New Government Guarantee Parameters for Mortgage Loan Insurance and CMHC Product Changes
The Government of Canada has recently announced new parameters regarding the application of the government guarantee supporting the Canadian mortgage insurance industry (view the Department of Finance’s news release). The effective date when the new rules are to come into force is April 19, 2010.
CMHC supports the Government of Canada’s on-going efforts to maintain a strong Canadian housing market. Consistent with the parameters established by the government, CMHC will no longer offer insurance for mortgages falling outside the scope of the new parameters after the effective date. CMHC will be implementing the following changes with respect to the new parameters on April 19, 2010:
1. The qualifying interest rate used to assess borrower eligibility will change only for loans with a loan to value ratio (LTV) greater than 80% as follows:
2. Fixed Rate Mortgages and Variable Rate Mortgages: For loans with a fixed rate term of less than 5 years and for all variable rate mortgages, regardless of the term, the qualifying interest rate is the greater of the benchmark rate1, and the contract interest rate. For loans with a fixed rate term of 5 years or more, the qualifying interest rate is the contract interest rate.
Mortgages with Multiple Interest Rates (e.g. Multi-Component Mortgages): Each component must be qualified using the applicable criteria defined above.
1CMHC defines the benchmark rate as the Chartered Bank — Conventional Mortgage 5-year rate that is the most recent interest rate published by the Bank of Canada in the series V121764 as of 12:01 AM (Eastern Time) each Monday.
3. The maximum amount Canadians can withdraw in refinancing their mortgages will change to 90 per cent from 95 per cent of the value of their homes.
4. A 20 per cent down payment will be required for 1-4 unit rental (non-owner occupied) properties.
In support of the government position, CMHC will also be implementing changes to the calculation of a borrower’s Total Debt Service Ratio where rental income is generated from the subject property. Effective April 19, 2010, fifty percent of the gross rental income from the subject property may be included into the borrower’s gross annual income for the purposes of calculating the borrower’s Total Debt Service Ratio. Additionally, CMHC Second Home product will only be available for a one unit owner occupied property.
Furthermore, CMHC subsequently announced that effective April 9, 2010 self-employed borrowers with more than 3 years in the same business and commissioned-income borrowers will be required to provide third party validation of income to qualify for CMHC’s Self-Employed Product.
For the majority of self-employed borrowers, income validation is readily available through financial statements, contracts, T4s and other third party income validations. The changes will ensure that self-employed borrowers with third party income validation will benefit from a lower premium.
A small portion of borrowers, such as those recently self-employed, may continue to apply for the CMHC Self-Employed Product Without Traditional Third Party Validation of Income, subject to a maximum loan-to-value of 90% for purchase transactions and 85% for refinance transactions.
Inquiries should be directed to CMHC’s Client Service Centre at 1-888-GO-emili (I 888 463 6454).