How To Navigate The Tightening Canadian Mortgage Rules
The Canadian government has been concerned for some time that Canadians are over-extending themselves by taking on larger loans or are simply being priced out of the housing market.
To combat the problem, the Canadian government announced several measures aimed at cooling the growth.
CMHC (Canadian Mortgage & Housing Corporation) will not likely extend its authorization limit past their current budget of $ 600 Billion for mortgage insurance. CMHC is a crown corporation, owned by the government of Canada, is the largest underwriter of mortgage insurance for financial institutions and serves to protect against defaults and stimulate the housing market. In Canada, all high ratio mortgages, or those with less than 20% in equity, have to be insured – a cost which is paid for by the borrower. The organization was not designed to take on this level of low ratio mortgage insurance and thus we are in this predicament.
The Federal Government also increased the Down payment requirement when purchasing a home whose listing price exceeded $ 500,000 to 10%. This is quite a hurdle for the average consumer to clear. Not many families have $ 50,000 as a starting deposit for a new home.
The Federal Government further restricted the consumer’s ability to borrow by making the qualifying rate for High Ratio (CMHC Insured) mortgages 4.64% regardless of the term selected by the consumer.
And for Refinance Requests… The Federal Government changes has prevented Consumers from accessing home equity by enforcing a refinance Loan to Value capped at 80% of the value. This affects the ability to access the equity which is sometimes needed for Canadian families to deal with emergency financial situations or to consolidate their debts to eliminate high monthly payments and avoid financial disaster.
Where can consumers turn when they do not fit in the proverbial “box” created in the Mortgage Industry?
How about Rent to Own?
These above changes have greatly increased the number of inquiries Rent to Own dealers are receiving. Consumers are looking for ways to get into Home Ownership and turning to Rent to own to sidestep some of the restrictions introduced by the regulator bodies. How?
On purchases, consumers can get into a home today with 5% down no matter what the Purchase Price. They are accumulating an addition 5% during the Rent to Own term and exiting into a Purchase mortgage with 10% as their Down payment. As long as the client has the “Exit Mortgage” strategy planned around the qualifying rate of 4.64% at the end of the Lease Term, their exit from a Rent to Own program should be smooth.
For refinances, using a Rent to Own maneuver to access up to 90% of your homes equity to avoid financial disaster is becoming increasingly popular. Consumers enter the program with 10% starting equity, clear their debts and repurchase the same home at the end of the rent to own program with 15% as their down payment on the Exit mortgage which is a purchase. Again, it is critical that every exit strategy from a Rent to Own program is qualified using current mortgage rules.
Rent to Own is an excellent option for consumers while the Federal Government tries to cool things off…