On January 1, 2018, some new mortgage rules have come into effect. These changes don’t impact homeowners who are renewing their existing mortgages (as long as they don’t make any alterations to their existing mortgage). These rules also don’t affect people that are purchasing new homes with a down payment below 20% on their insured mortgage. This is because they have already gone through the qualification process via the same stress test a year ago.
The 2018 mortgage stress test – some facts
- These new mortgage rules will apply to any borrower who is buying a property with a down payment of more than 20% (this means they have an uninsured mortgage).
- The rules will also now be applicable to any homeowner who has above 20% of equity in their property and are looking to refinance their existing mortgage.
- These new rules need to have the minimum qualifying rate for an uninsured mortgage to be the greater of the contract’s mortgage rate +2% or the 5-year benchmark rate that the Bank of Canada publishes (which currently stands at 4.99%). This simply means the initial amount (that you can qualify to borrow), will be the most significant impact to you. The monthly payments you make would still be based on the rate in the contract.
Understanding a little more about the stress test
Until Dec 31, 2017 when people qualified either for refinancing or a home purchase with an amount over 20%, the lower discounted rate was being used while assessing exactly how much the applicant is qualified to borrow depending on what their income is.
Since those applicants will now be paying the mortgage back at a much lower rate of interest, it gives them the opportunity to borrow much more money. However, now that the posted rates are going to be used in the qualification process, the purchase price or refinance that you qualify for will be far less than the amount you currently qualify for. For some buyers, this drop in purchasing power could be in the range of 20% which makes a massive difference the type of home they buy, or where it’s located.
The changes you’d have to make
If you have applied for pre-approval of your mortgage prior to Jan 1, 2018 and the approval comes in this year, the new qualifying rules will most likely apply to it. If this has happened or happens you may have to make some changes to your strategy and apply for pre-approval all over again but this time with the stress factor included. It also means that you will have to either increase down payment or restart the process of hunting for a new house that falls within the new restricted budget.
For any more information about the mortgage stress test, how it works and how it affects you and the mortgage you will be applying for, contact the experts at Luca Andolfatto at 613-541-9220 or through this online form.