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Confused About Debt-Service Ratio for Mortgage Transfer - Help Please

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  • Nov 6th, 2013 4:40 pm
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Confused About Debt-Service Ratio for Mortgage Transfer - Help Please

We want to transfer our mortgage to another financial institution. Our mortgage comes up for renewal at the end of October. We currently have a five-year variable rate mortgage and we want to keep that. The mortgage is quite small, about $65,000. Our most recent assessment puts our property at a value of about $225,000. Our current financial institution, let's call it Bank A, will renew, but the rate isn't as good as some others and they won't bargain very much.

We first went to ING Direct and discussed the transfer because they had a better variable rate than Bank A plus they had a targeted promotion that would give us $600 as a signing bonus. But after they crunched the numbers, they said we didn't qualify for the variable rate mortgage due to our debt-service ratio.

They'll give us a five-year fixed mortgage due to our equity in our home and our great credit rating. But that isn't what we really wanted. And by their rates at the point of our discussion, it was the difference between 2.75% and 3.39%.

I understand the concept of the debt-service ratio in that it's based on that BoC benchmark rate, which I think is 5.14% as of today. And I know that my husband and I -- both freelancers -- have had quite low incomes the past couple of years. Really, quite low. There's no point in explaining why, but thankfully this year has picked up. For ING Direct, they only look at last year alone (not even an average of the last three years) as the amount for last year was lower than the year prior. So they don't average them. But we also live *extremely* frugally and do fine. And we have zero debts other than the mortgage. But we, apparently, are WAY out on the debt-service ratio at 5.14%. Although we wouldn't be out if the debt-service ratio was being calculated on the *actual* rate we'd be signing for.

So here's my question -- when I went to look at that benchmark rate and an explanation, what I read was that institutions had to use the benchmark rate for the calculation of the debt-service ratio on variable and 1-4 year fixed mortgages IF the person was putting down less than 20% as a down payment. Now, in our case, seeing as it's a transfer, a down payment doesn't really apply. But shouldn't the large amount of equity in our home (far more than 20% more than the mortgage) fulfil that same purpose? Meaning that our equity is like we put down more than 20% and, thus, the 5.14% benchmark rate shouldn't apply when calculating the rate.

Does it make sense what I'm asking? I'd like an answer from an independent source, like here on RFD. Because, let's face it, ING Direct would benefit financially (due to the rate difference) from having us agree to the five-year fixed rather than the variable rate mortgage. So saying we're out on the debt-service ratio and that there's no flexibility could be seen as self-serving. Meaning that MAYBE -- I don't know for sure but maybe -- they could technically qualify us on their variable rate rather than the benchmark rate due to our equity in our home.

Anyway, could someone who knows about this area of debt-service ratio please comment? Does the high amount of equity in our home relative to the mortgage amount mean that the financial institution isn't actually obligated to use the benchmark rate for the debt-service ratio calculation? Or did I misunderstand what I read? Do they have any flexibility based on the equity in our home?
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TheHans wrote:
Aug 26th, 2013 4:58 pm
Meaning that our equity is like we put down more than 20% and, thus, the 5.14% benchmark rate shouldn't apply when calculating the rate.
It's at the discretion of the lender, but MOST lenders will qualify you based on the 5 year BoC benchmark if you want variable (well.. I can't think of any lender that doesn't do that).
For fixed rate on conventional mortgages (20%+ equity) it varies more on what the lender uses to qualify you. With ING they used the 5 year fixed you would get (if you choose to get it).

I don't know how far along you are in the amortization, but if it's a mortgage transfer, it means you gotta stick to the remaining amortization and they have to qualify you with it. So if you have 10 years left, they need to qualify with 10 years. Have you asked them for a full refinance so you can restart at 25 years? that would make it easier to fall within the TDS requirement.
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alkizmo wrote:
Aug 26th, 2013 6:45 pm

I don't know how far along you are in the amortization, but if it's a mortgage transfer, it means you gotta stick to the remaining amortization and they have to qualify you with it. So if you have 10 years left, they need to qualify with 10 years. Have you asked them for a full refinance so you can restart at 25 years? that would make it easier to fall within the TDS requirement.
There's 15 1/2 years remaining. And we'd totally prefer to have the 25 year amortisation to lower the payments. But, as you said, ING wouldn't do that with a straight transfer. All President's Choice said they could do it. And it would still be a straight transfer. It was explained to me with some vague "we have lots of mortgage products so we can do it" or something similar. I don't understand it, but that's what I was told. It's a bit too soon to apply with PC due to the fact that they only guarantee the rate for 60 days and we're a bit outside that. Literally days at this point. But I foresee the same problem with the debt-service ratio. Unless they can adjust the amortisation to figure it out the same way they can adjust the amortisation in general.

The best would be a refinance, but by the time we pay the costs for the lawyer, etc., it doesn't really make sense. We don't want to keep our condo for another five years anyway.
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Most lenders will calculate your GDS/TDS on a 1-4y fixed or any variable term using the benchmark rate, regardless the mortgage being insured or not. The difference between those cases (insured or not) is that if the mortgage is insured some lenders allow higher GDS/TDS ratios (39%/44%), while conventional (20% down/equity or more) will limit GDS/TDS to 32%/40%.
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TheHans wrote:
Aug 26th, 2013 7:10 pm
The best would be a refinance, but by the time we pay the costs for the lawyer, etc., it doesn't really make sense.
It might make sense IF the lowered payments = avoiding higher interest debts in the future.
Where would the extra cashflow from the lower payments go?
laptop-tech wrote:
Aug 26th, 2013 7:25 pm
Most lenders will calculate your GDS/TDS on a 1-4y fixed or any variable term using the benchmark rate, regardless the mortgage being insured or not.
Not since July 2012.
New CMHC rules are that insured loans are qualified using 5y benchmark, no matter what.

In the case of a insured loan TRANSFER, then no qualification is required by CMHC. However the lender might want to qualify just to see what's what.
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alkizmo wrote:
Aug 26th, 2013 8:35 pm
It might make sense IF the lowered payments = avoiding higher interest debts in the future.
Where would the extra cashflow from the lower payments go?



Not since July 2012.
New CMHC rules are that insured loans are qualified using 5y benchmark, no matter what.

In the case of a insured loan TRANSFER, then no qualification is required by CMHC. However the lender might want to qualify just to see what's what.
Laptop is correct. If the mortgage is 1-4years or a variable the benchmark is used. If it 5 year term then the contract rate applies.
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alkizmo wrote:
Aug 26th, 2013 8:35 pm
It might make sense IF the lowered payments = avoiding higher interest debts in the future.
Where would the extra cashflow from the lower payments go?
Yeah, it doesn't make sense. Particularly because we don't want to keep this condo for five more years. But ultimately, you're saying that financial institutions don't *have* to qualify us at the benchmark rate if they choose not to. So ING Direct was telling me a fib when I was told it's the law. And that's what I was told. I guess I'm concerned to be forced into a five-year fixed mortgage that we don't want because banks are salivating over our tiny mortgage with large equity that -- by the benchmark rate -- we can't afford. Why wouldn't a bank want it? But at the highest rate that they can squeeze out of us in the hope that we *can't* afford it and we'll default.

Sorry to sound so conspiratorial, but I just find it odd that they're making the excuse that it's the law that we have to qualify for the benchmark rate and that's why they won't give us the variable rate with the lower interest. BUT they'll give us the five-year fixed rate mortgage with the higher interest. In their eyes, theoretically, shouldn't we have even a *bigger* problem being able to afford that? I don't know, it just seems a bit weird to me.
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TheHans wrote:
Aug 26th, 2013 9:07 pm
Yeah, it doesn't make sense. Particularly because we don't want to keep this condo for five more years. But ultimately, you're saying that financial institutions don't *have* to qualify us at the benchmark rate if they choose not to. So ING Direct was telling me a fib when I was told it's the law. And that's what I was told. I guess I'm concerned to be forced into a five-year fixed mortgage that we don't want because banks are salivating over our tiny mortgage with large equity that -- by the benchmark rate -- we can't afford. Why wouldn't a bank want it? But at the highest rate that they can squeeze out of us in the hope that we *can't* afford it and we'll default.

Sorry to sound so conspiratorial, but I just find it odd that they're making the excuse that it's the law that we have to qualify for the benchmark rate and that's why they won't give us the variable rate with the lower interest. BUT they'll give us the five-year fixed rate mortgage with the higher interest. In their eyes, theoretically, shouldn't we have even a *bigger* problem being able to afford that? I don't know, it just seems a bit weird to me.
You are not being forced into a 5 year fix at all. The Ing rep was not lying to you. Based on your income your debt ratios do not qualify you for the variable. Because you are using a lower interest rate on the 5 year fixed you do qualify. If you are planning on selling in the next 5 years you just have to accept that you will have to pay a penalty unless you can port the mortgage if you are going to buy another home. The lenders are only following the rules that apply to them
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dougboswell wrote:
Aug 26th, 2013 9:03 pm
Laptop is correct. If the mortgage is 1-4years or a variable the benchmark is used. If it 5 year term then the contract rate applies.
edit - sorry I misread, I thought he said 1-4 fixed applies for insured qualification.
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dougboswell wrote:
Aug 26th, 2013 9:19 pm
You are not being forced into a 5 year fix at all. The Ing rep was not lying to you. Based on your income your debt ratios do not qualify you for the variable. Because you are using a lower interest rate on the 5 year fixed you do qualify. If you are planning on selling in the next 5 years you just have to accept that you will have to pay a penalty unless you can port the mortgage if you are going to buy another home. The lenders are only following the rules that apply to them
Well, I'm confused then and must have misunderstood some earlier posts. I thought that ING Direct didn't have to BY LAW have me qualify at the benchmark rate. I thought that was their choice. If it wasn't their choice, then that's different obviously. I meant the "forced" in the sense that if no financial institution has to have me qualify at the benchmark rate but they all do that anyway, then I'm put in a position where I'm forced to qualify at a rate that I do not technically have to qualify at. But if I DO have to qualify at the benchmark rate BY LAW, then it's completely true that I'm not being forced and I'm just being dramatic.
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If you are choosing a term shorter than 5y fixed (or any variable) you will have to qualify at the benchmark rate. But what varies is how high you GDS/TDS limits can go, as each lender may use the same limits for insured or not, while other lenders may use different limits. Some lenders may even allow a TDS of 50% in some cases. The key here is to understand that some lenders may be a little more forgiving in terms of setting a max GDS/TDS, but all will calculate it using the benchmark rate, unless you pick a 5y fixed term (or longer), in which case they will use the contract rate.
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So in the case of President's Choice Financial, where (for some reason) they'll extend our amortisation from the 15 1/2 years that are actually left to 25 years and still make it a straight transfer, do they use 15 1/2 years or 25 years with the benchmark rate for the calculation of the debt-service ratio? Or is that not clear because it's actually weird they can extend it like that in the first place and still make it a straight transfer? Does anyone know?
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TheHans wrote:
Aug 26th, 2013 11:40 pm
So in the case of President's Choice Financial, where (for some reason) they'll extend our amortization from the 15 1/2 years that are actually left to 25 years and still make it a straight transfer, do they use 15 1/2 years or 25 years with the benchmark rate for the calculation of the debt-service ratio? Or is that not clear because it's actually weird they can extend it like that in the first place and still make it a straight transfer? Does anyone know?

It depends of their internal policy. They might be willing to extend the amortization back to 25 years, and take the risk that they will pay up legal fees in 15 years to renew the mortgage registration on your house (as it expires after 30 years). It's a tiny risk as most people don't stick with the same mortgage, or house, for 30 years, or if they do, they tend to pay it faster. I might be wrong, it's not something I've ever heard of, but I could see it as being "possible".

OR

They simply are eating up the legal fee for a refinance so you think it's a straight transfer.
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I doubt PC will extend your amortization to 25y, as this would make the transaction a refinance. If this was a huge mortgage, I could see them covering the costs (about 700.00 to the lender if they use FCT or FNF) but with a 65k mortgage, I can almost assure you they gave you the wrong info.
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It seems to me a financial instituion does have the right to dicrimiate (be selective). In OP's case, I think banks would prefer much better income than more equity. The banks do not want to foreclose on a house. They just want their customers to pay their loans. (Also, if they feel OP is more risky, they do have the right to try to make more money ... charge a higher interest rate.)

So I'd say OP's main issue is being very borderline (income-wise) to qualify for a new mortgage. Most people in unstable jobs/income don't switch - as especially the past two years, the qualification rules are much tougher.

We know of relatives, whom couldn't qualify for a mortgage based on no/low income. They were not poor - as they were able to pay for the condo with cash, after being declined for their mortgage.

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