On October 3, 2016, the Minister of Finance announced a number of changes designed to reinforce the Canadian housing finance system. Building on measures announced in late 2015, the Government will:
- Bring consistency to mortgage insurance rules by standardizing eligibility criteria for high- and low-ratio insured mortgages, including a mortgage rate stress test;
- Improve tax fairness by closing loopholes surrounding the capital gains tax exemption on the sale of a principal residence; and,
- Consult on how to better protect taxpayers by ensuring that the distribution of risk in the housing finance system is balanced.
“Today’s announcement by the Minister of Finance demonstrates that housing and the housing finance system remains a top priority for the Government,” said Stuart Levings, President and CEO of Genworth Canada. “As a key stakeholder, we remain committed to responsible lending practices, while helping first-time homebuyers achieve the dream of homeownership.”
Key changes to the mortgage insurance rules are described below.
Applying a Mortgage Rate Stress Test to All Insured Mortgages
Effective October 17, 2016, all insured homebuyers must qualify for mortgage insurance at an interest rate that is the greater of their contract mortgage rate or the Bank of Canada’s conventional five-year fixed posted rate, which is currently 4.64%. This requirement is already in place for high-ratio insured mortgages with variable interest rates or fixed interest rates with terms less than five years. To qualify for mortgage insurance, debt-servicing ratios cannot exceed the maximum allowable levels of 39% and 44%, for Gross Debt Service ratio and Total Debt Service ratio, respectively.
Changes to Low-Ratio Mortgage Insurance Eligibility Requirements
Effective November 30, 2016, mortgage loans that lenders insure using portfolio insurance and other discretionary low loan-to-value mortgage insurance must meet the eligibility criteria that previously only applied to high-ratio insured mortgages. New criteria for low-ratio mortgages to be insured will include the following requirements:
- A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan;
- A maximum amortization length of 25 years;
- A maximum property purchase price below $1,000,000 at the time the loan is approved;
- For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once every five years to conform to the original amortization schedule;
- A minimum credit score of 600 at the time the loan is approved;
- A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent at the time the loan is approved, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate; and,
- A property that will be owner-occupied.
Impact of Changes Related to Mortgage Rate Stress Tests and Low-Ratio Mortgage Insurance Eligibility Requirements
Based on year-to-date 2016 data, we estimate that a little over one third of transactionally insured mortgages, predominantly for first time homebuyers, would have difficulty meeting the required debt service ratios and homebuyers would need to consider buying a lower priced property or increase the size of their down payment.
Furthermore, approximately 50% to 55% of our total portfolio new insurance written would no longer be eligible for mortgage insurance under the new Low Ratio mortgage insurance requirements.
Any impact on future premiums written may be partly offset by premium rate increases, in response to the higher capital requirements resulting from the Office of the Superintendent of Financial Institutions’ draft advisory entitled “Capital Requirements for Federally Regulated Mortgage Insurers” as noted in Genworth MI Canada’s press release dated September 23, 2016.
Forthcoming Consultation on Lender Risk Sharing
About Genworth MI Canada Inc.
Genworth MI Canada Inc. (TSX: MIC) through its subsidiary, Genworth Financial Mortgage Insurance Company Canada (Genworth Canada), is the largest private residential mortgage insurer in Canada. The Company provides mortgage default insurance to Canadian residential mortgage lenders, making homeownership more accessible to first-time homebuyers. Genworth Canada differentiates itself through customer service excellence, innovative processing technology, and a robust risk management framework. For more than two decades, Genworth Canada has supported the housing market by providing thought leadership and a focus on the safety and soundness of the mortgage finance system. As at June 30th, 2016, Genworth Canada had $6.4 billion total assets and $3.6 billionshareholders’ equity. Find out more at www.genworth.ca.
SOURCE Genworth MI Canada