So if you feel like all you hear about these days are mortgage rule changes then you should know that you are in fact correct. Every year for the past eight we have seen a major change to the rules. The latest round of mortgage rule changes have been announced so once again we need to take a closer look at how Canadians will be affected.
The first change is that all borrowers must now qualify for their mortgage on the stress test rate. The stress test rate is either the Bank of Canada posted rate or 2% higher than the rate the client is being offered, whichever is greater. Previously this was only for those with less than 20% down. The reasoning for this is to ensure that homeowners can afford potentially higher rates at the end of their mortgage term. In practical terms this will translate roughly to a decrease in purchasing power of approximately 20% to these home buyers.
There were additional limitations to lenders who offer first and second mortgages which are bundled together. These mortgages can no longer be presented as a way to circumvent the governmental rules. This type of mortgage was only for a very small percentage of homeowners as it is accompanied by slightly higher rates and lender fees.
There is mixed reaction to how this will affect the Canadian housing market. Some experts say that this will keep the banking system on balance. Others speculate that the changes were made as a further effort to cool the still hot markets of Toronto and Vancouver. Still others think that home prices across Canada will have to fall to allow sellers to find qualified buyers.
In October of 2016 the stress test was applied to those with less than 20% down and since then there has been decrease of 4.5% of insured homebuyers. During this same period there was an increase of 17.3% to uninsured mortgages.
So basically the take away is this – as of Jan. 1st all homebuyers in Canada will have to qualify at an increased rate.
Things which have not changed:
5% is the minimum down payment
Even if this is your second home you can purchase with 5% down
25 years is the maximum amortization with less than 20% down
30 years amortization is still possible with more than 20% down
Those with less than 20% down will be offered better rates as there is less risk given the mortgage default insurance
Mortgages can seem overwhelming. Call your local qualified mortgage professional for advice on how to navigate them as painlessly as possible.
Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.