The Bank of Canada’s historic 100 basis point rate hike last week has caused confusion over how the stress test should be applied to applications for variable rate mortgages (VRMs) already in lenders’ pipelines. .
Specifically, the question has arisen as to how mortgage applications approved by lenders and submitted to default mortgage insurers ahead of the Bank of Canada’s rate hike last week – and subsequent rate hike preferential – should be addressed.
On Tuesday, Canada’s three mortgage insurers – Sagen, CMHC and Canada Guaranty – released a joint statement to provide clarification on the matter.
“For VRM loans where the lender has made a legally binding commitment to lend and has obtained the approval of the mortgage loan insurer, in the event of an increase in the rate of the VRM contract before financing, the lender is not required to resubmit the VRM contract rate to the mortgage insurer for requalification,” the statement read.
However, CMHC has confirmed that in cases where a lender submits a VRM application prior to a prime rate increase, but has not yet received approval from the insurer, the lender will be required to resubmit the loan. to qualify under the expanded contract. assess.
“Any other changes made after the mortgage insurer has issued an approval should be resubmitted in accordance with existing underwriting policies,” the statement continued.
So, in other words, variable rate borrowers whose applications received both the lender and Insurer approval before July 14 (when the prime rate officially changed) can rest assured that their loan will qualify for the pre-BoC-up rates.
“The decision not to review the qualifying rate on thousands of previously approved purchases is both welcome and necessary,” Ron Butler of Butler Mortgage told CMT.
“Canadians who have purchased homes and received mortgage approvals in good faith should never be placed in an unmanageable, litigation-prone position due to a historically massive increase in the Bank of Canada’s prime rate,” he said. he added. “Let’s hope the Department of Finance continues to support ordinary homebuyers who depend on streamlined and secure financing processes.
Frances Hinojosa, CEO of Tribe Financial Group and an Ontario director on the Mortgage Professionals of Canada board, said she was concerned when she first heard that insurers were considering reassessing previously approved deals.
“The owners rely on the prudent underwriting that we have in our Canadian banking system,” she told CMT. “Such a decision would have set a dangerous precedent for the future and would have essentially deemed any mortgage loan approval with all conditions met to be null and void until effectively closed.”
How the BoC’s oversized rate hike broke the stress test
So how did this all happen?
Rob McLister, editor of MortgageLogic.newsfirst reported on the matter last Friday.
“Canada’s three default carriers are trying to decide whether they will requalify variable rate claims that have been already submitted and approved by the lender before [last] Thursday’s oversized 100 basis point prime rate hike,” he wrote. “The impetus being the fact that variable mortgages now suddenly have to qualify at rates above the federal minimum qualifying rate of 5.25%.”
Mortgage stress test rules mean that insured and uninsured mortgage borrowers qualify based on the borrower’s contract rate plus 2% or 5.25%, whichever is greater.
Fixed rate mortgage borrowers have had to qualify at rates above 5.25% for several months since fixed mortgage rates rose above 3.25%. Prior to the Bank of Canada’s 100 basis point rate hike last week, VRM borrowers were stress tested at 5.25%, while trades submitted after the rate hike must now qualify for rates of around 6.25%.
Many brokers contacted by CMT on Tuesday were unsure whether the policy established by the three default insurers was new or not.
“The truthful answer is that it has never happened before,” Butler said. “Since the start of the stress test in 2016, this is the first time the prime rate has risen so quickly that it breaches it.”
Butler added that some pre-approved purchases that were posted online and submitted on the day of the rate hike may have been affected.
Advice for mortgage borrowers
Although the complications caused by last week’s rate hike were a one-time event when it came to the stress test, borrowers should still be mindful of making changes to approved loans, especially if they are getting close to increases. forecasts of the prime rate and whether their debt ratios are close to the maximum.
“Frankly, I always tell clients with insured transactions that we’re not approved until the application has been reviewed twice…once by the lender and then by the insurer,” he told CMT Ross Taylor, mortgage agent at Concierge Mortgage Group. “So in my mind, if only the lender has approved, then it’s not a done deal.”
However, Taylor says, in most cases, lenders send approved agreements to insurers quickly, with all approvals often received the same day.
Dan Pultr, senior vice president, strategic initiatives at TMG The Mortgage Group, says borrowers should avoid making changes to their loans after approval.
“We’ve always advised people that once you’re approved, don’t touch the approval if the topics get deleted,” he said.
“A seemingly minor change can be seen as significant, such as a lower mortgage amount, change in debts, etc.,” he added. “It’s wise to keep everything exactly as it is and avoid the lender having to send it back to the insurer.”