Changes to Mortgage Insurance Rules

Zero-down, interest-only and longer amortization mortgages were popular over the last few years, partly as a result of dramatically-rising house prices in many parts of Canada. These non-conventional mortgage products became a way in which first-time buyers could get into the market, and real estate industry members capitalized on this by using these mortgage options in their advertising to attract potential buyers. Lenders were able to offer these products because of government-backed mortgage insurance

However, as of October 15, 2008, significant changes were made to the Mortgage Insurance Guarantee Framework, which establishes a boundary on the risk characteristics of the mortgage and of the borrower that are acceptable when the government guarantees the mortgage insurance policy. Industry members must ensure any mortgage-related advertising or representations they make to potential clients must accurately reflect mortgage options available. In light of the changes to the Mortgage Insurance Guarantee Framework, it may mean making changes to personal websites.

Below are some of the key amendments to the Mortgage Insurance Guarantee Framework:

• Loan-to-Value Ratio

Loan-to-value ratio is the percentage that results from dividing the dollar value of a mortgage loan into the market value of the property. The percentage determines if mortgage insurance is required. High-ratio mortgages are those where the mortgage amount is more than 80 per cent of the value of the home. High-ratio mortgages require government-backed mortgage insurance.

Previously, purchasers could borrow 100 per cent of the value of a property and have that full amount insured. Government-backed mortgage insurance is still available and required for high-ratio mortgages, but it will only be provided on the portion of the mortgage that is up to 95 per cent of the value of the property.

• Amortization Period

Amortization is the period or length of time it will take to pay off the entire mortgage loan. When housing prices began to dramatically rise, lenders introduced 35 and 40-year insured mortgages.

With the recent changes, though, the maximum amortization for mortgages with government backed insurance is now 35 years, which effectively means 40-year mortgages are no longer possible.

• Interest-Only Mortgages

Another means by which many first-time buyers were entering the market was through an interest-only mortgage. Interest-only mortgages allow the mortgage holder to begin with “interest-only” periods for a time at the beginning of their mortgage term. This keeps the regular weekly or monthly payment low, but it does little to pay down the mortgage.

Under the revised Mortgage Insurance Guarantee Framework, interest-only mortgages are no longer insurable.

• Maximum Debt Service Ratio

Total debt service ratio is the proportion of gross income that is spent on debt service and housing-related fixed or essential payments. The industry standard is that a total debt service ratio of less than 45 per cent is preferable, though in the past, some lenders were willing to stretch a borrower’s total debt service ratio to 50 per cent. The Mortgage Insurance Guarantee Framework now sets the maximum debt service ratio at 45 per cent for the mortgage to be backed by mortgage insurance.

• Loan Documentation

The new Mortgage Insurance Guarantee Framework now has minimum loan documentation standards to provide evidence of the borrower’s sources and level of income, and to support the reasonableness of the property’s value.

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