Or so many lenders and mortgage brokers would have you believe with the recent changes announced by the Department of Finance (DofF) on October 3rd. Admittedly, when I read the edited announcement I found in the Globe and Mail later that day (when I was home sick, by the way), I thought the sky was falling. This one announcement could have singlehandedly made massive changes to the industry I love and enjoy, and threatened my livelihood.
The single most important piece of this announcement, which was tucked into later edits of the original article by what I guess was an unsuspecting author, was that effective October 17th, all high and low ratio insured mortgages need to qualify at the mortgage qualifying rate (MQR) of 4.64%.
On the surface, it means nothing to anyone that reads it, but to insiders like myself, I instantly recognized that the various non-bank lenders will have big issues because most of them use low ratio mortgage insurance so they can package up and sell their mortgage portfolio to other investors.
In the past, the underwriting requirements for low ratio insurance was different from high ratio insurance. There were traces of it, but the differences were not game changing.
I’m not going to delve into the already effective change for all high ratio insured mortgages to qualify at 4.64%. That’s a done deal, and it is expected that 7-10% of the home buying market are being impacted by this change. Instantly, homebuyers with less than 20% down saw their mortgage preapproval decrease by an average of 20%. It’s huge for those folks on the margins of affordability, trying to get into competitive neighbourhoods.
Under the new requirement to apply high ratio insurance rules to low ratio insurance products, this now meant the following:
- Mortgages must be qualified at 4.64% (even those with 20% down)
- Maximum amortizations will be reduced to 25 years
- No rental properties or homes with more than 2 units
- Maximum purchase price/value of $1 million
- Minimum credit score of 600
You can see with these changes, it will be a new world for all lenders that need low ratio insurance, and there were almost instant announcements from lenders indicating they no longer offer 30 amortizations, no more rental products and no refinances, inlcuding the commercial real eastate banking. And lenders that were still offering them were adding big premiums to the rates.
Admittedly, I was scared. I even held off on my plans to hire a new member to our growing team.
Fast forward two weeks and our lenders are showing their resiliency. Most are retracting those earlier announcements, bringing back the programs they were quick to cancel. Refinances and 30 year amortizations are back on the table as new sources of funding are found and both lender and investors get more innovative, and tolerant, of our new environment. And the rate premiums being attached are being removed in most cases.
It appears the DofF is also listening to lobbying parties as they have made some adjustments to the earlier announcement, allowing lenders more time to implement these radical rule changes. The need to qualify low ratio insured deals at the MQR has been deferred to November 30th.
Many lenders have made arrangements for new sources of financing that gets around this requirement, but for those still scrambling, it lets them all breathe a huge sigh of relief that they don’t have to shutter operations while they make these arrangements.
Post October 17th, we have lenders that are announcing that they are honouring previous preapprovals until they expire. It would have been helpful to have this information before the deadline passed, but given the built in cost of a preapproval and that statistically, only 25% of these deals fund, I can appreciate that lenders didn’t want to take on a barrage of applications that will ultimately slow down operations for clients that have actually purchased a home and need time sensitive financing.
The tone has also softened in that any deal signed before October 17th will still be honoured under the old qualifying rules, including preconstruction purchases. Not every lender will honour this, but there are still some options available.
It was a crazy couple of weeks while the high risk borrowers scramble to find a home before their dreams of home ownership disappear as quick as the announcement was made. We’ve made it through that storm, and another round of mortgage changes. Let’s see what the government throws at us next.