Vancouver Mortgage Rate Update by Kyle Green
Bulk insurance limits restricting many lenders from lending on rentals
As you may have seen in previous newsletters or presentations of mine, CMHC has been close to their $600 Billion cap for quite some time. News first broke out in Feb 2012 that they were literally “running out of money” and that convincing Canadian citizens to guarantee even more insured mortgages wouldn’t be an option.
So, CMHC began taking action to lower their insured book:
- Mortgage “run-offs” occur, which is insured mortgages coming up for renewal and becoming uninsured.
- Lowering bulk insurance. Bulk insurance is when lenders take a large bundle of mortgages with over 20% down and have CMHC insure them all. CMHC began putting restrictions on bulk insuring in early 2012.
- Changing lending guidelines. Round 4 of insured mortgage tightening occurred last summer, and although the headlines read something along the lines of “Flaherty wants the housing market to slow”, the undertones that should have been highlighted were “CMHC is running out of money and is restricting its availability to only A+ borrowers”.
- Insurance Portfolio Restrictions. This is an interesting one. There are HUGE costs to lenders going over their limits on how much of their insured book with any insurer for specific products. Most lenders can only have 10% of their book in insured rental mortgages. This is why many lenders have either completely cut off their rental products or have severely cut their program.
The reality is that because of new international guidelines (called Basel III), lenders are required to keep more money in cash for each dollar lent and kept on their own books. Lenders could, however, bulk insure these mortgages and sell them to investors, which would take them off the books and make them more profitable. That’s why sometimes the best mortgage rates are actually for borrowers putting less than 20% down (you pay the insurance premium, not the bank).
Final Thoughts: Unless bulk insurance opens up again, or lenders have more deposits on their books (unlikely when the returns are ~1% for GIC’s), lending on rental properties will continue to be tight. Rates going up could actually open up the door a little bit for rental mortgages to be more available. As I’ve said before, don’t worry about the rates (they’re fantastic right now!), worry about getting the money at all.
OSFI intervention runs deeper than expected
Government getting lenders to change guidelines, and most of them aren’t common sense
The Office of the Superintendant of Financial Institutions has been active in the markets since March of 2012, and have been intervening with lending guidelines for all uninsured mortgages. If you missed it, here are the changes they made that came into effect year end 2012 for all federally regulated banks (more on this later):
- Home Equity Lines of Credit reduced to 65% financing. You can still finance 80% of the value of your home, but only 65% can be “re-advance able” (as you pay down the principal, you can re-borrow against it).
- Variable rates qualify at the 5yr posted rate (currently 5.24%)
- “Stated Income” borrowers require reasonable income verification. If you are self employed and you don’t claim enough income on your tax returns to qualify, stated income programs were typically another route to go. These have become MUCH more difficult than in the past.
- Cash back mortgages – Cashback is no longer able to be used towards down payment (and subsequently the lenders offering this pulled these products off the shelves).
These guidelines were fairly well publicized and to most in the industry were made aware of these changes. However, over the past two months we have encountered more weird rules that we have been told (off the record of course) is due to government audits:
- Using a borrower’s Line of Credit limit, not balance, to qualify them. To give some perspective, a borrower with an empty $600,000 Line of Credit wouldn’t have to service any payments, but now the same LOC would have a massive $3,572 monthly payment to service, which would require an annual income of about $115,000 just to service. That’s ON TOP of any other loans, etc.
- Lenders asking for tax returns to verify rental income – if it isn’t being reported, they may not use it. Government trying to make sure people are paying their taxes? No, couldn’t be…
- Lenders asking for leases in place PRIOR to funding your mortgage. This can be a challenge when making a purchase. Some lenders will either use no rental income if there is no lease, or will only finance 65%.
- Property condition – Any hints on the MLS, in the strata minutes or appraisal of a sub-par property, and the lender is out. Anything below average will likely not get financed by a major bank.
- A general increase in documentation. Like we need to ask for more! Some of our clients have to provide (literally) 200+ pages of documents when you add up 2 years of tax returns, company incorporation documents, financial statements, leases for each property, mortgage statements, property tax notices… you get the idea.
Final Thoughts: I get the feeling that there is a bit of an “over-correction” here with regards to OSFI getting their hands dirty here. The above changes do not apply to all lenders, and for the ones that it does apply to we have already come up with a couple of ways to get around them. Look for things to stay tight for 6 – 12 months or so and a general loosening of the above requirements to follow.
Kyle Green is a Vancouver Mortgage Expert, and one of the best in the business. You can reach him at: +1 778 373 5441 or by his website: www.kylegreen.ca. Oh and he’s currently securing 10yr fixed rates under 4% for our clients!