Here is an article written by George Christopoulos from the Mortgage Centre summarizing the proposed changes to the Canadian mortgage landscape.
Once again we are seeing the federal government propose changes to the way Canadian mortgage lenders manage their approval process and the rules they will follow. While this may be prudent financially, it will cause a ripple effect to borrowers, making it more difficult for some, and even eliminate others from eligibility. These rules have not yet come into effect, but the fact that the government has issued a draft proposal would seem to indicate that it will happen sooner rather than later.
Some of the major changes contemplated in the guidelines are as follows:
1. For self employed individuals – a much higher degree of due diligence to ensure that their true income is sufficient to support the loan payments. This will include requiring the borrower to provide full disclosure of financial statements, personal tax returns, and tax assessments from Canada Revenue Agency
2. For Home Equity Lines of Credit ( HELOCS), maximum borrowing of 65% of the property value. Also, there will be a requirement to have a repayment plan in place rather than allowing the borrower to pay only interest indefinitely. This will significantly increase borrowers monthly obligations. In the long term, it will build equity in the home.
3. Qualifying for a mortgage will be more conservative. Lenders will start using a government mandated rate on all mortgage terms less than 5 years in term and on all variable rate mortgages. This is intended to protect borrowers against payment shock in case rates increase at time of renewal. These provisions currently only apply to high ratio mortgages.
4. For borrowers approaching retirement, lenders will be looking at probable income levels once the borrower retires to ensure they will be able to meet their payment schedule once retirement occurs.
5. For borrowers earning non standard income such as overtime, commission, or bonuses, more diligence will be applied to protect against the reduction of these amounts in the future. Likely, this will mean that only a portion of non standard income will be considered as part of income for mortgage lending purposes.
6. Property appraisals will now be required at time of renewal to establish what the loan to value ratio is at that time. Currently, mortgages are routinely renewed without any assessment of property value or borrower qualifications.
7. For non conforming mortgages – typically meaning self employed borrowers with stated income or those borrowers with higher than standard debt service ratios, the maximum loan amount will be limited to 65% of the property value.
8. 100% financing which is typically done using a cash back incentive in the mortgage, will no longer be available and borrowers will have to have the minimum down payment (currently 5%) from their own savings or from a gift from an immediate family member.
These changes, when implemented, will result in confusion in the marketplace as there are many changes for many borrower classes. The value of consulting with an experienced mortgage professional to provide proper guidance through the maze will become even more important to ensure that the borrower is fully aware of all of their options and how the rules may affect them.
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