In the last two years – the only guarantee in Canadian mortgages has been change. Before this we had a good 5-7 years of loose regulations and super easy qualifications for most mortgages. Many Canadian mortgage holders are not even aware of how these changes will affect them as their mortgage term has not come up for maturity. It is so important – here is what you need to know:
What Happened And How Does This Affect My Mortgage?
We are living in a new financial age. Increased government regulation, bank liquidity restrictions, and more oversight of where your money comes from and goes to. We have to thank the Wall Street wizards for their financial alchemy in turning bad mortgage debt into grade A investments and the fall out that ensued. Now comes the hammer down on the consumer in the form of frustrating lending restrictions, overall increased cost of borrowing, and the feeling that you are a financial criminal (with your own money) until proven otherwise. Interestingly enough – although no criminal prosecution of those who abused the financial system ever took place – the blow back sure enough is affecting the common man making life for honest Canadians that much more difficult.
New Regulations For Your Mortgage In Canada
In many cases, the loan to value normal of lending to 80% has now become 65%. This is quite significant for self employed business owners and those with less than perfect credit as the rules have been changed with you as the targeted demographic here. If you are applying for a home purchase or refinancing your mortgage and require a scenario where you state your income versus the traditional job letter, unless your mortgage is insured with CMHC you are now the new normal of only being allowed to finance up to 65% of the value of your home. On even a small mortgage of 250K, that is an extra $37,500 you will have to come up with to get your mortgage completed. This also hits hard with those with a credit score of less than 580 on the primary borrower. You will also be subject to the new normal of 65% thanks to your friends and mine at the Office of the Superintendent of Financial Institutions.
Up until even last year, it was common knowledge to most savvy Ontario mortgage holders that the amount of their gross income that was needed to qualify to service their mortgage debt would not affect the amount of their downpayment required. This is another area targeted by the changes in that depending on your credit rating, if your income does not service your mortgage at 39% of gross annual family income for borrowers with 680 credit scores you will also be subject to a 65% borrowing limit. It is worse for borrowers with a score less than this as the percentage goes down to 35% and you will experience the same equity reduction or downpayment increase depending on your scenario. As for interest rates, if you choose a mortgage with a term of less than 5 years, you will have to qualify at the Bank of Canada’s rate of 5.34% as of today’s writing.
Increased Cost Of Borrowing
For those Canadians who do not fit the federal government’s ideal borrower – the alternative is to work with a lender who will still provide you with a loan that meets your needs. The issue here is that these lenders have to take the full brunt of the perceived risk that comes with falling outside of the safety zone of the new rules. In order for this to be overcome – you the borrower get additional interest charged in the form of a premium to perform a mortgage that was completed without prior to the rule changes. In the end – the same amount of money borrowed costs you thousands of additional dollars. This can be overcome through educating yourself and working with a mortgage professional who can, over time, assist you in meeting the new requirements.
Winning A Better Mortgage Through Education
The only way to begin to win where your mortgage is concerned is to begin the process of taking control of your mortgage contract. Take the time to pull it out and blow the dust off. Go over the fine print and ask pertinent questions well before your maturity date arrives. Reach out to me and I will provide you with the understanding of the pros and cons of your existing mortgage as well as putting together a strategy to meet the new rules head on and come out a winner in the end.
My heart goes out to the everyday Canadian who is negatively affected by the changes the industry has made. My concern is greater for those who haven’t taken the time to understand what will be in the future if they do not take control of their financial picture. By learning what happened leading up to the changes, becoming familiar with how the rules affect you, and educating yourself, you stand a much great chance of success. Your questions and comments below please.