As many of you know, the government has recently implemented some new rules without much (if any) industry consultation. While you may have read the occasional article attempting to describe what the new rules actually mean, here’s the lowdown – they have severely impacted the structure of the mortgage rate market.
Qualifying For A Mortgage Rate
Effective October 17, 2016 the “Stress Test” came into play. In simple terms, borrowers with less than 20% for a down payment can now afford 20-25% less. That’s huge. When you look at a typical real estate market, the marginal buyer enables people to move up through the system, which in turn increases absorption rates and can result in a healthy, balanced market. When you take these people out, the natural progression is disrupted. The problem with this rule is that the marginal, first time buyer wasn’t necessarily the culprit for inflating real estate prices to exorbitantly high levels. There are some definite policy issues at play here as well. Moreover, rumour has it, conventional business (i.e. greater than 20% down payment) may have to follow suit, which would further interrupt the market. Time will tell. All we can be sure of is that there are a lot of people out there, currently with a mortgage, that won’t qualify again.
Mortgage Rate Confusion
Effective November 30, 2016 it became more expensive for lenders to provide mortgages. CMHC has decided not to back-end insure conventional business as it always has. This is a massive structural change for lenders in terms of how they securitize their loans. This coupled with proposed increases to capital reserve requirements has materially changed the mortgage rate business. If consumers, brokers, and banks were already confused, it just got a whole lot worse. There will now be tiers of rates based on amortization, transaction type and property type for conventional business. Amortizations over 25 years will see premiums of at least 10 bps. Rentals will command a 25 bp mortgage rate surcharge. Refinances will range from 10-20 bps. Products have disappeared overnight. What was available yesterday, won’t be an option tomorrow. Ironically, the rate advantage just got even better for those with less than 20% down; however, those people may not even qualify for a mortgage anymore since the introduction of the stress test!
Advertising just got a lot harder for brokers and lenders alike. Mortgage rates just became a great deal more convoluted than they already were with restricted products, quick close specials, LTV (loan to value) constraints, effective rates, etc. In a world where the majority of folk are already completely bewildered by the complexity of advertised rates, it just transformed into mortgage rate hell.