Arranging Mortgage Financing

Federal Government Changes Mortgage Rules

February 16, 2010 -- The federal government has announced changes to the rules for government-backed insured mortgages (less than 20 percent down payment) as follows:

* All borrowers will be required to meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter terms.

* Reduced maximum amount that can be withdrawn in refinancing a government-backed insured mortgage to 90 per cent from 95 per cent of the value of the home.

* Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner occupied properties purchased for speculation. Borrowers purchasing owner-occupied residential properties will still be able to access government-backed mortgage insurance with a 5 per cent down payment.

Additional detail is available here: http://www.fin.gc.ca/n10/data/10-011_1-eng.asp

QUALIFYING AT A FIVE YEAR RATE

Current interest rates are at record low levels, which has improved the affordability of housing for Canadians. It is important that Canadians borrow prudently and are able to manage their debt loads when interest rates rise.

Lender and mortgage insurers look at two key ratios when assessing the ability of a borrower to make payments on a mortgage loan:

•Gross Debt Service (GDS) ratio—the ratio of the carrying costs of the home, including the mortgage payment, taxes and heating costs, to the borrower's income.
•Total Debt Service (TDS) ratio—the ratio of the carrying costs of the home and all other debt payments to the borrower's total income.
Currently, the interest rate used to determine the mortgage payment for these calculations is either the rate fixed for the term of the mortgage or, in the case of a variable-rate mortgage and mortgages with terms of less than three years, the greater of the contract rate and the prevailing three-year fixed rate.

The adjustments to the mortgage framework will require mortgage insurers to ensure that borrowers qualify for their mortgage amount using the greater of the contract rate or the interest rate for a five-year fixed rate mortgage when calculating the GDS and TDS ratios.

This measure is intended to protect Canadians by providing them with additional flexibility to support mortgage payments at higher interest rates in the future.

Limit the Maximum Refinancing Amount to 90 per cent of the Loan-to-Value Ratio
Borrowers seeking financial flexibility can currently refinance their mortgage and increase the amount they are borrowing on the security of their home up to a limit of 95 per cent of the value of the property. This type of refinancing lowers the borrower's equity in their home. The adjustments today will lower the maximum amount of the mortgage loan in a refinancing of a government-backed high ratio mortgage loan to 90 per cent of the value of the property, consistent with the principle that home ownership is a tool for savings.

Discouraging Speculation by Requiring a Minimum Down Payment of 20 per cent for non-owner-occupied properties
This measure will require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation. Currently, borrowers may purchase a residential property with a 5 per cent down payment. Today's change will require a 20 per cent down payment for small (i.e., 1- to 4-unit) non-owner-occupied residential rental properties. Borrowers purchasing owner-occupied residential properties which also include some rental units (e.g., borrowers purchasing a duplex to live in one unit and rent out the other) will still be able to access government-backed mortgage insurance with a 5 per cent down payment.

Moving to the New Framework
These adjustments to the mortgage insurance guarantee framework are intended to come into force on April 19, 2010. Exceptions would be allowed after April 19 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19, 2010.

You can either use the services of a mortgage broker or you can bypass the broker and go directly to a lender.

Banks, mortgage bankers and lenders make loans to consumers. They have the money to lend. If you go to one of these institutions to get a mortgage, you will be dealing directly with the money source.

In this case, a loan agent, who is employed by the lender, takes your mortgage application and helps process your loan. The lender's underwriters evaluate your financial documents to determine your credit-worthiness. Lenders either have their own appraisers, or they hire outside appraisers. But, your mortgage is processed in-house. The lender usually collects fees at closing to cover the cost of originating and processing your mortgage.

A mortgage broker, on the other hand, usually does not have money to lend. A broker acts as an intermediary between the borrower and the lender. You submit a loan application and all of your supporting financial documentation to your broker, rather than directly to a lender. The broker hires a lender-approved appraiser to appraise the property for you.

Brokers shop the mortgage market for their customers to find the best interest rate and terms possible. When the borrower decides on a mortgage product, the broker assembles the loan package, which consists of the borrower's application, financial documents and the appraisal, and submits it to the lender for approval. The lender's underwriters grant final approval.

Mortgage brokers work on commission. They charge borrowers a fee (called points) for their loan brokering services. (One point is equal to one percent of the loan amount.) The broker's fees may be in addition to fees charged by the lender. Mortgage brokers need to disclose these fees to you.

Discuss and clarify with the mortgage broker if you will be charged any fees before signing an agreement with them. Depending on your qualification or financial situation, you may be subject to broker’s fees. However, if you are qualified and has good crediting rating, most mortgage brokers will not charge you fees as they are paid by the lenders directly. Again, discuss and clarify before you commit with the mortgage broker.

Tip: Why would you want to pay two loan origination fees when you can pay one if you go directly to the lender? One reason is that mortgage brokers can arrange financing that wouldn't otherwise be available to you.

Some lenders work only with mortgage brokers. They do not accept loan applications directly from individual borrowers. These lenders are called wholesale lenders. Some of these loans have the best rates and terms available.

A lender that deals directly with borrowers is called a retail lender. Some lenders have both retail and wholesale divisions, which often charge different fees. For example, if you go directly to Bank "A" for a mortgage, you'll be charged one point. If you use a mortgage broker who brokers your loan through the wholesale division of Bank "A", the mortgage broker will charge you one-half point and Bank "A" will charge one-half point for a total of one point.

Make sure that you don't use a mortgage broker who charges excessive fees for his or her services. You shouldn't pay more for a mortgage through a broker than you would if you went directly to the same lender.

As in any profession, there are people who do an outstanding job. They value your repeat business and referrals. Unfortunately, there are a few less-than-scrupulous people who take unfair advantage of any situation. So you should ask for referrals from acquaintances you trust. And check for rates and fees with competitors before choosing a broker.

The Closing: A big benefit in using a broker is that he or she can quickly move you from one lender to another if for some reason you have difficulty qualifying. Also a broker may have access to a larger array of mortgage products than might be available from an individual lender.

If you need assistance in arranging your pre-approval or mortgage financing, please forward your request.

Request for Pre-approval Form

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Terms Used in Mortgages:

Conventional Mortgage - a mortgage where the down payment is equal to 25% or more of the property's value. A conventional mortgage does not normally require mortgage loan insurance.

High-Ratio Mortgage - a mortgage where the borrower is contributing less than 25% of the value of the property as the down payment. High-ratio mortgagesmust be insured through Canada Mortgage and Housing Corporation (CMHC) or GE Mortgage Insurance Canada (GE), the two mortgage insurance companies in Canada.

Open Mortgage - an open mortgage allows the mortgagor to prepay all or part of the principal amount at any time with or without notice or bonus. Open mortgages usually have short terms of six months to one year. Interest rates on open mortgages are higher than on closed mortgages with similar terms.

Closed Mortgage - Closed mortgages are mortgages that do not allow any prepayment or early repayment except on the sale of the property, in which case penalties are required.

Fixed Rate Mortgage - the interest rate is derermined and locked in for the term of the mortgage. Lenders often offer different prepayment options allowing for quicker repayment of the mortgage and for partial or full repayment of the mortgage.

Variable Rate Mortgage (VRM) / Adjustable Rate Mortgage (ARM) - this type of loan differs from a fixed payment mortgage in that the interest rate charged on the loan may be changed during the term of the mortgage. Generally, these loans are initially set up like a standard loan, based on the current interest rate.