The Death of the Equity Mortgage
Rewind 5 years. Canadians could get a mortgage for 65% of the value of their home without declaring much actual income. If the borrower has more than 35% equity in their home that means they have a significant interest to prevent them from defaulting or from losing their home due to power of sale. These mortgages became known as “Equity” mortgages.
Fast forward 5 years and several Office of the Superintendent of Financial Institutions (OSFI) and federal mortgage changes later, the Equity mortgage now rests in peace. OSFI has removed the equity mortgage concept completely. As a result, equity in your home without verifiable income or liquid assets to back it up is gone.
The mortgage rule changes were only announced to the mortgage industry consequently leaving the Canadian public in the dark. This created a problem. No wonder the average borrower gets angry when they hear they cannot get a mortgage from a lender even if they have a ton of equity in their home.
OSFI has shifted away from the Equity mortgage. Due to this change, they now keep lenders accountable for proving that borrowers can pay for their mortgages, irrespective of how much equity they have in their homes.
Below are ways that various lenders will make sure borrowers can afford their mortgages:
- If a borrower has more than 150% of the requested mortgage amount in net worth, that means they should be able to get a mortgage from an A lender without a rate premium. Furthermore, the eligible mortgage amount will also be capped at a maximum depending on the lender.
- If a borrow has more than 50% equity in their home they don’t have to show much income. However, the mortgage amount will be capped at $400,000. A rate premium will also be applied to compensate the lender for the borrower risk.
- If a borrower does not have assets and cannot prove income from conventional sources they can still get a mortgage based on enough, undeclared income. These mortgage are issued by alternate lenders at significant rate premiums and lender fees.
- The Equity mortgage concept cannot be applied to investment properties; only to a borrower’s principal residence.
The above also depends on the borrowers’ credit worthiness. If a borrower has poor credit, even if they have a huge amount of equity in their home, they will find it difficult to get a low cost mortgage.
Avoid difficulties while qualifying for a mortgage based on the equity in your home by:
- Making sure that your credit remains strong.
- Keeping your liabilities down.
- Building your liquid assets.
- Increasing your verifiable income.