Last week, while largely unbeknownst to borrowers, a policy change with the potential to devastate recent mortgage deals was being quietly discussed among the nation’s top mortgage insurers.
Initially reported in a bulletin from Mortgagelogic.news mortgage analyst Rob McLister, Canada’s three big mortgage insurers -- Canada Guaranty, Sagen, and the Canada Mortgage and Housing Corporation (CMHC) -- were considering requiring freshly-approved high-ratio variable mortgage borrowers to retroactively requalify for their home loans following the surprise 1% hike from the Bank of Canada.
This is because the recent rate increase pushed all available five-year variable rates above the threshold where they could be effectively stress tested. That didn’t sit well with insurers -- but the suggestion prompted sharp warnings from the mortgage industry of deep consequences for borrowers with firm deals.
“Needless to say, if insurers go this route it could be a nightmare for some insured borrowers who may have already waived financing conditions on their mortgage originator’s advice,” wrote McLister at the time.
But, as it turned out, borrowers will be spared after all; following consultations, the insurers decided they would honour any firm deals made prior to the rate hike.
In a statement to STOREYS, the CMHC stated, ”Given the rising interest rate environment, the mortgage insurers (Canada Guaranty, CMHC, Sagen) have collaborated to provide clarification regarding the application of the minimum qualifying rate on a Variable Rate Mortgage (“VRM”) that are impacted by interest rate increases prior to loan funding.
“For VRM loans where the Lender has made a legally binding commitment to lend and has obtained an approval from the mortgage loan insurer, in the event of an increase to the VRM contract rate prior to funding, the Lender is not required to resubmit the VRM contract rate to the mortgage insurer for requalification.”
The insurer adds that any other changes that have been made after the mortgage insurer has approved an application would indeed need to be submitted under the updated underwriting policies.
However, the fact that such a proposal was in talks at all has the mortgage industry scratching its head. There's consensus that it was a highly illogical suggestion that would be felt deeply throughout the marketplace with a domino effect among failed deals.
“Once someone has gone firm and they waive conditions, everyone who is involved in that has to come through,” says James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender. “I think the insurers understand that now, and I’m surprised they even thought they could do this, but I think they’re quite clear that they cannot, and I don’t expect this to be an issue going forward.”
Ron Butler, mortgage broker at Butler Mortgage, says that the effects would have been “simply devastating,” putting buyers in a position where they owed “several thousand -- and maybe over $10,000; [these] are families with purchase contracts but no mortgage anymore and no way to close.”
What the whole almost-debacle has re-ignited is whether the existing mortgage stress test is due for an upgrade; it currently uses a benchmark of 5.25% (the combination of the five-year posted fixed rates from Canada’s biggest lenders) or a borrower's contract rate plus 2%, whichever is higher.
However, as both fixed and variable mortgage rates have risen sharply since March, many of today’s borrowers are being stress tested in the 6-8% range, which has greatly reduced their homebuying power.
That’s led to a greater uptake in variable-rate borrowing; as the spread between fixed and variable is still pretty favourable, the latter is often the only way for some borrowers to qualify.
“Most people in the industry think it should be tweaked, and that the first thing that should be tweaked is that it should not be easier to qualify with a variable than a fixed, that’s backwards -- if one’s going to be harder, it should be variable,” says Laird. “And surprisingly, to those who have spoken directly with the regulator, they don’t seem that concerned with it.”
“In a way it’s surprising that it’s gone on this long, you’d think; obviously the government moves slow, but you’re really influencing people into a riskier type of loan and that’s not good. And it really means that the most stretched households will be in a variable rate, which is not what we want.”
He says the regulator has expressed beliefs that the increase in variable-rate borrowing -- which now makes up more than half of the market at 56% of all new deals, according to the CMHC -- is due to consumer preference, rather than affordability.
But, says Laird, “anyone who has worked with a consumer who is trying to qualify for a home in an expensive city knows that that’s not true."