AREA remains in contact with REALTORS®, mortgage professionals, lenders and insurers for information that continues to become available as the real estate and mortgage industries continue to prepare for changes to the mortgage insurance rules effective October 17, 2016.
In speaking with lenders, it is our understanding that lenders and insurers are establishing their policies with a limited amount of contact from the federal government other than the government’s backgrounder on the announcement, which states:
| The announced measure will apply to new mortgage insurance applications received on October 17, 2016 or later. This measure will not apply to mortgage loans where, before October 3, 2016: a mortgage insurance application was received; the lender made a legally binding commitment to make the loan; or the borrower entered into a legally binding agreement of purchase and sale for the property against which the loan is secured. Mortgage loans for which mortgage insurance applications are received after October 2, 2016 and before October 17, 2016 are also not affected by the rule change, provided that the mortgage is funded by March 1, 2017. Homeowners with an existing insured mortgage or those renewing existing insured mortgages are not affected by this measure. |
Based on the information AREA received, the AREA Advisory to members stated that ‘Accepted Offers to Purchase signed before October 17, 2016 will qualify under the current rules provided that the mortgage is funded by March 1, 2017‘. Discussions with lenders and the government backgrounder indicate that having a legally binding purchase contract prior to October 17, 2016 may not be enough – the mortgage insurance application may also have to occur prior to October 17 for the current rules to remain in effect.
What does this mean?
- Make sure to contact your lender to learn more about their policies on the application of the new mortgage insurance rules.
- In many cases, we understand lenders will require the mortgage insurance application to occur prior to October 17, 2016 to fall under the current rules.
- Where the application does not occur until on or after October 17, 2016, the new ‘stress test’ would apply, requiring the buyer to qualify for a mortgage at the Bank of Canada posted rate, currently 4.64%, even though they would still receive the contract rate.
The example in the October 7 Advisory illustrating the effect of the new rules continues to apply. Family A is qualifying for a mortgage using the following information:
| Current Annual Family Income | $87,000 |
| Household Debt Payments | $700 per month |
| Property Tax Payments | $3,000 per year |
| Down Payment | 5% |
| Mortgage Rate | 2.49% |
Result:
- Qualifying for a mortgage and applying for mortgage insurance under current rules, Family A qualifies for a purchase price of $450,000.
- Qualifying for a mortgage and applying for mortgage insurance after October 17, 2016, given the need to qualify at the Bank of Canada rate of 4.64%, Family A qualifies for a purchase price of $360,000.
Questions
Speak to their lender and their mortgage professional about your circumstances. Depending on where you are at in your search or the purchase process, the changes may affect your buying power and adjustments may need to be made to your search criteria.
