As of January 1, 2018 the mortgage rules for Canadians has changed. What that means is that if you are getting, renewing or refinancing a mortgage you might have to prove that you would be able to handle a hike in interest rates that are a lot higher than the current contract rate.
The new rules mean that even borrowers with a down payment of 20 per cent or more will now face what is called a ‘stress test’. This has already been the case since last year for applicants with smaller downpayments that require mortgage insurance.
So what does that mean? In a nutshell about 10 per cent of Canadians who DID get an uninsured mortgage between mid-2016 and mid-2017 would not have qualified under the new standards, as suggested by a recent analysis by the Bank of Canada.
The rules will affect homebuyers, who would qualify for a mortgage for their preferred house today, but will likely fail the stress test for an equally large loan next year according a report.
Here’s how the new guidelines might affect you:
If you’re planning to buy a house with a downpayment of 20 per cent or more next year
The stress test means that financial institutions will vet your mortgage application by using a minimum qualifying rate equal to the greater of the Bank of Canada’s five-year benchmark rate (currently 4.99 per cent) or their contractual rate plus two percentage points.
If you’re going be house-hunting next year, this may force you to settle for a less expensive home than you would be able to buy today. Or, you might have to wait and save up for a larger down payment.
The rules might force Canadians to set their eyes on homes that are up to 20 per cent cheaper. Experts say that about half will be able to make a different purchase than they had planned. The rest will give up on a home purchase.
If you’re renewing your mortgage next year
Lenders don’t have to apply the stress test to clients renewing an existing mortgage.
This means that if you fail the stress test, you’ll probably get stuck renewing with your current financial institution, without being able to shop around for a better rate.
If you’re refinancing your mortgage
If you’re planning on refinancing your mortgage, you’ll have to qualify according to the higher stress-state rates rather than your existing contractual mortgage rate. So, say, for example, that you bought a $400,000 home and have a $100,000 mortgage balance left. You’d like to borrow $50,000 more for a renovation. You have a five year fixed-rate mortgage at 3.3 per cent.
Today, your lender would make sure that you can take on a $150,000 loan at 3.3 per cent.
Starting next year, your financial institution would have to vet that $150,000 loan using a 5.3 per cent rate. If you’re close to the borrowing limit today, you might have to settle for a smaller loan.
Four cases in which the rules likely won’t affect you
As they generally do, financial regulators have allowed for measures that will ease the transition, making sure the new rules don’t disrupt transactions that are underway by not yet completed in early 2018.
If you signed a purchase agreement on a new home before Jan. 1., lenders won’t have to apply the stress test even if you apply for a mortgage in the new year. This also goes for for pre-construction sale and purchase agreements.
If you are pre-approved for a mortgage, some lenders will give you 120 days starting Jan. 1 to buy your new home without worrying about the new rules.
The same holds for mortgage refinancing. If you have a mortgage refinance commitment in place by Dec. 31, you have 120 days to follow suit.
Of course, the stress test won’t have much of a concrete impact on you if you pass it.
About credit unions
The Office of the Superintendent of Financial Institutions (OSFI) rules only apply to federally regulated financial institutions, meaning Canadians might be able to continue borrowing without a stress test if they turn to provincially-regulated credit unions.
In the past, however, credit unions have voluntarily adopted new federal standards on mortgage rates. Still, adopting rules on a voluntary basis means they would be able to make some exceptions.
The stress test measures only one of three risk metrics lenders look at. Essentially, it ensures that borrowers’ housing expenses compared to their income remain below a certain threshold even if rates rise.
But when evaluating a borrower, financial institutions also look at the size of the loan compared to the price of the house, as well as credit scores.
A credit union that has voluntarily adopted the stress test, might make an exception for a family with very strong credit scores and a down payment considerably higher than 20 per cent, even if they fail to qualify under the new rules by a small margin.
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