Mortgage Affordability Ratios Change

Insurance competition is helping to drive change in the mortgage industry.

Oct 30, 2006

Posted October 2006
Dan Eisner AMP, MBA, and Founder of True North Mortgage

In recent Mortgage News...

Some sweeping changes are coming to the mortgage industry in Canada.

For decades, the ability to afford a mortgage was determined by two numbers (actually ratios):

Total Home Ownership Costs compared to Total Family Income
Total Debt compared to Total Family Income

To qualify for a mortgage, your home ownership costs could not be greater than 32% of your salary, and your total debt could not be greater that 40% of your total salary. So for example, someone making $50,000 could afford a mortgage size of about $175,000, assuming a 5% down payment.

Mortgage qualifications are about to change.

Competition breeds better products — and better products are now changing the mortgage industry. For years, the Canada Mortgage and Housing Corporation (CMHC) has been the sole supplier of mortgage insurance. Even if your mortgage wasn't insured, CMHC had a major role in determining your bank's mortgage policies.

A few years ago, General Electric (GE) was given permission to compete against CMHC. They did a great job and fostered some improvements in the mortgage business (such as lower insurance fees), as CMHC and GE (known as Genworth) wrestled for market share.

So now, AIG has come to Canada and will become the third competitor to enter the mortgage insurance business.

CMHC, as a government run organization, wasn't necessarily a great competitor to begin with. However, GE (Genworth was renamed as Sagen) and AIG will clash in ways that will end up being a great benefit for the general mortgage purchaser.

The first insurance-competition bout will lay waste to the decades' old qualifying-ratio mentioned above.

Starting October 23, 2006, that same person making $50,000 will now be able to afford a mortgage size of around $290,000, assuming a 5% down payment. That makes an over $100,000 qualifying difference. The best part is that the mortgage interest rate charged on either mortgage will be still be 5.25% (or whatever is the current best rate).

These new rules will allow for 44% of total debt to total salary, AND allow for 40-year amortizations. The 32% ratio has been dropped altogether.

Please note that you'll still need to have very good credit and very little other debt in order to maximize your mortgage size.