Mortgage lenders don’t carry enough of the risk of insured mortgages and, as of today’s announcement, this could soon change.
In an effort to reduce the risk to taxpayers, Finance Minister Bill Morneau introduced changes to mortgage insurance rules that will impact both home buyers and banks.
At present, lenders are required to obtain mortgage loan insurance for any high loan-to-value mortgage—a loan where the homebuyer’s down payment or equity in the home is less than 20%. It’s pretty much an industry standard for lenders to pass on the cost of this mortgage insurance to homebuyers.
However, lenders can also opt to pass on the risk of a mortgage to taxpayers by paying for mortgage loan insurance, even when the downpayment or the equity in the home is greater than 20%. The insurance is bought and paid for by the lender as it helps defray the downside risk of mortgaging a more expensive property.
However, since last November, the Department of Finance acknowledged that it was examining the impact of shifting more of the risk of insured mortgages onto the banks and mortgage lenders.
As of today’s announcement, the government still hasn’t shifted the responsibility but plans to hold consultations on risk in housing finance, including whether it would require mortgage lenders to assume a portion of losses on default loans. Currently, the risk falls onto taxpayers, who ultimately back insurers.
The most popular policy would be to require the banks and mortgage lenders to pay a deductible on each mortgage loan insurance claim made, however, the Department of Finance has not confirmed if this is the policy route they will take. Still, home buyers should pay attention. In such a low-rate environment, almost all mortgage lenders are passing the cost of more stringent regulation on to borrowers. So, any change in the regulations governing mortgage loan insurance could mean an increase in costs for banks, which is passed on to home buyers, or banks could simply make it harder for borrowers to qualify for mortgages, as they look to reduce their exposure to riskier mortgages.
Impact on those looking to buy
While consultations on how to shift mortgage risk to lenders continues, home buyers should be aware that starting November 30, 2016, mortgage insurance criteria for low loan-to-value ratio mortgages—any mortgage where the homeowner’s equity is 20% or more of the home value—will be just as stringent as the criteria used for high loan-to-value insured mortgages (loans representing 80% or more of the home’s value).
This means if a homeowner puts down 5% or 25% and the lender wants to insure that mortgage—to protect against a potential loss—the criteria to get this insurance will be the same.
At present, a mortgage can qualify for mortgage loan insurance if:
- The home is located in Canada;
- The maximum purchase price or as-improved property value is below $1 million;
- The down payment meets the minimum requirements (5% for homes purchase prices of $500,000 or less and 10% for the remaining portion);
- The down payment must come from the homebuyer’s own resources, which include: savings or a gift of a down payment from an immediate relative. For some borrowers, additional sources of down payment, such as lender incentives and borrowed funds, are also permitted;
- The homebuyer’s total monthly housing costs cannot exceed 32% of the person’s gross household income (Gross Debt Service, or GDS, ratio);
- The homebuyer’s total debt load (Total Debt Service, or TDS, ratio) cannot be more than 40% of their gross household income;
Homeowners with an existing mortgage or renewing their mortgage will not be affected by these new mortgage changes.