The Bank of Canada’s historic 100-bps rate hike last week has led to confusion over how the stress test should be applied to variable rate mortgage (VRM) applications already in lender pipelines.
Specifically, the question arose as to how mortgage applications that were approved by lenders and submitted to default mortgage insurers prior to last week’s Bank of Canada rate increase—and subsequent prime rate increase—should be handled.
On Tuesday, Canada’s three mortgage insurers—Sagen, CMHC and Canada Guaranty—issued 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 an approval from the mortgage loan insurer, in the event of an increase to the VRM contract rate prior to funding, the lender is not required to resubmit the VRM contract rate to the mortgage insurer for re-qualification,” the statement reads.
“All other changes that are made after the mortgage insurer has issued an approval are expected to be re-submitted in line with existing underwriting policies.”
So, in other words, variable-rate borrowers whose applications received both lender and insurer approval before July 14 (when prime rate officially changed) can rest assured that their loan will be qualified at pre-BoC-hike rates.
“The decision to not revisit the qualifying rate on thousands of previously approved purchases is both welcome and necessary,” Ron Butler of Butler Mortgage told CMT.
“Canadians who bought homes and received mortgage approvals in good faith should never be put in an unmanageable situation, subject to litigation, due to a historically massive Bank of Canada prime rate increase,” he added. “Let’s hope the Department of Finance continues to support ordinary homebuyers who depend on rational, secure processes in financing.”
However, CMHC confirmed that in cases where a lender submitted a VRM application prior to an increase in the prime rate, but hadn’t yet received insurer approval, the lender would be required to re-submit the loan to be qualified under the increased contract rate.
How the BoC’s supersized rate hike broke the stress test
So, how did this all come about?
Rob McLister, editor of MortgageLogic.news, first reported on the issue last Friday.
“Canada’s three default insurers have been trying to decide if they will re-qualify variable-rate applications that were already submitted and lender-approved before [last] Thursday’s supersized 100-bps prime rate hike,” he wrote. “The impetus being the fact that variable mortgages must now suddenly be qualified at rates above the federal 5.25% minimum qualifying rate.”
Mortgage stress test rules mean that both insured and uninsured mortgage borrowers are qualified based on the borrower’s contract rate plus 2% or 5.25%, whichever is higher.
Fixed-rate mortgage borrowers have had to qualify at rates above 5.25% for several months, ever since fixed mortgage rates rose above 3.25%. Prior to last week’s 100-bps rate hike by the Bank of Canada, VRM borrowers were being stress-tested at 5.25%, while deals submitted after the rate hike must now qualify at rates of around 6.25%.
Many brokers CMT reached out to on Tuesday were unclear whether the policy set out by the three default insurers is new or not.
“The truthful answer is this has never happened before,” Butler said. “Since the inception of the stress test in 2016, this is the first time that prime rate has risen so quickly, it broke through it.”
Butler added that some pre-approved purchases that went live and were submitted on the day of the rate hike may have been affected.
Advice to mortgage borrowers
While the complications caused by last week’s rate hike were a one-off event as far as the stress test is concerned, borrowers must still be mindful about making changes to approved loans, especially if they fall close to anticipated increases in the prime rate and if their debt ratios are near the max.
“Frankly, I always tell clients with insured deals that we are not approved till the app has been reviewed twice…once by the lender and then by the insurer,” Ross Taylor, a mortgage agent with Concierge Mortgage Group, told CMT. “So, in my mind, if only the lender has approved, then it is not a done deal.”
However, Taylor says in most cases lenders send approved deals off to the insurers quickly, with all approvals often received on the same day.
Dan Pultr, Senior Vice President, Strategic Initiatives at TMG The Mortgage Group, says borrowers should avoid making any changes to their loans post-approval.
“We’ve always coached people that once you’re approved, don’t mess with the approval if subjects are removed,” he said.
“A seemingly minor change can be deemed material, such as a lower mortgage amount, change in debts, etc.,” he added. “It’s wise to keep everything exactly as it is and prevent any requirement for the lender to have to send it back to the insurer.”