Changes To Qualifications

2010/03/14 Originally published in the Vernon Morning Star

Last month Ottawa took some gentle steps towards less liberal lending policies. I think there has been more made of this than there needs to be. What is billed as major changes by some media is more like gentle tweaking.

Before I elaborate on these changes, I’d like to dispel a rumor. Buyers including first time buyers, can still purchase with 5 per cent down.

The first change is that the lenders must now calculate the buyer’s qualification formula based on the posted five year rate. For any of you out there placing mortgages over the last few years, you are probably aware that lenders negotiate their rates, they feature “specials”, or they give lower interest rates to especially good clients. The posted rate is the non-discounted rate and it can be found posted weekly on the Government website www.bankofcanada.ca/en/rates/interest-look

To qualify for a mortgage, lenders take 32%, depending on their policy, of one twelfth of the borrowers wage before income tax. That gives a monthly figure that the borrower is allowed to use for principal, interest, property taxes on a mortgage and heat costs. The lender then calculates to see how many borrowed dollars that monthly amount can service. With the change, the lender must make this calculation using the posted rate of interest, even if the buyer is borrowing at a lower rate of interest. The result is there is a fairly small difference in the amount buyers may qualify to borrow. F.Y.I., the shorter the term, the lower the interest rate usually is.

The second change is a tightening on equity take-out refinances. Homeowners were borrowing to as much as 95% of the value of their existing home. As an example, an owner has owned their home for enough years that they only owe 60% of its CMV (Current Market Value). Previously they could increase their existing mortgage all the way up to 95% of the CMV and use those dollars as a down payment on a revenue or vacation home, or a new car, or any way they so chose. Ottawa has intervened and said that they can no longer refinance to 95% of CMV. Now a borrower can only go to 90% of CMV. So the borrowing power for a person in a $400,000 home is reduced by about $20,000.

The third change applies to non owner occupied homes. Lenders will now require 20-25% down and amortization periods no longer than 30 years. This I think, will be barely noticed by this type of buyers. The reason being that most buyers buying second homes or investment homes borrowed the 20-25% down payment against their primary residences in order to avoid paying costly high ratio fees to CMHC. By putting 20-25% down, secured by their existing home, they are able to use what is called “conventional” financing and no CMHC fees are payable in this circumstance.

So all in all these policies won’t change anything radically. Ottawa is just trying to avoid the loose lending practices that got the United States in such hot water.

Jane Field works with RE/MAX Vernon. Jane has over 30 years experience in the Real Estate business. To suggest topics for future articles or to ask Jane questions, email her or call 503-3755.

RE/MAX Vernon | 250.503.3755 | Toll free 1.888.503.3755 | 5603 - 27 ST | Vernon | BC | V1T 8Z5 | Canada

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Changes To Qualifications