ICYMI: Canada’s New Mortgage Rules

In case you missed it, Canada’s new mortgage rules came into effect yesterday. As of October 17, a stress test used for approving high-ratio mortgages will be applied to all new insured mortgages – including those where the buyer has more than 20 per cent for a down payment. This stress test is used to determine if buyers can increase from their preferred mortgage lending late to the Bank of Canada rate.

What does this mean for me?

Old Mortgage Process Prior to October 17th, 2016

• $350,000 Purchase Price
• 5% Down Payment = $17,500
• 25 Year Amortization
• Qualifying Fixed Rate – 5 Year Posted Rate @ 2.49%
• Mortgage Payment = $1541.40

New Mortgage Process After October 17th, 2016

• $350,000 Purchase Price
• 5% Down Payment = $17,500
• 25 Year Amortization
• Qualifying Fixed Rate – 5 Year Posted Rate @ 4.64%
• Mortgage Payment = $1933.45
• Using the above situation as an example, this would mean that you would lose an approximate 20% of your purchasing power.
• Delays in financing: Mortgage lenders and brokers may now extend the time that it takes homebuyers to qualify for both the preferred rate and stress rate. This might mean homebuyers need to increase their income or get a co-signer for their mortgage.

Why?

The idea behind this new stress test is to insure that homeowners can still afford to pay their mortgage if their preferred interest rate rises.

This is done with the Bank of Canada’s “stress rate”, which is 4.64 per cent as of September 28. In this case, the homebuyer (you) would have to qualify for your mortgage loan at your negotiated rate in your mortgage contract, and also at the stress rate of 4.64%.

How is this done?

Your mortgage broker will determine if you qualify for your mortgage based on the Bank of Canada’s stress rate of 4.64%. This is done by taking into consideration your income, debt-to-income ratio, credit score and other factors.

Anything else I should be aware of?

• The new stress test also requires that homebuyers are spending no more than 39 per cent of total income on “home-carrying costs” i.e. mortgage payments, heat, taxes, etc.
• Total debt service must be no more than 44 percent of income.

Who do these new rules predominantly affect?

• First time home buyers with limited purchasing power
• Families with two or three mortgages on their home

For more information about the new mortgage rules, please contact your bank representative, mortgage broker, Trico Area Sales Manager or consult with the Bank of Canada.