Summary of Concerns Over Department of Finance Announcement
By now, you will have seen yesterday’s announcement from Finance Minister Morneau outlining mortgage insurance and qualification changes effective October 17 and November 30 respectively.
These changes were announced with no warning to our industry and, based on conversations we’ve had with a number of industry leaders, almost no consultation. The qualification changes requiring all ‘insured’ (bulk or high ratio) loans to meet 25-year amortizations and be qualified at the Bank of Canada benchmark rate (currently 4.64%) will force many would-be homeowners into the sidelines. The benchmark rate is generally 200+ bps higher than actual rates available in the market and will require anywhere from a 20-40% exaggeration of actual mortgage payments to be used to meet servicing ratios.
Additionally, the changes to mortgage insurance eligibility significantly impacts our monoline lenders. It has the potential to severely restrict their access to capital, their ability to compete with the traditional banks and the million-dollar purchase price limit effectively excludes them from the very markets that arguably have the greatest need for funding accessibility and availability.
These are just two of the issues in a very large list of complications these changes will bring to our marketplace.
Mortgage Professionals Canada is in communication with the Ministry of Finance and the Financial Sector Policy Branch and discussing the impact and unintended consequences to the marketplace these changes will bring. The mortgage broker channel originates approximately 33% of all mortgages in Canada, and approximately 50% of mortgages for first time buyers. We are an incredibly important segment of the economy and help maintain a healthy and competitive marketplace. We will keep you informed of our discussions and communications with government in the coming days.
If you have not yet seen the announcements, see below
- All insured mortgages will now need to qualify at the Bank of Canada benchmark rate (4.64%) instead of the contract rate offered on their commitment. This change is scheduled to come into effect on October 17, 2016.
- Portfolio (‘bulk’) insurance must now meet the same criteria as those that are high ratio insured. This change is scheduled to come into effect on November 30. This means that amortizations greater than 25 years, rental and investment properties and homes with values greater than $1M can no longer be portfolio-insured.
- Capital gains exemptions on principal residences will apply only to residents of Canada.
- In addition, there is further discussion about ‘sharing in risk’ that is currently borne in large part by the three mortgage insurers. While high ratio customers and portfolio insurance funders pay for this risk, there is discussion about sharing in the cost of losses beyond just the mortgage insurers. This in and of itself could have significant implications. We will continue to monitor any discussion around this as well.