What's your best rate?

Often calls from new clients start with “I’m looking for help with a mortgage. What’s your best rate?”

I’m pretty sure that I frustrate some of those clients with my reply which is “It all depends.”

The short explanation is that the best rate for each client truly depends on their particular circumstances.

Prior to October 2016, this question could be met with a very simple answer. Generally speaking, we could find the best rate fairly easily. If the client was putting down less than 20 per cent, we could search out the best insured rate. If they were putting down more than 20 per cent, we could search for the best conventional rate.

In October 2016, several important changes were implemented that changed which mortgages are considered insurable and which mortgages are not.

Four of the main changes were:

  • Properties with a purchase price of over $1 million could no longer be insured
  • Mortgages with an amortization of more than 25 years could no longer be insured
  • Rental properties could no longer be insured
  • Refinances could no longer be insured

So how do these changes affect your interest rate?

These changes effectively created three different groups of interest rates:

  • Insured
  • Insurable 
  • Uninsurable

When you see interest rates advertised on TV or online, most often the insured rates are featured. These rates are the lowest of the three rate groups because you pay an insurance premium (this is added to the mortgage) so the lender will not suffer a loss if down the road the client defaults on their mortgage.

Insurable rates apply if you are putting down more than 20 per cent but meet the other criteria required to qualify for an insured mortgage: purchase price is under $1 million, your amortization is 25 years or less, and you are not buying a rental property. 

Because you do not have to pay an insurance premium, even though the rate is slightly higher, you pay less interest over the long haul and your mortgage balance is lower at renewal as you are not adding the insurance premium to the amount you borrow.

I’ve run the calculations many times to show clients that in this circumstance even though the rate is higher, it costs them less in the long run.

The third rate group applies if you are buying a rental property, refinancing, or needing an amortization longer than 25 years (you must have at least 20 per cent down for the longer amortization). The higher (perceived) risk to lenders is reflected by slightly higher interest rates.

To further complicate the best-rate conversation, there are intricacies within each of these rate categories.

For instance, if you are self-employed and we are using a specific stated income program, some lenders will increase the rate slightly.

If your application falls into the insurable group and you are putting 35 or more per cent down, some lenders use a sliding scale and reduce your rate slightly to reflect the amount of equity you have in your home.

If you are wanting to use a Purchase Plus Improvements mortgage to renovate your new home right away, some lenders do not offer this as an option.

Yet another twist is that many lenders offer a no-frills mortgage option which is usually priced .05 per cent lower than their other mortgages.

Several lenders offer cash-back mortgages. They will provide a lump sum up front for you and this is reflected in a slightly higher rate. It is crucial to know that for most of these products if you try to pay these mortgages back even one day before your renewal date they will require that the full cash-back amount be repaid.

This means that you are locked in for the full term or have to pay a hefty amount to break your mortgage.

From time to time lenders come out swinging with bargain basement interest rates. It is important to know that these rates often come with strings attached, or clauses that may cost you more in the long run.

The no-frills mortgages may be the right fit for you, but it is important that you understand what saving that .05 per cent might cost you in the long run. Some of these products come with a bona-fide sales clause or higher penalty if you need to pay the mortgage in full before the renewal date. Some are not portable to another property.

Future client service is a feature that it is hard to put a price on. One financial institution comes out every spring advertising the lowest of the low interest rates. They are notorious for missing closing dates, poor service after the mortgage has been advanced, and their penalties are significantly higher than other mortgage lenders. As well, from time to time they choose not to renew mortgages – not because of anything the client has done but because they are not actively in the mortgage business at the time.

There are online brokerages that offer low low rates as well. I’ve heard from several clients that the rate they were offered when their approval arrived was not what was initially discussed. 

If you are looking for a mortgage, the lowest rate is not always the best rate. It is important to do your homework upfront to understand your options.

Arguably more important is to work with someone that takes the time to understand your unique situation and treats you as a human being. If you are looking for help with a mortgage and wondering which rate group you fit into, we are happy to spend a few minutes helping you explore options.

Mortgages as (almost) usual

When I wrote my last column, we had just learned that Canada Mortgage and Housing Corporation (CMHC) had announced changes to their policies. In a nutshell, the three changes are:

  • Lowering debt service ratios used to qualify insured mortgages
  • Increasing the minimum credit score required
  • Eliminating the borrowed down payment program

These changes are significant because clients who put down less than 20 per cent when they purchase a home must qualify for default insurance, which is what CMHC provides.

There are two other companies that provide mortgage default insurance: Genworth and Canada Guaranty. Both Genworth and Canada Guaranty have announced that they would not be changing their policies at the current time. 

Since CMHC announced its policy changes, we have had bulletins from multiple lenders outlining how they will be handling new applications. Lenders have the ability to choose which company they use, so for the time being it is business as usual for clients that require slightly higher ratios.

I’ve had conversations about this rule change with most of my clients that are actively house shopping. I’ve also informally polled a few other brokers and friends as to their thoughts on tighter qualification guidelines.

My clients in northern B.C., for the most part, will be less impacted by a tightening of mortgage rules. On average, incomes are higher and home prices are proportionately lower.

In the Okanagan, I am glad that we still have Genworth and Canada Guaranty as options because I see more clients needing to purchase homes that put them at the top of their debt servicing.

This disparity has led to some rather thought-provoking conversations.

It’s all well and good to tell clients what the maximum mortgage amount they qualify for is. It's quite another to tell them what their actual mortgage payment will be at that price point.

When working with clients on a pre-qualification and rate hold, we discuss what their new payment will be. One of the tips I’ve shared is trying to tuck that amount away monthly into a savings account for four to six months to see if the higher shelter payment truly works for the clients.

Those conversations were often the springboard into discussions of how differently people handle their finances.

Some people will turn a nickle over half a dozen times before parting with it, while others are more about immediate gratification. I’ve seen clients who are making less income scratch and save to put together a down payment and seen others who make significant income unable to save what they need to buy a home.

The last few months have given us a glimpse into how we will make it through unexpected financial crises. 

In one of my columns I talked about how changing habits like buying daily coffees can really impact our savings accounts. As I am starting to slide back into old habits I can definitely see the change in my account.

How does this all tie together?

Smaller mortgages would (in theory) mean that people are better able to save and have adequate resources available to carry them through income interruptions. Smaller payments would (in theory) mean people could potentially tough it out a little longer than if responsible for larger payments.

From a professional perspective, I am glad that Genworth and Canada Guaranty have decided not to follow CMHC’s changes. I won’t be surprised to see them change down the road. 

In the meantime, while chatting with clients about their pre-qualification amounts I am also discussing the ratio changes and how those changes would directly impact them if for some reason we needed to use CMHC for their default insurance.

Being over-extended and feeling stressed about finances all the time is not a fun way to live. If you are thinking about buying a home (particularly if that home is a mobile / manufactured home) over the next few months, make sure you connect with your mortgage person to see if you may be impacted by the CMHC changes. 

On a more positive note, it feels like more people are out and about buying homes. Lenders have had a few months to adjust to new protocols for their employees.

Starting to feel like it is back to mortgages as usual.

Mortgage rules tightening

Canada Mortgage and Housing Corporation (CMHC) has announced three significant changes to the way insured mortgage applications will be evaluated effective July 1, 2020. 

These changes are:

  • Debt service ratios are changing to 35/42 from 39/44
  • At least one applicant must have a minimum credit score of 680
  • Borrowed funds can no longer be used for a down payment

Before I get into potential impacts for borrowers, I want to explain what debt service ratios are and how we use them when calculating how much you are able to borrow to buy a home. 

There are two ratios we use: 

  • Gross Debt Service
  • Total Debt Service

Gross Debt Service:

At the current time, the first rule is that your monthly housing costs shouldn't be more than 39 per cent of your gross monthly income. Housing costs include your monthly mortgage payments (principal and interest), property taxes and heating expenses. This is known as PITH for short —Principal, Interest, Taxes, and Heating. 

If your credit score is less than 680, this ratio is reduced to 35 per cent of your income.

Lenders add up your housing costs and figure out what percentage they are of your gross monthly income. This figure is called your Gross Debt Service (GDS) ratio. To be considered for a mortgage, your GDS must be 39 per cent or less of your gross household monthly income. 

Total Debt Service:

The second rule is that your entire monthly debt load should not be more than 44 per cent of your gross monthly income. Your entire monthly debt load includes your housing costs (PITH) plus all your other debt payments (car loans or leases, credit card payments, lines of credit payments, etc.). This figure is called your Total Debt Service (TDS) ratio.

If your credit score is less than 680 this ratio is reduced to 42 per cent.

For a more thorough explanation of how we calculate what you are qualified to borrow, check out a previous post Mortgage pre-approval – Know what you can afford.

Let’s look at how the changes coming into effect July 1 will affect your mortgage application.

Borrowed down payment:

Currently there is a Flex-Down program available that allows people to use borrowed funds as part of their down payment. To do this, the payment for any borrowed funds has to be factored into debt service calculations. 

This is not a program I have ever used with my clients. I have discussed it with a few over the years, but in these cases adding in the payment for the borrowed funds pushed their debt service numbers out of line so they opted not to use the program.

Minimum Credit Score of 680: 

The second change may impact a few more borrowers. At the current time, the current minimum credit score required for at least one of the borrowers on an insured application is 600. Effective July 1 that number increases to 680. 

Basing my thoughts on my client base and not statistics from lenders or CMHC,  I feel this change will affect a proportionately small group of borrowers. 

At the current time, if a borrower’s credit score is between 600 and 679, they are subject to reduced ratios of 35/42, where clients whose score is 680 or greater are able to borrow based on ratios of 39/44. 

Many lenders already have a minimum credit score requirement of 680 already so I feel the effects of this change will truly affect a limited number of home buyers.

An interesting timing twist which may mean the impact will be slightly greater is that Equifax recently made several tweaks as to how they calculate credit scores. Since these changes kicked in I have seen multiple comments from mortgage brokers across the country discussing sudden drops to clients’ scores.

Debt service ratios reducing to 35/42 from 39/44:

The reduced debt service ratios will most significantly affect borrowers. 

I want to dollarize this for you and give you a concrete example of how this will affect your borrowing power.

Using a household income of $75,000 and assuming:

  • a minimum down payment of five per cent
  • no consumer debt
  • a credit score of higher than 680
  • a strata fee of $300 per month and gross property taxes of $2,000 annually

Based on current guidelines, you would be qualified to purchase a home priced at $350,000.

Based on the reduced debt service ratios after July 1, your maximum price drops to $310,000.

If you have been pre-qualified to buy a home and are currently house hunting, I cannot stress how critical it is that you touch base with your mortgage person to see how these changes may affect your application.

My understanding is that if you have an accepted offer and your application has been submitted to CMHC prior to July 1, your application will be evaluated using the old rules.

If you write an offer and it is not submitted prior to July 1, your application will be reviewed under the new guidelines. If you have written at the top of your price range based on a prequalification done based on a 39 per cent GDS, your application may not be approved.

A couple of important things to note. There are three organizations in Canada that provide mortgage default insurance: CMHC, Genworth, and Canada Guarantee.

Genworth and Canada Guarantee have not yet announced changes to their underwriting policies but historically follow CMHC’s lead. 

We have not yet heard from lenders as to whether they will be evaluating mortgage applications where clients put down 20 per cent or more.

I am struggling a bit as to how to wrap up today’s column. There is a huge discussion to be had around why these changes are being made, if they are necessary, what the true desired outcome is, and how this may impede access to home ownership.

When CMHC introduced the Stress Test in October 2016, we were all very concerned about the impact the Stress Test would have on borrowers. A very general observation is that this reduced borrowing power by 20 per cent.

We adjusted and this change became business as usual. Looking back and comparing applications pre- and post-stress test, again based on anecdotal experience and not hard stats, I will say that I am seeing more applications that require either additional down payment or strong co-borrowers. What I haven’t noted is a dramatic decrease in house prices.

Evan Siddall’s (CEO of CMHC) presented to the Standing Committee on Finance May 19. One of the statements from his speaking notes really made me pause.

“Homeownership is like blood pressure: you can have too much of it. Housing demand is far easier to stimulate than supply and the result, as we’ve seen, is Economics 101: ever-increasing prices. So if housing affordability is our aim, as surely it must be, then there must be a limit to the demand we help to create, especially when supply isn’t keeping up.”

If you are interested in reading the whole document, it can be found here.

So what is the true intent behind the changes? To keep more people in the rental market as opposed to becoming home owners? To help protect Canadians from becoming over-extended financially? To take a more conservative approach as we navigate through what our economy will look like post-COVID-19? To drive home prices down?

A prudent approach to qualifying home buyers is absolutely necessary. Some markets will feel this more keenly than others, and this arguably boils down to lifestyle choices. 

My concern is that these changes will impact lower wage earners the most dramatically. These are the clients who are already struggling to get into the housing market.

In our area, I find that clients in the lower income brackets are paying more in rent than the housing expenses would be for a similar unit.

I have said before and will say again that a more prudent approach to consumer debt like credit cards and car loans will go a long way to preventing Canadians from becoming over-extended financially. For the majority of the refinances I work on, clients find themselves stretched too thin because they have charged too much on their cards or purchased vehicles with expensive payments.

It is pretty easy to walk into a car dealership and come out with a brand new car. Certainly far easier than it is to buy a home.

The bottom line is that we will adjust to these changes. They too will become business as usual. 

If you are currently shopping for a home, I cannot stress how important it is to touch base with your mortgage person to see how the changing guidelines may affect your mortgage application.

Good time for pre-approval?

If you are laid off right now due to the virus, or maybe working from home with your life a bit upside down, looking into mortgage pre-approval might be the furthest thing from your mind.

However, it may be the perfect time to do some research and think about getting your ducks in a row.

I worked from home for just over a month but found that I needed the structure and routine of going in to my office, so two weeks ago I started working from my office again.

I was chatting with a friend and commented that I was pleasantly surprised by how little I had spent since the beginning of March. I took a look at my account statement and it didn’t seem that different. 

When I took a closer look, I realized how much I normally spend on fuel, coffees out, and eating out (work lunch meetings / grabbing dinner on the way home after a long day).

More importantly, over the last few months I’ve done a lot of thinking about plans and priorities. Taking things down a notch schedule-wise has allowed me time to think about what has been working and what has not.

If you’ve been doing the same and are wondering about either getting into the housing market or potentially downsizing, now may be a great time to explore your options and what you need to do to be prepared.

My guess is that many of us have learned important lessons over the last few months. 

By the very nature of my work, I see how differently people manage their finances. People have different comfort levels with how much debt they carry, and how much of a financial buffer they have on hand.

Often we fall into the habit of living paycheque to paycheque, stretched tighter than we’d like by virtue of how expensive it is to live in the Okanagan.

Over the years, I’ve had conversations with clients who are diligent savers and have been impressed by their commitment to their financial plans. Over the last few months I’ve realized how simple it can be to make minor changes that make a significant difference to my bottom line.

Three key takeaways for me, not new lessons but lessons that have been reinforced, are:

  • Having a plan and goals to work towards helps you stick to a savings plan
  • Having savings on hand to cover three (or more) months of living expenses is crucial
  • Maintaining an adequate supply of toilet paper and yeast at all times is a must

Before we are all back to business as usual it might be the right time to take a hard look at your choices. 

If you were doing well financially when the virus hit, congratulations on being prepared. Your diligence and dedication to being fiscally responsible put you in a great position.

If you were caught unprepared, this might be a great time to think about how you can set yourself up for any emergency that you may face down the road.

If you fell somewhere in the middle and want to fine-tune your approach to handling your finances, I encourage you to connect with a reputable financial planner to develop a plan for your future. 

If, like me, you’ve done some thinking about how you’d like your future to look it might be time to commit to making some changes.

If your plan for the future involves becoming a homeowner, or learning how to pay your current mortgage down faster, now is a great time to reach out to your mortgage broker or banker to learn more about what you need to do to make this happen.

Feel free to reach out if you have any questions about how to ready yourself to buy a home.

Hoping that you and yours are healthy. Stay well.

More The Mortgage Gal articles

About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order to match the needs of their clients with the right mortgage package.

They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit http://www.okanaganmortgages.com

Visit their blog at https://www.okanaganmortgages.com/blog


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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