Mortgage Insurance and Your Borrowing Power
As a Canadian homebuyer or homeowner, your borrowing power is impacted by a few factors. Recent changes to the lending policies announced by CMHC, The Bank of Canada’s qualifying rate and your banks’ Prime Rate and mortgage stipulations are all things to consider when thinking about purchasing a home.
If you have less than 20% down, mortgage default insurance is required (known as a high ratio mortgage). This insurance policy protects lenders in the event you, the borrower, ever stop making payments and default on the mortgage loan. What you might not know is that mortgages in Canada are insured by one of three companies: CMHC, Genworth Canada or Canada Guaranty. In addition, both the lender and the insurer need to approve your application once you have qualified. In order to qualify, all insured mortgages use the Bank of Canada’s Conventional 5 year fixed posted rate (also referred to as the Benchmark Rate), which has recently dropped to 4.94%! Once you’ve qualified, we can then start to shop the market for you to get the best financing options.
While homeowners are not able to specify the mortgage insurer they prefer, it is important to know what is going on with these companies as every mortgage is covered by one of these three – depending on your bank – and their policies directly affect you as a homeowner. Recently, falling home prices and a stalled economy due to COVID-19 have resulted in some policy changes to insured mortgages, specifically from The Canada Mortgage and Housing Corporation (CMHC).
The recent changes announced by CMHC on June 4, 2020 relate specifically to new applications for homeowner insurance, such as new purchases, as well as renewals; refinancing is not included. So, what are these changes and how do they affect you or a potential homeowner you know?
- Credit Score Increase: Previously, the minimum credit score was 600 but has now been increased to a 680 mandatory credit score for at least one applicant. This is important as 80 points is a considerable jump when the score can only range from 300-900!
- Down Payment Sources: The source of down payment options have changed. Now, you can no longer utilize borrowed funds towards the down-payment. This includes funds from credit card, line of credit or a loan with repayment terms of any kind. Your down payment must come from your own savings.
- GDS/TDS Ratio: This is a ratio of “Gross Debt Service” / “Total Debt Service” and represents how much debt one can have in relation to income. The requirements for this have been decreased from prior potential of 39/44 to a more conservative 35/42. The result is reduced borrowing power in relation to existing debt and size of mortgage request to the allowed income.Overall, these changes represent an approximate 9% – 13% reduction in what you may qualify for, which primarily impacts first time homebuyers. This is a large reduction in borrowing power and may seem quite restricting in terms of new qualifying policies.
Thankfully, there is some good news! These changes have only been adopted by the CMHC. Canada’s other mortgage insurers, Genworth Canada and Canada Guaranty, have both announced they have no plans to make changes to their debt service ratio limits, minimum credit score and down payment requirements.
While there is still more information to come, and more changes may yet be made, it is a good idea for any potential homeowner to remain educated on the marketplace, especially those with upcoming renewals or plans to purchase.
If you are looking to renew your mortgage, or are a first-time home buyer wanting to make the most of your borrowing power, please contact me today. I would be happy to discuss these changes further and help you to find a mortgage provider that best suits your individual needs.
What Your Banker Won’t Tell You!
Did you know the biggest difference between getting your mortgage from a bank vs. a mortgage broker is that the bank only has access to their products, while I, your mortgage broker, have access to hundreds of different lending institutions and mortgage products to fit your unique needs?
Here are a few things to keep in mind while doing business with your bank – from opening chequing and savings accounts to personal loans and mortgages, I’ve got you covered!
Bank Fees Add Up
One of the biggest money makers for a bank is the fees; this is especially true with overdraft charges. It is important that you are always checking your accounts and loans to ensure that you are aware of all extra fees (and any interest rate changes), as well as staying on top of your bank account balance. Overdraft and banking fees can add up quickly! Fortunately, these fees can often be negotiated and reduced, especially when addressed early.
Banks are a business and the mortgages and loans you sign with them are contracts. If your mortgage is with a traditional bank, they can often come with steep penalties when broken. When signing for a mortgage or loan, be sure to always read the contract thoroughly and make note of any penalties. Generally speaking, big banks typically have higher penalties to break a mortgage than alternative lenders. Most bank loans have terms of five years or more – but a lot can happen in that time! Even if you don’t think so, you just have to take a look at the current situation in the world to realize just how quickly things can change. While your bank may compete on rates, the high break penalty is built in. As your mortgage broker, I would be happy to help you locate the best mortgage contract with minimal penalties.
Your Credit Health
Most of you have received a letter from your bank, at least once, offering you a line of credit; or a letter from your credit card company urging you to increase your credit card limit, or maybe even sign up for their new card. What these letters typically leave out is how this will affect the health of your credit and where you currently stand. You might be paying extremely high-interest rates on all your financial products, not realizing that your credit score (and other credit-related factors) could be earning you a more reasonable rate for your mortgage, credit card or lines of credit! This is where I can help you to review your financial situation and ensure that you get the best mortgage – at the best rate – based on your current credit health.
You Should Shop Around
A bank only has access to their own mortgage rates. While most people will stay with the same bank for years, there can be a cost for that convenience. More often than not, it’s true that individuals who are renewing will be offered a higher rate than a new customer. Shopping around, especially at renewal time, is a great way to ensure that you are getting the best rate available to you. When you are a few months away from renewal, contact me and I would be happy to help you determine if you are getting the best mortgage before you renew.
When dealing with a bank for your mortgage, it can help to get third-party expert advice. As a mortgage broker, I have access to additional mortgage products beyond your current bank and access to even more options to best suit your needs. Contact me today to book your virtual appointment or download the My Mortgage Toolbox App!
Growing Your Own Organic Garden
With many of us spending more time at home this year, now is a great time to start that organic garden you’ve always wanted! As someone with friends who grow their own herbs and vegetables, it can seem pretty daunting at first – but if they can do it, so can you.
Location, Location, Location: Ideally, an organic vegetable garden needs at least 6 to 8 hours of sunlight each day but don’t mind a little shade so they don’t overheat. A handy tip is to choose a spot near your house that you can see from inside – this will remind you to tend to it. Raised beds are another great option if you have limited space, or want a “cleaner” look to your yard.
Start Small: It can be easy to want to plant a full yard right away, but starting small can help you to ensure future success by getting into the habit of gardening and learning about it, without becoming overwhelmed.
Choose The Right Plants: Next you need to decide what plants you want to grow, and find the best strains to suit your environment. A few of the easiest vegetables to grow, regardless of skill level or experience, are: carrots, green beans, lettuce, cucumbers, spinach and tomatoes. If you are looking for more of a herb garden, beginners will want to stick to: chives, mint, parsley, basil and cilantro.
Garden Maintenance: To keep your garden healthy, you will want to water it daily – especially on hot days. The best time is in the morning as there is less evaporation and it keeps your plants hydrated all day. Make sure to focus on the roots, and not the leafy stems! Your garden will also require some maintenance in terms of weeding. Mulch can help reduce the number of weeds present, but you will still want to check regularly and remove any unwanted plant matter. Keeping your plants healthy and hydrated will also prevent pests and allow your plants to flourish.
Harvest Time! Did you know that, generally the more you harvest, the more your plants will produce? Remember to always use scissors to cut produce off, versus pulling and ripping your plant. If you use them fresh, pick them right before you need them!