Never have we seen so many changes in such a short time. This has been a month jam-packed with mortgage rule easing. Last week, the feds declared that starting Dec. 15, they’re boosting the property value limit for default insurance to $1,499,999.99, increasing the maximum amortization for all insured first-time buyers to 30 years and lifting the maximum amortization for all insured buyers of new construction to 30 years. What does that mean for you....
Borrowers got yet another round of mortgage relief yesterday when The Office of the Superintendent of Financial Institutions (OSFI) announced it was eliminating the federal stress test for uninsured mortgage switches. That change is expected on Nov. 21.
For borrowers who need extra flexibility when applying for a mortgage, these developments give them many more options. They’re also a bonanza for the lending business itself.
Here are five more things to know about this mortgage policy windfall.
1) It’s a boost for the $1-million to $1.5-million home market
When the government announced its new policy, it forgot to clarify what the minimum down payment would be for default-insured purchases over $1 million. Oops. It finally confirmed this week that the down payment requirement is five per cent of the first $500,000 and 10 per cent of the balance. That’s just $125,000 (8.33 per cent) on a $1.5 million purchase, far less than the $300,000 currently required. Moreover, it’s rumoured that default insurance premiums on homes over $1 million may stay the same at 4.2 per cent, assuming a 30-year amortization and minimum down payment. That’s a premium of up to $57,750 plus provincial tax, if applicable, on a $1.5 million property. While pricey, this cost is offset by the 50-plus basis point rate savings that insured borrowers get, and from the ability to get in the market quicker and free up capital for other investments (assuming someone has the full standard 20 per cent down payment lying around). If home prices eventually resume their historical pace, buying one year later could cost a buyer over five per cent more: $50,000 to $75,000-plus on a $1.0 to $1.5 million home.
2) This all adds to other bullish developments
More accessible lending will combine with lower mortgage rates, lower home values and higher incomes. What’s more, the ratio of mortgage-related costs to income has fallen to a three-year low for typical dual-income homebuyers. These juicier fundamentals will (sooner or later) draw more house hunters to the property playground.
3) OSFI’s new switch rule will save people money
For years, the government’s mortgage stress test has prevented a minority of borrowers from switching lenders to get a better deal. By eliminating the stress test for uninsured borrowers who want to change lenders, OSFI is effectively reducing the amount of income someone requires to get approved elsewhere — by well over 10 per cent in some cases. That’ll enable thousands of folks with temporarily high debt-to-income ratios to change lenders at renewal. Saving even 10 basis points on the average $300,000 renewal rate could put over $1,400 in a borrower’s back pocket over five years. This change should have happened years ago because there was never sufficient data to oppose it. Without the push from politicians, industry and a bit of public nagging, OSFI might have never given this policy a rethink. Good thing they finally did.
4) The new $1.5 million insurance limit has limits
The Department of Finance says that it’s only raising the insured value maximum for buyers putting less than 20 per cent down. This means lenders buying “portfolio insurance” to cut funding costs on low loan-to-value mortgages can’t help buyers with 20 per cent equity. The government totally dropped the ball here. If they’re going to ease up on rules for riskier borrowers, why not extend the love to those with more skin in the game — who, by the way, are 60 per cent less likely to default, per CMHC stats? By snubbing portfolio insurance for properties up to $1.5 million, the Department of Finance is handcuffing smaller bank rivals from getting the insured funding needed to duke it out with the big guys and offer you better deals. It makes you question whose interests these policymakers are really going to bat for.
5) Protecting the taxpayer
Just over a decade ago, the government started tightening the reins on government-backed mortgage default insurance, largely in the name of protecting us, the taxpayers, from potential losses. Fast forward to now, and it looks like the taxpayer scare was more ghost story than documentary. That’s validated not only by these latest insurance rule changes, but by the fact mortgage arrears are about half the long-run average despite near-record debt and the most vicious rate hike cycle since the early eighties. That’s not to mention the fact that default insurers are significantly over-capitalized, and government policy now almost forces banks to try to keep troubled borrowers in their homes.
Bottom line: mortgage insurance is about as risky as a nap in a hammock. And regulators continually watch it under a microscope. These new rules will do nothing to add meaningful risk to taxpayers, but they will increase the dividends CMHC pays taxpayers.
