Mortgage Information

Mortgage rules you should be aware of: (especially for first time home buyers)

Since 2008, the federal government has made several changes to the rules for mortgages insured through the Canada Mortgage and Housing Corporation (CMHC) and other private sector mortgage insurance providers. These rules particularly affect home buyers with less than a 20 per cent down payment, which include many first-time home buyers in Canada.

The changes include the following:

  • The maximum amortization period has been reduced to 25 years from 40 years.

  • Home buyers must have a down payment of at least five per cent of the home purchase price and starting February 15, 2016, home buyers must add  a further 10 per cent to their down payment for the portion of the house price between $500,000 and $999,999. Borrowers buying homes at or above $1,000,000 will need a down payment of at least 20 per cent if their financing is from a federally-regulated financial institution. For non-owner occupied properties (i.e. investment properties), a minimum down payment of at least 20 per cent is mandatory. Government-backed mortgage insurance is available only for homes with a purchase price of less than $1 million.

  • Canadians can now borrow to a maximum of 80 per cent of the value of their homes when refinancing, a drop from 95 per cent.

  • Limiting the maximum gross debt service (GDS) ratio to 39 per cent and the maximum total debt service (TDS) ratio to 44 per cent. 

    • These two important ratios (GDS & TDS) are used by lenders when calculating a person’s ability to pay down debt. GDS is the share of a borrower’s gross household income needed to pay for home-related expenses, such as mortgage payments, property taxes and heating expenses. For example, let's say your gross monthly income is $5,000 and the bank's GDS ratio for you is 36% (it can vary within a range depending on the circumstances). This means that in order to qualify for the mortgage, your monthly mortgage payments, property taxes and heating expenses cannot exceed $1,800/month (5,000 monthly income x GDS ratio of 36%). For someone considering purchasing a condo, you would include 50% of your anticipated maintenance fees. In other words, your monthly mortgage payments, property taxes, heating expenses and 50% of your anticipated maintenance fees cannot exceed $1,800/month.

    • TDS is the share of a borrower’s gross income needed to pay for all debts, including those relating to home ownership. In addition to the those items considered in the GDS calculation, TDS also includes monthly car payments, loans, minimum credit card payments, etc.

    • Lenders have some flexibility in terms of the percentages they use to calculate the GDS and TDS ratios. The GDS percentage is typically between 32%-39%. The TDS ratio is typically between 40%-44%. Credit scores and other factors impact the percentage used by the lender.

  • New federal legislation in 2016/2017All homebuyers (insured or not) seeking a mortgage from a federally regulated bank (not a credit union) must qualify for a mortgage at an interest rate the greater of their contract mortgage rate + 2% or the Bank of Canada’s conventional five-year fixed posted rate (5.14% as of Feb 11/2018; rates are updated weekly; click here for the latest rate & scroll down to "Interest Rates" section, Conventional 5 year term).  This is referred to as a "stress test". For borrowers to qualify, their debt-servicing ratios (GDS & TDS ratios discussed above) must be no higher than the maximum allowable levels when calculated using the greater of the contract rate + 2% and the Bank of Canada posted rate. I urge you to keep reading because my example below will illustrate the impact of the new legislation.

    • So, say you're applying for a 5 year fixed rate mortgage and you're putting more of less than 20% down of the value of the home, when the lender computes how much they're willing to lend you (the mortgage amount), the lender will calculate your GDS & TDS ratios (see above) based on this revised "stress" test. In other words, for purposes of determining how much you qualify for, the bank will assume that your mortgage payments are based on the higher of the rate they're offering you + 2% or the Bank of Canada 5 year fixed rate. This means that as a result of these legislative changes, you'll qualify for a lower mortgage amount given the same household income!
      • Let's look at an example. Let's say you're considering a condo purchase listed at $500,000. You plan on putting 10% down (that's $50,000). This will be an insured mortgage but we'll ignore adding any mortgage insurance to the loan amount for purposes of this example. Your lender is offering you a 5 year fixed rate mortgage at 3% over 25 years and you'll be making monthly payments. Your monthly mortgage payment would be approximately $2,130. Say your family income is $7,500/month and the estimated monthly property taxes, condo fees and heating costs are $200, $400 and $100 respectively. Ignoring the new legislative changes, what is the GDS ratio that your lender will calculate to determine if you qualify for this mortgage? [$2,130 + $200 + 50% of $400 (remember that only 50% of the condo fee is included in the GDS) + $100] / $6,500 = 35%. Based on this, your lender will likely qualify you for the $450,000 mortgage you're applying for (ignore any mortgage insurance added onto your loan)! Now let's turn our attention to how the new legislation applies to this example using the same facts. The revised monthly mortgage payment (for purposes of calculating the GDS) would be $2,653 (vs $2,130). This is because instead of using the 3% rate your lender is offering you, for purposes of computing the GDS, the lender will now use the greater of the rate offered + 2% OR the 5 year BOC fixed rate of 5.14% (this is the rate as of Feb 11/2018 but it'll fluctuate). So now, when the lender calculates the GDS rate, it'll be as follows: [$2,653 + $200 + 50% of $400 + $100}/$7,500 = 42% (vs 35% without the new legislative changes). Unfortunately, as a result of the new legislation, you won't qualify for a $450,000 mortgage because you exceed the 39% max GDS established by CMHC. By the way, 39% is the maximum GDS allowed by CMHC to qualify for an insured mortgage. The lender can use a lower percentage to determine your eligibility. 

      • Homeowners renewing existing mortgages are not affected by this measure.

      • The moral of the story is that as a result of these legislative changes, you'll need a higher income to qualify for the same mortgage amount you would have qualified for without the rule change; you'll need roughly 20%-30% more income now than before the rule change to qualify for the same 5 year fixed term mortgage (as an example)!!!

Now that you have a better idea regarding some of the mortgage related rules, keep in mind that when deciding to buy a home, it's important to arrange for the right type and form of financing. There are a variety of mortgage products offerred by all the lending institutions and it's important to ensure you get the mortgage that best suits your needs.

Things to consider in advance of any discussion you have with your bank or mortgage broker:

Bi-weekly and weekly payments

Apart from monthly payment options, most mortgages have the option to allow payments to be made on a weekly or bi-weekly basis. This option may be desirable for two reasons. The first is it can save you money as you can expect to pay off your mortgage sooner. This can save you dramatically over the life of your mortgage. The other reason why these options are so popular is that if your employer pays you on a weekly or bi-weekly basis, you can simplify your budgeting by making the payment line up with the way you paid. So - make sure that you ask your lender or mortgage broker to run the numbers for you based on different payment frequencies to see how much interest can be saved over your mortgage term depending on the payment frequency.

Making Extra payments

Paying extra amounts on your mortgage can make a big interest saving over time. When we select a mortgage company, privilege payments options are something that we look for. A 20% privilege payment will allow you to pay off up to $20,000 per year on a $100 000 mortgage. It is important that the privilege payment also be flexible to allow you to pay smaller payments on the mortgage and as often as you wish. An extra $1000 periodically paid on a mortgage can help you become mortgage free faster. You'll want to be sure that you understand exactly how any lender treats any prepayments. i.e. does your mortgage allow for prepayments? If so, how often and for what amount?

Reducing the CMHC fees on your purchase

When you require a mortgage for more than 80% of the purchase price of a property, that mortgage must be insured by Canada Mortgage and Housing (CMHC) or GE Mortgage insurance. The premium charged by these company`s decreases as the down payment increases. When you finance your property at 95%, a premium of 3.6% is added to the mortgage. By increasing the down payment to 10% of the purchase price the premium can be reduced to 2.4%. If you can put down 20%, you can avoid any additional insurance fee. Depending on your situation there are ways that you can structure this financing to avoid the CMHC or GE insurance premium. A knowledgeable lender or mortgage broker can assist you with options.

Advantages of Bigger Down Payments

As mentioned above, when you put a 20% down payment on your purchase you can avoid the CMHC premium. More importantly the larger the down payment, the lower the amount of interest you will pay over the life of your mortgage. It is important to note that it may not be wise to stretch yourself to increase your down payment and end up borrowing on credit cards or a line of credit at a higher rate.

Short Term Rates vs. Long Term Rates

The options for mortgages available can be very confusing for most mortgage shoppers. Terms for mortgages vary between variable and fixed rate, 6-month terms to 10 year terms. Taking a variable or floating rate mortgage can have savings. Typically the shorter the term or guarantee of the rate, the lower the rate will be. This does not always happen, depending on the market place and the economy, but history has shown that short-term rates tend to be lower than long-term rates. The upside of variable rate is the strong potential for interest rate savings. The downside is the fact that you are accepting the interest rate risk without a guarantee. If you are considering a variable rate mortgage you need to look at your own risk tolerance, and your cash flow available to deal with potential increased payment. Considering projections of rates and where we see interest rates heading can also be important in this decision. Make sure you talk to an expert when you are making this decision but keep in mind that no one has a "crystal ball"! Also keep in mind that even if you choose a variable rate option, there may be the potential to "cap" the rate at a certain percentage. Be sure to ask your lender or mortgage broker about this option.

Mortgage features - Some other considerations

Every lending institution is different, and each will have their own customizable mortgage options. Consider discussing the following with your lender/mortgage broker:

  • Open vs. Closed mortgage - An open mortgage can be prepaid, in part or in full, during the term of the mortgage without paying a prepayment charge. The interest rate on an open mortgage is often higher than the interest rate on a closed mortgage. An open mortgage can provide flexibility until you are ready to lock into a closed term.
    A closed mortgage is one that cannot be prepaid, renegotiated or refinanced before the end of the term without paying a prepayment charge. However, most closed mortgages contain certain prepayment privileges, such as the right to make a prepayment of 10-20% of the original principal amount each year, without paying a prepayment charge. A closed mortgage often has a lower interest rate than an open mortgage.
  • Prepayment - This privilege gives you the right to make payments toward the principal portion of your mortgage over and above the monthly payments. Make sure you understand what penalties, if any, arise if you decide to sell your home and repay any borrowed amounts before or at end of term.
  • Portability - This means transferring the balance of your current mortgage at the existing rates and with the existing terms and conditions to your new home.
  • Assumability - With an assumable mortgage, you, the purchaser simply assumes the obligations of the seller’s mortgage. This is a good feature especially if the terms are more favourable than the existing market conditions allow.
  • Expandibility - If you need additional funds down the road, will your mortgage terms allow you to increase the principal amount? Usually, your new rate will be a blended amount of the initial mortgage rate and the prevailing rates. Be sure to discuss this with your lender if you foresee large expenses in your future like renovation or education costs.

Mistakes you can't afford to make:

  1. Don’t choose the wrong mortgage: With the advent of instant refinancing, home loans are no longer the lifetime obligations they used to be. Still, you don't want to be saddled for even a short period of time with the wrong mortgage.
    Investigate all your options, then lay your choices side-by-side and 
    do the math like a 'beancounter', making sure to compare worst-case scenarios. Be sure to look at initial interest rates, future interest rates and payments (if different), and the possibility of prepayment penalties.

  2. Don’t confuse "preapproved" and prequalified" with a loan commitment: These are debatable terms in real estate because not all lenders define them the same way. In fact, one leading real estate dictionary contains neither expression because their definitions are uncertain.
    According to one school of thought, when you are prequalified, the lender is making an educated guess about how much you can borrow based on information you've provided. When you are preapproved, the lender has verified everything you have told him or her and is offering to lend you up to a given amount at current interest rates - under certain conditions.
    Whether prequalified or preapproved, final clearance and a check at closing - a loan commitment - are subject to an appraisal satisfactory to the lender, good title, a last-minute credit check and other verifications. When meeting with lenders, always ask how they define each term and what additional steps will be required to actually obtain a loan.

  3. Don’t have too much credit: Excessive credit is almost as bad as no credit or even bad credit. Even if you pay your bills on time, lenders tend to focus just as much on how much credit you have available to you as they do on timeliness. So being up to your ears in car loans and credit cards is a sure way to be turned down for a mortgage. Postpone any major purchases until after you buy your house.

  4. Don’t lie on your loan application: Exaggerating your income on a mortgage application or putting down other untruths can be an offense. Lenders rarely prosecute liars, but if they find out later, they can call your loan due and payable. In other words, your lender can force you to pay the total amount owing immediately.

  5. Don’t hide if you can't make your payments: The worst thing you can do is ignore phone calls and letters from your lender when you are behind on your payments. Lenders have many options at their disposal to help keep borrowers from losing their homes to foreclosure. But they can't do anything for you unless they can talk to you about your difficulties. Lenders are the enemy only if you give them no other choice.

Something else to consider - Although obvious to many, banks and mortgage brokers compete intensely with one another for your business. Be sure to ask either your bank or mortgage broker for their best rate. Keep in mind your mortgage broker is typically paid by the lending institution as a percentage of the loan value; somewhere between 0.75%-0.90% but it can vary. So, if your mortgage broker arranges a $500,000 mortgage for you, their fee will be around $3,750-$4,500 (can vary), typically paid for by the lending institution. Keep in mind this amount is typically shared/split in some proportion between the mortgage broker and his/her brokerage.

For those of you who do not have existing relationships with a bank or mortgage broker, you may want to make a few calls to see what rates are being offered. Before giving you this information, banks & mortgage brokers will typically require you to complete an application and provide various information, such as a letter of employment, pay stub, driver's license, Notice of Assessment (for the self-employed), etc. Before providing them with this information, you may want to ask them what the quickest way of obtaining the best rates would be without providing them all this information. It's possible that initially they can shortcut the information they need you to provide them with the understanding that you have very good credit, stable employment, etc. Keep in mind that in the end, whether you obtain your mortgage from the bank directly or thru a mortgage broker, you'll need to provide all the above mentioned information. Also keep in mind that a lower interest rate doesn't automatically mean that you should "switch" lenders. You really want to see the numbers. i.e How much interest would you save over the term between the options you've been given? Over and above the math, there may be non-financial considerations. 

For those considering obtaining a mortgage, I'd like to invite you to read a couple of articles regarding "collateral mortgages" by clicking here. Collateral mortgages are offered in the marketplace by a few lenders (such as TD Bank) and at times may not be properly explained to consumers. These differ from the regular mortgages most have become accustomed to but there seems to be a trend toward lenders moving towards "collateral mortgages".

One last thing - Click here for current rates
The "Rates" tab gives you a good idea as to the best rates currently offered in the market; you can use this info for a more informed chat with your bank or mortgage broker but remember it's not always about finding the best rate!

The "Mortgage Qualifier" tab gives you an estimate of the mortgage amount that you would qualify for. It's a very useful tool. Once you enter a few numbers, it figures out approximately how much a bank would be willing to lend you for your home purchase. Keep in mind, that banks/mortgage brokers will also need to obtain your credit score along with other documentation that shows your income, assets and liabilities; it's part of the whole credit application process.

Due to very recently introduced federal legislation taking effect as of October 17, 2016, the calculator is in the process of being modified to reflect this significant change. The legislation impacts insured mortgages and essentially changes how the banks qualify borrowers. Unfortunately for some (first time homebuyers in particular), this change will lower the mortgage amount they qualify for by 20%-30% (approximately). Click here for details.