The Most Important Change
The most important change to the rules affects borrowers who are placing less than 20% down, and want to secure a variable rate mortgage or a fixed rate mortgage of less than 5-years. To qualify for these types of mortgages, the qualifying rate has now jumped all the way up to 6.10% o April 20 (increased from 5.85% April 19 and from 3.84% on Friday, April 16th).
Translation: you might need almost 25% MORE income to qualify for the exact same variable or 1 to 4-year fixed mortgage from last week.
It appears the majority of the big banks will be using this new contract rate regardless of the loan-to-value, although wholesale lenders and credit unions may continue using discounted rates for qualification of all conventional financing applications, which is a major advantage for borrowers. As an aside, if want a 5 to 10-year mortgage, it’ll be business as usual.
This change only affects those self-employed borrowers that are unable to verify their income, or who relied on “stated income” to qualify for financing. Essentially, if an individual has been self-employed for more than 3-years, they are expected to provide their tax returns and qualify for a mortgage in a traditional manner (purchase financing is still available up to 95% loan-to-value).
If a borrower has been self-employed for less than 2-years however, we are able to use the ever loved “stated income” rule for qualification, but this only applies to owner-occupied properties, and any refinances are limited to 85% LTV (purchases cap out at 90% loan-to-value).
The maximum insured refinance is now restricted to 90% loan-to-value.
These types of properties now qualify for high-ratio financing only if they are limited to one unit. Previously, as long as one unit was occupied by the applicant in a four-unit complex, financing was possible; no longer.
Investors must now place 20% (increased from 5% last week) down to receive insured rental financing.
The other major issue pertaining to rental financing is the use of rental income. My mortgage broker communicated with CMHC (as I’m sure many other brokers have), and additional clarification was provided by CMHC in the form of a news release, as follows:
If a subject property or owner-occupied property generates rental income, then the following occurs:
- 50% of the gross rental income is added to the borrower’s gross income
- Property taxes and heating costs will be excluded from the Total Debt Servicing (TDS) ratio
If the property is non-owner occupied:
- 100% of the net rental income is added to the borrower’s gross income
- The mortgage payment, property taxes, and heating costs are excluded from the TDS calculations
Net rental income is calculated using a 2-year average of rental income (such as via a Statement of Real Estate Rentals [T776]) or lenders may use their own procedures to authenticate the rental income. Net rental income may also be grossed up (i.e. increased) by 15% if the borrower also deducts for depreciation, amortization, or rental-related self-employed earnings.
*Source Daman Lehal,EQ Lending Corp