- Since 2008, the federal government has made several changes to the rules for government-backed insured mortgages that have included increasing the qualifying interest rate, reducing amortization periods and increasing the minimum down payment required for home buyers.
- The banks’ regulator has guidelines that sets out requirements for prudent mortgage lending and the amount that banks can lend through a home equity line of credit.
- The changes made by the federal government may reduce the number of people qualifying for insured mortgages in Canada.
The bottom line
The government has changed mortgage requirements several times over the last few years which affects how borrowers qualify for government-backed insured mortgages. Banks in Canada continue to offer very competitive mortgage products and services to millions of Canadians.
Changing regulations in Canada’s mortgage market
Canadian banking regulations prohibit banks from providing a mortgage with less than a 20 per cent down payment without mortgage default insurance. Since 2008, the federal government has made several changes to the rules for mortgages insured through the Canada Mortgage and Housing Corporation (CMHC) and private sector mortgage insurance providers.
The changes include the following:
- Increasing premiums (the amount a borrower must pay) for mortgage default insurance.
- Reducing the maximum amortization period for insured mortgages from 40 years to 25 years.
- Requiring banks to qualify all borrowers applying for an insured mortgage at the Bank of Canada’s conventional five-year fixed posted mortgage rate, an interest rate that is typically higher than what they will actually be paying.
- 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 are used 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. TDS is the share of a borrower’s gross income needed to pay for all debts, including those relating to home ownership.
- Requiring a down payment of at least five per cent of the home purchase price. A further 10 per cent must be added to the down payment for the portion of the house price between $500,000 and $999,999. For non-owner occupied properties, a minimum down payment of at least 20 per cent is mandatory.
- Making government-backed mortgage insurance available only for homes with a purchase price of less than $1 million. Borrowers buying homes at or above this amount will need a down payment of at least 20 per cent if their mortgage is from a federally-regulated financial institution such as a bank.
- Limiting borrowing to a maximum of 80 per cent of the value of their homes when refinancing, a drop from 95 per cent.
- Withdrawing mortgage insurance on home equity lines of credit (HELOCs).
- Instituting a 20 per cent minimum down payment for non-owner occupied properties.
The banks’ prudential regulator, the Office of the Superintendent of Financial Institutions (OSFI) has also introduced two new guidelines for banks and other federally regulated lenders as well as for federally regulated mortgage insurers.
OSFI’s B-20 Guideline on Residential Mortgage Underwriting Policies and Procedures, which came into effect in 2012, outlines key principles for prudent mortgage underwriting that banks are required to follow. It also places limits on home equity lines of credit (HELOC). A homeowner can borrow no more than 65 per cent of the value of their property through a non-amortizing HELOC. Any additional mortgage credit beyond the 65 per cent of the property value on HELOCs should be amortized.
OSFI’s B-21 Guideline on Residential Mortgage Insurance Underwriting Policies and Procedures, which came into effect in 2015, focusses on the mortgage insurer’s interaction with lenders as part of the insurance underwriting process and includes on-going due diligence into a lender’s operations and its risk management processes.
What do these changes mean for consumers?
Because of these changes , households may alter their decision making when borrowing to purchase a house. For example, borrowers may decide to postpone their purchase of a home, buy a less expensive home or make larger down payments and larger mortgage payments.
Canadians are prudent borrowers
Historically, Canadians have been very prudent borrowers, and the best evidence of this is the mortgage-in-arrears statistics in Canada, which track the number of households that have not made mortgage payments in three or more months.
Less than half of one per cent of all mortgage holders with the country's largest banks are ninety days in arrears. This number has been stable for more than two decades, in times of high and low unemployment, high and low interest rates, and a strong or weak Canadian dollar.
Banks are prudent mortgage lenders
Canada’s banks adhere to prudent lending standards and ensure that consumers take on debt loads that are manageable. Because of this, Canada avoided the problems seen in the US housing market during the global financial crisis.
Banks, the government, regulators, and consumers all play an important role in ensuring that the Canadian mortgage and housing market remains stable and sound, which it has been for many years.
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