Getting an insured mortgage with high debt? Apply well in advance of scheduled rate hikes

Experts advise people with a high debt-to-income ratio to never make changes that might require them to requalify before the mortgage closes, such as increasing debt, changing the term of mortgage, etcJohn Bazemore/Associated Press

Some highly indebted mortgage seekers had a nasty surprise last week.

They applied for variable rate mortgages, were told they qualified, and then the Bank of Canada raised the rates by a startling percentage point.

Lenders quickly raised their prime rates by the same amount.

Mortgage insurers saw this and decided that new borrowers would have to prove they could afford a much higher “stress test” rate, even if rates were lower when they applied.

This has led to the cancellation of some lender approvals, sparking outrage among homebuyers and affected mortgage professionals.

On Tuesday, that country’s three default insurers — Canada Mortgage and Housing Corporation, Sagen MI Canada Inc. and Canada Guaranty Mortgage Insurance Co. — released guidance on the matter. If you’re buying a home with less than 20% down, here’s what you need to know.

First, in case you apply for a mortgage, an insurer approves you, then rates go up – you don’t have to worry about any of that.

The problem comes when you apply and the rates go up while you are waiting for the insurer to underwrite your application. In this case, the insurer will use the new higher stress test rate.

Now, most insured mortgages are approved instantly, so there’s no time for rates to go up in the process. But, for more complex files, approvals can sometimes take more than a day.

Although infrequent, delays can occur when an insurer asks for a co-signer, for example. Meanwhile, if the Bank of Canada raises its rates and your lender’s prime rate goes up, that could be a problem.

“This is another example of why it is important for buyers to ensure their mortgage application has been approved before waiving the financing condition in their purchase and sale agreement,” Sagen spokeswoman Susan Carter said.

What you must remember

As noted, this only applies to people with a high debt-to-income ratio. We are talking about limit borrowers here. Even if there are many more than before.

If you are one of those borderline insured borrowers with high debt ratios, here are four tips:

  • Apply at least one week ahead of any scheduled Bank of Canada rate hike;
  • never make changes that may require requalification before closing your mortgage, such as increasing your debt, changing the term of the mortgage, etc.;
  • never lift financing conditions until you have obtained official approval from the lender and the insurer;
  • pre-approvals are usually qualified using the stress test rate at the time you request full approval. Keep in mind that rates can increase significantly between when you are pre-approved and officially approved.

Assessment games

In some Canadian markets, home prices have fallen more than 10% in less than 60 days. As a result, appraisers use “timing adjustments” whereby they discount comparable properties that sold a month ago by several percentage points in larger markets, says Leigh Walker, president of Lawrenson Walker Real Estate Appraisers Ltd.

Undervaluations are increasingly encouraging mortgage originators and homeowners to pressure appraisers to find other comparables – in order to raise their lower appraisal value. But most of the time it doesn’t work. “Assessors have no choice but to use the most up-to-date compositions,” says Chris Bisson, managing director of Value Connect.

“Although it happens, in 20 years I can count on my hands how many times we’ve missed a comparable,” Walker adds. “But, we’re human, so if we missed something, we’re always happy to include it.”

Will the Fed allow longer amortizations?

“We may need more financial innovation to help people cope with [affordability]said former Bank of Canada Governor Stephen Poloz in a recent Veritas Investment Research presentation. “Maybe we’ll look at longer-term mortgages…as a solution.”

In the United Kingdom, for example, the amortizations go up to 40 years. Here, such long-term amortization is limited to non-prime mortgages, with traditional banks remaining limited to 25 years (insured) and 30 years (uninsured).

Mr. Poloz may be onto something. Canada should also have 40-year mortgages, if only for borrower flexibility. Paying off a mortgage faster isn’t the smartest use of money for everyone.

The problem is that when you allow people to borrow longer, they get bigger mortgages and therefore pay more. This inflates house prices, exactly what we don’t need this year (but may need if prices continue to fall).

If the federal government wants to give people flexibility without impacting house prices, there is a simple solution. Allow 40-year amortizations, but make people eligible for 30-year amortizations, which means they can’t be approved for a larger mortgage and thus put pressure on house prices.

Variable rates cross the 4% mark

After the Bank of Canada’s 100 basis point wake-up call last week, the lowest available uninsured floating rate nationally is north of 4% for the first time since 2008. To qualify to most lenders, you must prove that you can afford a rate above 6%.

That’s always easier to do than qualifying for a five-year term set at over 7%. And that’s exactly why countless debt-ridden borrowers will continue to choose variable rates over fixed rates.

Incidentally, Allison Van Rooijen, vice president of consumer credit at Meridian Credit Union, said demand has surged for qualified mortgages at the contract rate instead of the federal stress test rate.

“The secret is starting to come out,” she says, adding that these borrowers have miniscule default rates, comparable to borrowers stress-tested at much higher rates. “We lend to people, not houses. When subscribing, we try to see what [banks] Miss.”

In other mortgage news, the best five-year insured fixed rates are now 55 basis points lower than comparable uninsured rates. (There are 100 basis points, or basis points, in a percentage point.) That spread is more than double its 10-year average.

Why? According to Blake Dumelie, vice president of financial markets at Nesto, mortgages are more risky, as house prices have recently fallen. This makes government-backed mortgages relatively more attractive to lenders.

In addition, uninsured mortgage financing (debt issuances, covered bonds, etc.) is increasingly expensive compared to insured mortgage financing, such as government-guaranteed mortgage-backed securities and mortgage bonds. from Canada.

The lowest mortgage rates available nationwide

1 year fixed 4.59% Manulife 4.09% Radius Financial
2 year fixed 4.74% Simplii 4.49% Radius Financial
fixed 3 years 5.04% Simplii 4.54% Marathon
4 years fixed 5.09% Simplii 4.69% Radius Financial
5 years fixed 5.09% HSBC 4.54% True North
10 years fixed 5.84% HSBC 5.84% HSBC
Variable 4.09% HSBC 3.69% HSBC
5 year old hybrid 4.59% HSBC 4.74% Scotia eHOME
HELOC 4.55% HSBC N / A N / A

Robert McLister is an interest rate analyst, mortgage strategist and editor of You can follow him on Twitter at @RobMcLister.

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John A. Bogar