In the Fall of 2016 the Federal Government made some significant changes to mortgage financing guidelines but how did the change to the mortgage rules impact interest rates? I receive calls from people each week after checking rates with their bank and online wondering why the rates are so different. In fact people wonder why they may pay a higher rate with more money down than someone with a lower down payment. It can be confusing and that is why it is good to know your options and review with your mortgage broker.
Here is an example.
Ashley and Matt are buying their first home. They have saved $15,000 towards a down payment on a $300,000 condo. This 5% down payment puts them in a high ratio mortgage category. They qualify for the mortgage based on the insurer rules (currently 4.64% benchmark rate with maximum 25 year amortization). Because this is an insured mortgage they will be able to access better rates with some lenders.
All lenders prefer insured mortgages as they are backed by the insurers. Less risk for the lender. It all comes down to how the lenders secure the funds for those mortgages. Banks have deposits from savings and investment accounts. Mortgage companies have different investor pools with specific criteria and pricing. So Ashley and Matt can choose from their current bank offer or a lower offer from another lender. Same mortgage, same terms, same insurance, different lending source and corresponding lower cost of borrowing.
If Ashley and Matt had $60,000 (or 20%) down payment for their purchase they would be considered a conventional borrower and it gets a bit more complicated. So sit down and buckle up. They would have access to uninsured or insurable mortgages – not to be mistaken with an insured mortgage. Now stay with me…
An uninsured mortgage does not include any kind of insurance premium as Ashley and Matt have at least 20% down. These mortgages are offered by the banks and credit unions. Some mortgage companies also offer this uninsured option. The lack of insurance coverage means the lenders do not need to comply with the insurer rules as they take all of the risk on this mortgage. These uninsured mortgages can come with a longer amortization period and can qualify at the contract rate and not the benchmark (currently more than 2% spread). In return the lender may place additional requirements on qualifying and may pass on an additional premium on the rate to the borrower. Over the past months we have seen a rate premium of up to .20 percent on these mortgages.
The insurable mortgage is also available for a conventional borrower. It must meet insurer guidelines by qualifying at the benchmark rate and maximum 25 year amortization. However, the lender pays the insurance premium and passes on the increase increased cost in part to the borrower with a higher rate. We have seen a premium between .10 to .25 percent depending on the loan to value of the mortgage.
Bottom line, all the lenders, banks, credit unions and mortgage companies have seen an shift in how they do business. Costs are higher than before, the number of mortgage transactions are lower due to new rules and pressure on buyers with low inventory of properties to purchase. So you will likely continue to see competition heat up as all lenders fight for market share. Will we see a reduction in premiums on these mortgage rates? Possibly. Stay in contact with your mortgage broker— if you plan to make a purchase in the next 6-12 months or if you own a home and may want to refinance to take equity out for investment or debt consolidation. We can help set up a plan that will help you make informed decisions moving forward.