Factors That Influence Your Mortgage Rate and Qualification
Once upon a time in the Canadian mortgage lending landscape, the mortgage interest rates were pretty much universal. If you qualified for a mortgage you generally qualifed for the best available rate (with some room for negotiation of course). This meant rate shoppers could effectively shop for mortgage rates knowing if they qualified they would received the advertised rate.
Somewhere along the way, changes to mortgage regulations landscape altered lending practices dramatically. Specifically OSFI (The Office of the Superintendent of Financial Institutions) implemented dramatic changes to qualification as of January 1, 2018. Most significant of these changes was adding a qualifying stress test to all borrowers. Previously only borrowers with less than 20% down payment were subject to the stress test rule, however as of January 1, 2018 this rule means all borrowers must qualify at the Bank of Canada benchmark rate or the lender contractual rate + 2%. This change has drastically decreased buyers purchasing power by nearly 20%
Furthermore government regulations, have created 3 new classes of mortgages: Insured, Insurable and Uninsurable. Prior to these changes borrowers were accustomed to High ratio, less than 20% down payment and subject to default insurance fees and Conventional, which was greater than 20% down payment. Conventional mortgages often were still insured by the lender however those default insurance costs were not passed onto the borrower.
3 New Classes:
For borrowers with down payment of less than 20%, borrower is subject to their own defaul insurance fees. It is important to note the property must be below one million dollars, with a maximum 25 year amortization. The property must be a principle residence (ie rental properties do not qualify). The qualification rate is based on the Bank of Canada rate.
Same guidelines as an insured mortgage, however borrower has at least 20% down payment. Lender will likely insure the mortgage themselves without passing costs directly to borrower. Again the value of home must be under one million dollars, max 25 year amortization and must be a principle residence.
Any mortgages that do no fit the above guidelines above are deemed “uninsurable”. Examples of this are properties worth more than one million dollars or rental properties. In markets like Oakville and Burlington where more than 80% of detached homes are over the one million dollar threshold this translates to majority of the market having “uninsurable” mortgages.
How does this Impact your interest rate?
By conventional wisdom, one would think the higher the down payment the better the interest rate. However, given the lenders are backed by a default insurer (such as CMHC or Genworth) they deem mortgages which are insured to have lower risk. In other words, you will likely get a better interest rate at 5% down payment, compared to someone putting down 20% or more. In other words:
1. Insured Mortgages = lowest interest rates
2. Insurable Mortgages = slightly higher than insured rates
3. Uninsurable Mortgages = highest rates
Furthermore, lenders have different classes within each of the 3 classes. For example, within “uninsurable” mortgages lenders may discount rates further for 20%, 25%, 30% and 35% and above down payments (ie Loan to values of 80%, 75%, 70% and 65% and lower).
Another signficant change, is while it used to be most lenders either qualified you or denied you, lenders are now offering better interest rates for those with beacon credit scores of greater than 720 and higher rates for those below.
With so many different options, it is imperative that you have an expert guide you through the marketplace to find the best solution to fit your family’s needs.