The Canadian Mortgage Market

To support the Canadian housing market, the Government of Canada, through a strong regulatory framework, including the Office of the Superintendent of Financial Institutions (OSFI), the development of the National Housing Act (NHA) and Canada Mortgage and Housing Corporation (CMHC), has developed a number of programs specifically designed help Canadian borrowers access mortgage funding.

Lender Types

Notable among these is the Canda Mortgage Bond program. Operated through Canada Housing Trust, access to this program provides all qualified lenders with a dependable, cost-effective source of funding. Through the the use of mortgage default insurance, qualified borrowers can get a mortgage with less than the standard 20% down payment.

This has allowed smaller lenders to become competitive with the major banks, resulting in a highly diversified mortgage market for the benefit of all Canadian home buyers.

Loan Types

Conventional Loan: 20% Down Payment, Maximum LTV 80%
With a conventional mortgage, standard loan underwriting criteria calls for a minimum down payment of at least 20%.

Insured Loan: High Ratio – Less than 20% Down Payment, Maximum LTV 95%
By obtaining mortgage default insurance, qualified borrowers can purchase a home with less than a standard 20% down payment. Also referred to as a high ration loan, the maximum LTV can be up to 95%.

Loan-To-Value(LTV)
Loan-to-Value (LTV) is merely the percentage value of a mortgage amount divided by the property’s value

Mortgage Rates

Contract Rate
This is the actual mortgage rate that a lender offers to you and is used to calculate your monthly mortgage payment.

Qualifying Rate
This is the Contract Rate plus 2%

The “Stress Test”
Introduced by the Canadian government in 2017, all new borrowers must meet the lenders GDS/TDS requirements at their Qualifying Rate, or the Bank of Canada minimum qualifying rate of 5.25%, whichever is higher.

Mortgage Market Key Metrics

The real estate market has a number of standardized formulas that all lenders use to analyse and adjudicate on a mortgage loan.
These are the key metrics that govern the amount of mortgage that a lender will offer to you and therefore influence the price of the house you can afford.

GDS/TDS

These metrics examines whether you have sufficient income available to meet your regular mortgage payments while ensuring there is a reasonable amount left over for the rest of your life’s expenses. Can be calculated on an annual or monthly basis.

Gross Debt Servicing (GDS)
Defined as, your mortgage payment (principal and interest) plus property taxes and home heating bill

Total Debt Servicing (TDS)
Defined as other debt or contractual obligations, including: credit cards, personal loans, student debt, car loans or leases, other property payments and other court ordered obligations such as, child support, alimony or separation agreements.

Credit Score

This measures borrower behaviour (your character)

Your track record of paying your monthly bills is a big part of your credit score.

Your reward for having a great credit score is that lenders will offer you a better mortgage rate than they will to someone with a weak credit score.

A lower mortgage rate means that, all else being equal, your income can support a bigger mortgage principal allowing you to buy a more expensive house.

Loan To Value (LTV)

In a mortgage, the subject property is the collateral securing the loan, safe-guarding the lenders principal.

Measuring the amount of a loan to the value of a property is a core real estate metric that lenders use to determine the amount of risk they are undertaking on any given loan. (Loan amount divided by property value = LTV)

At inception, the down payment amount is the difference between the loan amount and the property value. This is the homeowners equity. (Down payment divided by property value = equity %)

If you are unable to make your payments, the lender can foreclose on your mortgage, seize the property, and liquidate it to recoup their outstanding principal.

Lenders are always mindful of a properties appraised value – a well maintained property in a great neighbourhood can be expected to hold its value.

Mortgage Amortization vs Term

Amortization refers to the length of time (# of years) it takes to paydown a loan

In Canada, most loan payments are considered “blended”, containing both principal and interest. The total monthly payment is held constant, but the composition of the two components changes each month. Typically, at inception, your first payment contains more interest than principal. As the outstanding principal balance declines, the interest portion of the monthly payment increases.

The term of your mortgage (3 years, 5 years etc) indicates the length of time until your next reset date.

For example, a 5 year mortgage with a 25 year amortization can be renewed 5 times until the loan is fully paid down. (This assumes that you maintain the original amortizations schedule at each renewal date.)