Note: I’ve invited Mike Grace to write this guest post to clarify the issue of insurability of a mortgage and how it affects mortgage rates that you can get. Last year we renewed our mortgage with our bank, but I realized later that I could have saved some money by shopping around. This article and the associated calculator is designed to help you understand what goes into your rate offer and whether your bank’s renewal offer is fair.
Mike is a mortage broker and HHV advertiser. No compensation was exchanged for this post but I did do the programming for the renewal calculator on his site.
Introduction
The implementation of insurer stress testing and B20 mortgage rules have created a complex mortgage landscape. This is no truer than in the renewal market, where your potential to receive the cheapest interest rate and most favourable qualification criteria is based on how your current mortgage fits into pre and post B20 insurer requirements.
B20 mortgage rules were implemented by the OSFI (federal banking regulator) on October 17, 2016 and changed the mortgage world substantially. The well known stress test was implemented for all new mortgages but most people don’t know that grandfathering allowances were included in B20 to offer stability for existing borrowers (and the market on the whole). These grandfathering rules are mostly unheard of in public and still poorly understood – even in in mortgage finance world.
So yes, the rumours of borrowers not having to re-qualify at the stress test are true, and this article will explain the mechanics.
The Challenge of Accurately Understanding your Options
For average borrowers at renewal, the time/energy-investment required to accurately assess the potential for saving by switching lenders is a significant hurdle. Most borrowers are happy to choose convenience and simply sign their existing lender’s renewal notice no questions asked. Most of the time, this convenience will come with a substantial (and unnecessary) cost.
I’ve set forth in this article to provide HHV followers the background knowledge and web-tools to perform a ‘minimum effort’ analysis to:
- Understand how your mortgage fits within the B20 landscape and what opportunities this may yield, and
- Quickly assess what potential savings a lender switch at renewal would yield.
The Big 3
Your existing mortgage can fall within 3 categories: Insured, Insurable, and Un-Insurable with insured mortgages generally priced lowest and rates going up from there.
Insured
An insured mortgage is one in which one of the three Canadian Mortgage Insurers currently holds an active policy for. Insured mortgages will always receive the best market rates because the borrower paid the insurance premium and the bank benefits from the security of insurer guaranteeing the loan.
If you purchased your home with a down payment of less than 20%, paid a mortgage insurance premium AND you have never refinanced, your mortgage is insured.
If you can’t quite remember how you structured your purchase, you can always pick up the phone and call the 3 mortgage insurers in Canada to find out for sure. The phone numbers below are each insurer’s underwriting centres. Hard to believe, but the service is excellent with a real, and often very qualified human answering the phone nearly immediately.
CMHC: 1-888-463-6454
Genworth Canada: 1-800-511-888
Canada Guaranty: 1-877-244-8422
Having an insured mortgage will enable you to receive the most competitive market pricing. In addition, if you originally arranged your mortgage before B20 was implemented, you’ll benefit from a number of grandfathering allowances.
- You will be able to re-qualify using the contract rate – NO STRESS TESTING REQUIRED.
- Your current amortization can be matched (and re-qualified) up to a maximum 30 years.
- If the property is currently a rental, you may still be able to access insured rates.
The core benefit of these grandfathering allowances is to allow a borrower who originally qualified for their mortgage under the old rules to continue to do so, and not be hamstrung by the tougher B20 requirements.
Insurable
An insurable mortgage will enable borrowers access to highly competitive rates upon renewal, second only to pricing available for Insured Mortgages. A new insurable mortgage begins when a borrower has purchased a property with a down-payment of 20% or greater, while at the same time meeting a number of insurer requirements.
The borrower is not charged a mortgage insurance premium, however their bank or lender may have chosen to “back insure” the mortgage (at their expense) to get it off their books. Just like CMHC premiums, the premiums the lender pays to insure a mortgage increases for higher loan to value ratios. Correspondingly, interest rate pricing on insurable mortgages follows the same trend (see table below).
| Loan to Value Ratio | Insurance Premium (Paid by banks on Insurable Mortgages) | Insurable Mortgage Pricing |
|---|---|---|
| Up to 65% | 0.60% | Best |
| Up to 75% | 1.7% | Second best |
| Up to 80% | 2.4% | Third best |
Under current B20 rules, a new insurable mortgage must abide by the following rules:
- Stress tested qualification
- Property must be owner occupied or a second home (no rentals)
- Property purchase price under $1M
- Maximum 25 year amortization
- Must be a purchase or transfer (no refinances)
If your existing mortgage was arranged prior to B20 implementation, you will qualify for some combination of additional grandfathering allowances when switching lenders at renewal:
- Stress testing may not be required (lender dependent)
- Amortization can be matched to your existing amortization up to a maximum of 30 years.
- Property value and original purchase price may exceed $1M.
- If you have an existing mortgage + HELOC, you can combine both balances into one insurable mortgage, and re-amortize/qualify up to a 25 year amortization. This allows a borrower to effectively refinance at insurable rates – a sizeable advantage.
- If your existing mortgage was originally arranged as a refinance, but was arranged prior to October 2016, insurable rates and extended amortizations can still apply.
Again, the core benefit of these grandfathering allowances is that a borrower is no longer forced to simply accept their existing bank’s un-competitive renewal rate out of fear of not being able to qualify.
Un-Insurable Mortgages
New Un-Insurable mortgages have characteristics that fall outside of current B20 Insurer Requirements. Since insurer backing reduces lender risk substantially, un-insurable mortgages generally maintain the highest market pricing due to the perception of increased risk.
A new mortgage is un-insurable if any of the following items apply:
- Property is purchased for over $1M
- Amortization is longer than 25 years
- Property is not owner occupied (rental)
- Refinance
Interestingly, there are instances where an existing un-insurable mortgage arranged after B20 implementation can be converted to an insurable mortgage. In these cases, the current B20 standard insurer requirements would need to be met (including stress testing).
Quickly Assessing Your Potential for Savings
If you’re still reading this, by now you’ve gathered the mortgage renewal landscape is a complex place. Normally if you want to assess the potential to save money by switching lenders you would need to engage with either a mortgage broker or another bank – which in and of itself is a bit of a tedious task.
Given the complexity of the renewal market, it’s also not guaranteed that your broker or bank will have the knowledge or understanding to maximize your savings. To make it simple, I’ve worked hard with Leo to build the following tool. The logic calculator below will ask you various details about your property and mortgage. It will determine which category (insured, insurable, un-insurable) your mortgage falls in, and if you will qualify for grandfathering allowances.
For the tool to be most effective, you should try to enter the most accurate information possible. It would be a good idea to work off either your most recent Annual Mortgage Statement or Mortgage Renewal Notice and your current assessed value (Look up on eValueBC).
I hope this article has been useful and I will do my best to answer any questions in the comments portion of the site.