Confused by the upcoming changes to the mortgage rules? Don’t panic.
Our very own Kent Browne, Owner and Broker at Royal LePage Team Realty, sat down with Mortgage Broker York Polk of Mortgage Alliance to discuss all these changes in order to help you, our clients, understand how they may affect you.
What home buyers need to know before 2018
As of January 1, 2018, Canadian homebuyers will have to meet stiffer requirements in order to qualify for a mortgage with a federally regulated mortgage lender.
Why are the Mortgage Rules changing?
- As Canada’s financial “watchdog” OSFI believes these new rules will decrease the risks for Canadian households with significant debt if and when the interest rates rise.
Here are the highlights:
Changes that came into effect November 30, 2016 and still apply:
- All buyers having a down payment of less than 20% are required to pass a “Stress Test”* to obtain a mortgage.
- To pass the stress test, buyers with a payment of less than 20% need to qualify at a higher rate (4.64% at the time) even though the contract rate is much lower (2.3% at the time).
Changes starting January 1, 2018
- When OSFI’s new rules take effect – even those who have down payments of 20% or higher and do not require mortgage insurance – will also have to undergo a “Stress Test”. Home buyers will need to qualify for mortgages that are two percentage points higher than the rates at which they are applying.
- The qualifying rate for the “Stress Test” would be the greater of either 2% higher than the contract rate or the Bank of Canada rate (currently at 4.99%).
The contract rate remains unaffected.
If you’re a prospective home buyer concerned about how the new mortgage rules will impact your buying power, here are a few tips:
- If you are thinking about buying a home, seriously consider buying now. Any firm agreement of purchase and sale on a specific property that has been completed and signed off on will follow the old rules, regardless of the closing date. Note, if you need to make any changes to the agreement after January 1st, you will need to qualify within the new rules.
- Conventional mortgages can be stretched over up to 30 years and by doing so, it will be easier to qualify at this time.
- While home buyers should always get pre-approved, this will not protect you from needing to qualify under the new rules if you are unable to purchase a property before 2018.
* Stress testing is a best practice risk management tool. Stress tests are not predictions or forecasts, they involve searching out extreme “what if” scenarios that have a very remote chance of happening, and planning for them.
Diligent stress testing is an essential part of CMHC’s risk management program and allows CMHC to evaluate its capital levels against multiple scenarios. Effectively, they confirm if CMHC’s capital holdings are sufficient for even the most extreme scenarios.
Stress tests are used by financial institutions to gauge how their business would fare under extremely difficult conditions. They provide a formalized mechanism for companies to look at risks and to assess the impact of the different extreme events. This information is from the CMCH article found here.