As if all the government rules now put into place within the Canadian mortgage market weren’t difficult enough to deal with – now we’ve got lenders changing their debt servicing policies to make it even tougher. Street Capital and First National are just two of the handful of lenders that have now changed their guidelines to make debt servicing and refinancing for customers – especially those that are co-signing a mortgage for their children.
Both Street Capital and First National have changed their lending guidelines to now calculate 3 er cent of the balance of a credit card or line of credit, or other borrowing mediums, when calculating a client’s debt servicing ratio – or the amount they can borrow; or whether or not they’re eligible to borrow at all. This change represents a significant difference from the interest-only payments they were using before the calculation.
“It is extremely frustrating that instead of going after changes made to how easy it is to obtain unsecured debt that it keeps getting harder to apply for a mortgage,” says Jason Friesen, a broker with Premiere Mortgage Centre. “Financing a mortgage is becoming harder and harder and if this change in policy is widespread it will impact borrowing significantly.”
The difference could mean that those who are most eligible to qualify won’t be able to. This is because under these new lending rules, someone with a line of credit of $500,000 – and no balance on it – would still have to be subjected to using 3 per cent of that in their debt servicing ratio; instead of the zero they would have had to use in the past when these ratios were based on interest-only payments.
“The implications of this change in underwriting could be huge if it catches on with all lenders,” says Friesen. “I feel using 3 per cent of the balance on unsecured lines of credit and loans is a very smart thing to do, if you are barely qualifying at today’s historically low rates and based on using the interest only payments on your debts than you likely should not be taking out the mortgage you are applying for. What concerns me is that using a payment on any secured line of credit based on the limit but not the balance will have a serious impact on people.”
In his example, Friesen uses the $500,000 value.
“In their monthly liability this would be over $1,900 as a monthly payment from what the lenders are doing,” he says. “Take for example a parent who wants to help co-sign for a child. The parent has paid their own $500,000 mortgage off, but have a $500,000 line of credit remaining. Even though they have no intention of using the line of credit, they can’t help their child qualify because of the payment that the bank must use.”
The question that brokers are left asking is whether or not lenders will hold onto these lending policies, or back away from them and drop these restrictions. Unfortunately, most think that these are rules that are here to stay.
