The dawn of the new mortgage rules is upon us. Just as the dawn of a new day reveals the storm clouds that we will face, so do the months of January and February reveal to us how the year will shape up for real estate in 2017.
The last set of changes put in place by Bill Morneau is currently starting to show their effects in the mortgage market. Lenders are scrambling to make sense of the new rules and put in place new policies that will be implemented for the new buying season in 2017. In the last quarter of 2016, we saw a sharp increase in rates as well as Canadians being refused for mortgages that they would have otherwise easily qualified for to get a complete breakdown and explanation of the new rules please visit our article titled New Rules Hit Housing Market.
As a Mortgage Broker, my Job is to always look out for my clients best interest and set up a mortgage that gives them the best possible rate and conditions. We rely heavily on having a vast network of lenders to pick from, this is what gives clients who choose to do business with us the upper hand in the mortgage transaction.
The new rules have caused a great deal of turmoil within the banking world in particular within the ranks of the Monoline lenders that we rely on to give us the best possible rates for our clients. You ask what the hell is a Monoline lender to put it simply think of them as a mortgage wholesaler. When banks have excess mortgage funds that they can not place they turn to Monolines like First National or Paradigm to underwrite and fund those mortgages. The banks, in turn, become investors for those mortgages. Then the Monolines block ensures the mortgages and protects the asset for the investor, In this case, one of the big 5 banks in Canada.
I don’t want to harp about how damaging the new rules are to the industry nor is my intent to point a finger to how irresponsible the government has been with the new rules. The point of this article is simply to educate and guide you the reader to what is important to you. Getting your mortgage request approved. So let us start!
The 3 elements required to make up a successful mortgage transaction are 1) Credit, 2) Income, 3) Equity.
CREDIT: Your credit report is the foundation of your entire transaction you can have a great job and have money in the bank if the credit bureau shows you are irresponsible then you will not be able to qualify for the mortgage. The two credit reporting agencies in Canada that are used by the banks today are Equifax and Transunion. Your information is gathered by these agencies from your creditors and summarized in your report, the report is also run through a series of algorithms that determine your credit score. This score serves as a guideline to lenders to determine if they will approve or refuse the mortgage. The new mortgage rule changes put in place as of Nov 30th limit Canadians with credit scores of less than 600 to be able to qualify for an insured mortgage. Before you make a move to buy a property I recommend that you take a moment and obtain a copy of your credit bureau you can do this for free by using this form. This is the element that you as a consumer have the most control over. In subsequent posts, we will be discussing how to make sure that you have the highest score possible.
INCOME: The second element that is looked at is what you spend vs what you earn. The banks will look at your gross household income and run it through a series of calculations that will determine your indebtedness. The two ratios used by the banks are the GDS (Gross Debt Service) & TDS (Total Debt Service) Ratios. Your credit score will determine how high a bank is willing to allow your ratios to go. The better your score the higher they will allow you to go with the ratios. For example, if your credit score is over 680 they will allow you to spend up to 39% of your gross annual income on debts that are related to the home you are purchasing this is your GDS ratio. They will as well allow you to go up to 44% on your TDS ratio this one looks at all your debts including car payments, loans, credit cards as well as all the expenses of the property you are buying.
Equity: Last but not least is your equity. This is calculated by a ratio called LTV (Loan to Value). This ratio will determine if your mortgage will be insured or if it will be conventional. It will also determine if you are allowed to stretch your amortization to 30 years vs the insured max of 25 years. The equity portion of the equation looks at how much money you will put down vs. the amount of mortgage you will be borrowing. An LTV of 5 means that you have put down 5% Downpayment and the bank has lent you 95% for the purchase this would be an example of an insured mortgage capped at 25 years amortization. If you have an LTV of 20 this is an example of a conventional mortgage that could be stretched to 30 years.
It remains to be seen what will happen this year with the new mortgage rules. It is important for us to be prepared for the moment that we transition to homeownership. We will be releasing a series of posts over the next month that will be designed to do just that.
As always if you have any questions or comments please feel free to contact me.