New Rules to Qualify for a Mortgage

This week, Department of Finance Minister Bill Morneau announced further regulations in the Canadian Housing market.  These changes include:

Standardizing lending criteria for high and low ratio mortgages, including a Mortgage Stress Test Closing loopholes for capital gains exemptions for non-residents Consulting industry stake holders to ensure risk is properly distributed, including possible risk sharing

The first point above is the one causing the biggest uproar in the industry this week.  Here is how it can affect you:

Mortgage Stress Test

Starting October 17th 2016, all new insured mortgages (this includes all mortgages with less than 20% downpayment) will be required to qualify for a new mortgage at the Bank of Canada Benchmark rate of 4.64% instead of the Contract Rate.

What this means, is if you were planning to buy a home with less than 20% downpayment, the mortgage amount you qualify for has just drastically reduced.  This new rule was imposed by the Department of Finance and applies to all Canadian mortgages.

Let’s take a look at what that means to an average consumer:

Example: A young couple are planning to buy their first home.  They earn $60,000 combined family income, with a $15,000 balance on their line of credit and no other debt.  The estimated property taxes of their new home are $2500 per year and Heat will cost them $100 per month on average.

Under the Old Rules, they qualify for a mortgage of $279,036.  With 5% down that’s approximately a purchase price of $285,000.  This example is calculated under the old rules and applying the Contract Rate, which today’s 5 year fixed rate is approximately 2.44%.

Under the New Rules starting October 17th 2016, they now only qualify for a mortgage of $221,219.  With 5% down that is approximately a purchase price of $225,000.  This example is calculated the government enforced Bank of Canada Benchmark Rate of 4.64% to qualify.  Although you are still only paying the contract rate of 2.44% interest, you must now qualify using a “stress test” calculation, effectively meaning average consumers now have about 21% less buying power than they did last week.

If you are currently pre-approved for a mortgage, you should aim to complete a purchase offer and have an approval in place before October 17th.  If this is not possible, you should talk to your broker or banker about what you now qualify for under the new mortgage rules as it could be less than you are pre-approved for now.

Part of the new changes also involves standardizing rules for high ratio and low ratio mortgages.  High ratios are those with less than 20% downpayment, and low ratios are mortgages with 20% downpayment or equity (in the case of refinancing).

Genworth Canada has stated that approximately 1/3 of it 2016 insured business would have difficulty qualifying under the new rules.  This is a startling number.

Genworth published a great primer on what those requirements are:
 

A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan;A maximum amortization length of 25 years;A maximum property purchase price below $1,000,000 at the time the loan is approved;For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once every five years to conform to the original amortization schedule;A minimum credit score of 600 at the time the loan is approved;A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent at the time the loan is approved, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate; and,A property that will be owner-occupied.

As a homebuyer today, brace yourself for the upcoming changes and be prepared by re-qualifying for your pre-approved mortgage as soon as possible so your dream home doesn’t slip through your hands due to the new rules.

For homeowners, be prepared for tougher rules for qualifying to refinance your home, take out equity, or buy an investment property.  Having your mortgage broker or other professional calculate the figures for you, will allow you to continue your homeownership dreams stress free.

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