Mortgage Default Insurance Rule Changes

By: John Singer

Recent federal government rule changes for insured mortgages have had an impact on many home buyers and owners. Two new measures were introduced to address concerns that Canadians have overextended themselves financially with low-interest rate mortgages, and to target mortgage default insurance toward lower-risk lending.

1. High-ratio mortgages, where there is less than 20% equity in the property or where the down payment is less than 20% of the purchase price, must be insured against borrower default. Mortgage default insurance is primarily provided by Canada Mortgage and Housing Corporation ("CMHC"), a federal Crown corporation.

Borrowers who obtain high-ratio mortgages must now pass a stricter income stress test to prove that they can continue paying their debts, including mortgage payments, utilities and taxes, if interest rates increase or their household income decreases. This rule change requires that all high-ratio insured borrowers must qualify for mortgage default insurance at an interest rate which is the greater of their mortgage rate and the Bank of Canada's conventional five-year fixed posted rate. When the rule change became effective on October 17, 2016, the Bank of Canada's conventional five-year fixed posted rate was 4.64% per annum, and a discounted five-year fixed rate with many lenders was around 2.40% per annum.

The tougher stress test reduces the amount that home buyers with less than a 20% down payment and a discounted five-year fixed rate mortgage can borrow, which may prevent some buyers from getting into the market.

2. Mortgage default insurance is not required for low-ratio mortgages, where the borrower has at least 20% equity in the property, or where the buyer makes a down payment exceeding 20%. Certain mortgage lenders purchase low-ratio portfolio insurance from CMHC, however, to access mortgage funding through government-sponsored securitization programs.

As of November 30, 2016, portfolio-insured mortgages must meet the eligibility criteria that previously only applied to high-ratio insured mortgages, including a maximum amortization period of 25 years, property value below $1 million, no single-unit rental properties and borrower qualification using the stricter income stress test.

The new rules mean that home owners with mortgages currently portfolio-insured may not qualify for a mortgage renewal with their current lender, and mortgage default insurance will not be available on rental and investment properties.

For further information, please contact John Singer by phone at (416) 364-4400 or by e-mail at jsinger@businesslawyers.com.

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