Getting into a Variable Rate Mortgage Harder Today!!
The federal government announced last month new requirements for anyone borrowing money for a house and needing mortgage insurance. If you have less than a 20% down payment and are borrowing from a financial institution covered by the Bank Act, you have to take out mortgage default insurance, which ensures the banks are covered for any losses resulting from payment defaults.
For principal residences, the new rules force consumers to qualify for a loan based on being able to make payments on a five-year fixed-rate mortgage, which has a much higher interest rate than variable mortgages, now as low 1.75%.
Clearly, Ottawa's view was toward rising rates. And this week, two of the major banks raised their posted rate on five-year fixed mortgages to 6.10-6.25%.
But one lingering question was how the five-year rate would be calculated in terms of qualifying a customer. In other words, it would obviously be a lot tougher to qualify for a mortgage under the new rules when using the posted rate of 6.25%. But if using the actual rate consumers get -- these days as low as 4.49% -- that's a lot less income you'll need to buy your new home.
But an internal document distributed by Canada Mortgage and Housing Corp. to mortgage brokers shows consumers will be able to use their "actual rate" to qualify for a mortgage if they go for a term five years or longer.
If buyers want a variable-rate mortgage, they will have to qualify based on "the benchmark rate," which is set by the Bank of Canada, currently 6.10%.
So, if you want to go short or variable, you had better be able to make payments based on an interest rate as high as 6.10%, which is where the benchmark rate will likely sit for awhile.
Probably 20% of the overall mortgage population is going to be affected by this rule in the sense they are no longer going to be able to qualify for a variable-rate mortgage or a one- to four-year term. The qualifying rate is going to affect the debt ratios of those people.
The end result may see more people forced to lock in their rate, which would hardly seem fair given variable-rate mortgages have been a better deal than fixed-rate mortgages about 90% of the time over the past 50 years, before the recent credit crisis.
"This will help people become accustomed to making payments based on where mortgage payments are likely to be going," said Peter Vukanovich, chief executive of Genworth Financial Canada, the mortgage insurer.
He doesn't think the changes are a major deal, given that most of the major banks have been qualifying consumers based on their four- and five-year rates. His company was already only insuring products based on rates as high as 4%.
Lenders have been qualifying borrowers at posted rates for variable mortgages for awhile now, but with rates increasing and the qualification ratio's tightening, we will likely avoid a run on Variable Rate mortgages. This is not all bad, and will protect many people from increasing mortgage payment shock, which happened in the USA and led to the current situation down there! Our financial set up is not always easy to deal with, but it does protect our market from major problems and we should be thankful for that!
Embrace the changes, we all knew they were coming, now we need to adapt and make them work in our favor!