available. It wasn’t long ago that you could refinance your home up to 95% of its value – the same percentage financed as if you were to purchase a home. They then reduced this to 90%, 85% and then 80% in three subsequent years.
- Line of Credit limits reduced. At one point in time you could get a line of credit on a high ratio mortgage financed at over 80%. This was then drastically cut back to 65%.
- Stated income mortgages reduced. For self-employed borrowers who didn’t show enough income, stated income mortgages were a way to get a mortgage by stating a reasonable level of income that was higher than their net income. While you can still get this type of financing up to 90% on a high ratio purchase, for conventional purchases and refinances it has been reduced to 65% financing.
- Increased qualifying rate for high ratio mortgages. You used to be able to qualify for a high ratio mortgage at the rate you were paying regardless of the term you chose. So if you chose a one year rate then you got to qualify at that rate. Then the government decided that if you chose a term less than a 5 year fixed rate or you chose a variable rate that you would need to qualify at the 5 year posted rate. Then last year they decided that even if you chose a 5 year fixed rate you would still have to qualify at the 5 year posted rate. This rate currently sits at 4.84% and has drastically reduced what people qualify for.
- Increased qualifying rate for conventional mortgages. You used to be able to qualify for a conventional mortgage (20% down) at the rate you were paying regardless of the term you chose. Then the government decided that if you chose a term less than a 5 year fixed rate or you chose a variable rate that you would need to qualify at the 5 year posted rate of 4.84%.
- Reduced amortizations on mortgages. It was not long ago that you could get a 40 year high ratio mortgage. Then it was reduced to 35 years, 30 years and now 25 years if you put less than 20% down. If you have more than 20% down it is only slightly better with most lenders only offering a 30 year amortization.
- Maximum purchase price reduced on high ratio mortgages. For those of you looking to purchase a property with less than 20% down there used to be no cap on the price. Then the government decided that they would put a cap of $1 million on any mortgage where a consumer has less than 20% down.
- Debt ratios reduced. At one point in time you could borrow up to 44% of your income towards mortgage debt assuming you had a good credit score and no other debt. This was then reduced to 39% of your income regardless of what other debt you have or how good your credit score was.
- Equity lending essentially eliminated. In the past, if you had good credit, a good net worth and lots of equity in your home you could get a mortgage purely based on the equity you had. The lender was relying on the fact that you managed to maintain a great financial picture regardless of your income. These programs are now essentially gone even if you have 50% or more equity.
- Payments used for debt ratio calculations. Whenever you had a line of credit that was secured by your house or even if it was unsecured we used to be able to use the actual payment you were making in calculating your debt ratios. Now, as of one of the last few changes, if you have a line of credit secured by your house we are required to use a payment as if you are paying the benchmark rate of 4.84% amortized over 25 years. This is a significant difference from what you actually pay. Also if you have an unsecured line of credit or credit card we are required to use a payment of 3% of the balance rather than what you actually pay.
You would think that after all of this that the onslaught of changes would stop. Well it isn’t. The biggest mortgage rule change yet to come is that the government is proposing that anyone with 20% down will now have to qualify for their mortgage at a rate that is 2% higher than what they are actually paying. So if you are getting a rate of 3% on your mortgage we will be required to assess it as if you are paying a rate of 5%. What does this do to the numbers? Let’s say you have an income of $70,000 per year. You could currently qualify for a mortgage of $540,000 not taking into account any other property costs. Under the new proposed rules you would only qualify for a mortgage of $426,000. This is a drop of approximately $114,000 just because of the rule change and assuming nothing else changes.
So what does this mean for you? The proposed rule changes are not set in stone yet but there is a high chance they may come into place. This means if you are looking to purchase or refinance with 20% down or more now may be the time to consider getting your mortgage in place before your borrowing power is reduced.
If you need any advice on your personal situation please contact our office at 604-556-3893 or email at firstname.lastname@example.org.
For more information on our mortgage products please visit our website at www.ymscanada.ca.