So 2017 was an exciting year in the mortgage world!
The problem is that we mortgage professionals really hate it when things get exciting. Between the economy and the federally mandated mortgage rule changes and their ensuing fallout, it is now more important than ever to get a solid pre-approval in place.
I am not just speaking to first-time home owners either! Before you list your current home or refinance your mortgage or consider buying a rental, you need to make sure that you qualify under the new mortgage rules.
The biggest change by far in 2017 was in regards to conventional mortgages.
This is the term given to homes which have more than 20% equity. Previously mortgage lenders could put mortgage default insurance in place at their own expense.
They are no longer able to do so on mortgages taken for refinance which increases their risk and so increases the interest rates offered.
The second major change was the mortgage lenders are now required to keep a certain amount of cash reserves in place for all loans they fund. That means these funds are not available to lend out and therefore they offer higher interest rate to account for the lost revenue.
The third and most significant change is that all mortgages must now qualify at a higher interest rate.
Basically, no matter which term you are selecting you will have to qualify at the Bank of Canada posted rate which is currently 5.14% OR 2% higher than the contract rate you are being offered. If you are choosing a mortgage with a rate of 3.89%, you will have to qualify at a rate of 5.89%.
The mortgage rate you are given will be less than this and will be based on whichever term you choose.
The rationale is that there is no way rates were going to stay at 3.29% and all of a sudden a lot of people could be hit with a significant mortgage payment increase which could mean increased foreclosures.
So the things you need to know:
1. Rates have climbed since the rule changes were announced so if a new home is in your future get a rate hold in place so you are protected against further increases. Most are good for 120 days
2. Make sure they are checking your credit and not just seeing how much you are qualified for based on your income. Can you imagine selling your home only to be told that you do not qualify for the financing on the next because of something on your credit bureau? It has happened, I assure you.
3. Given the variety of ways in which we all get paid, you also need to make sure your pre-approval is solid given your situation.
For example, the mortgage lenders require a two-year history on all variable income. That means if your income is commission, bonuses, overtime or shift differential then you will need a two-year history of it before it can be used for the mortgage qualification.
4. Porting is an area which is slightly misunderstood.
You will have to qualify for the mortgage under the new rules even if you are just moving the mortgage from A to B. Please refer back to the previous horror story of the people who had sold and then could not buy a new home.
5. Ironically the changes now mean that with more than 20% to put down, you will be offered a higher interest rate than someone with 5% down.
6. Rental properties have been heavily hit by the changes.
Our economy means that fewer lenders are willing to consider these mortgages to start with and those that still are have upped the ante. Some have increased the minimum down to 35% from 20%.
Others require a very strong net worth in liquid assets. If you have multiple properties make sure they are reporting on your taxes.
So that’s about that.
A solid pre-approval from a qualified mortgage professional is a very good peace of mind strategy for both the new home buyer and you veteran buyers.
Pam Pikkert is a mortgage broker with Mortgage Alliance – Regional Mortgage Group in Red Deer.