The start of 2015 has brought around some mortgage underwriting changes that are a little bit less than positive for many Canadians.  I have included some of the details and commentary on the mortgage changes below.

Details of the mortgage changes:

These changes did not happen overnight, rather the government had requested lenders to have them completed by the end of 2013 and then provided an extension to lenders until the end of 2014.  As a result, some lenders instituted these changes at the end of 2013, some throughout 2014, and some waited until the last day of 2014 to finalize the changes.

Secured Lines of Credit:
Lenders will calculate the minimum payment using the current balance and the benchmark rate, amortized over 25 years. If the borrower can provide proof that the contract rate (your mortgage rate) is lower than the benchmark rate (currently 4.79%), lenders can use the contract rate instead.

Example: 
Lets say you have a balance of $100 000 on your secured line of credit.  Your monthly minimum interest only payments are typically ~$292.  With the new method of calculation lenders have to use a payment based upon a $100 000 mortgage with a rate of 4.79% amortized over 25 years.  The resulting payment used for qualification  is $569.71

Verdict: Major negative change for clients with secured lines of credits.  Essentially the payment that lenders now have to use is doubled versus the previous payment thus making it harder to qualify.

 

Heating:

Lenders are now using the square footage of the property when calculating the heating costs to be included in debt service ratios.  Previously lenders had just used a basic calculation of $75 to $100 for heat when qualify a client for a mortgage, now they use the greater of either $100/month or $.60 per square foot/12.  This means that with an average 2400 square foot home the heating component is now $120 for qualification purposes.

Verdict: Neutral, there is a small potential effect but it is extremely minor and more administrative in nature.

 

Unsecured lines of credit:

Previously lenders were able to calculate unsecured line of credit payments at their discretion.  The two common methods were to either use a payment based upon 3% of the line of credit balance or interest only payments.  Now lenders have to use 3% of the balance.  For example, if a client had $20 000 owing on their line of credit, the payment lenders would use would either be $600 per month (3%) or $100 (interest only).

Verdict: Major negative change for some clients.  The debt servicing payment is six times higher with the new requirement than with the previous options available.  This could especially have a significant negative effect on clients who have borrowed from student lines of credit for school and are now back in the workforce and purchasing a home but have not yet repaid the student line of credit debt.

Some positives items that were not affected with the mortgage changes

With every cloud I try to look toward the silver lining, I have included below a quick list of unique mortgage products that we are able to offer our clients and are currently not being revised by the government.

• Maternity Leave – full income can be used with a confirmed return to work date
  
• Child Tax Credit income – children under 12 years of age
• Rental worksheet offset on non-subject properties
• Deduction of support payments from income instead of including in liabilities
• Allow Rentals in a Holding Company Name
• Borrowed down payment still permitted

Please always feel free to contact me directly with any mortgage questions or if you would like to discuss your mortgage options to purchase or refinance a home or investment property.

Rylan Hahn – Ph 403-802-7201 for the most recent Canadian mortgage changes.