The New Rules

Mortgage Rate Stress TestUnderstanding the Government changes affecting the mortgage industry. Your answers to the What, Who and Why, and How The Mortgage Advisors can help!

New: Mortgage Rate Stress Test

 

WHY did the Department of Finance implement these new changes as of October 17, 2016? The new regulations are intended to help protect the Canadian financial security and support the long-term stability of the Canadian Housing Market.

 

WHAT is it? All insured mortgages, regardless of term (fixed or variable) will now have to QUALIFY on the greater of the contract rate or Bank of Canada (BOC) benchmark rate (currently 4.64%). An Insured Mortgage is when a homebuyer has less than 20% down payment or the mortgage is insured by either CMHC, Genworth or Canadian Guarantee. The insurance premium is paid by the borrower and usually added to the mortgage. The insurance provides security to the lender in the event of default. A Non-Insured Mortgage is when a home purchaser has 20% or more down payment and is not required to pay the mortgage insurance.

 

HOW does this affect a home buyer with LESS than 20% down payment? The biggest effect will be on the amount home buyers can borrow or qualify for. Previously, borrowers were qualified using the lower contract rate for a 5-year term and the BOC rate for variable rates and terms less than 5 years. Now all insured mortgages will be qualified using the BOC posted benchmark rate (currently 4.64%). For example, before the changes, a 5-year fixed mortgage at 2.39% was qualified using 2.39%. Under the new rules, the “Stress Test” applies by qualifying at the BOC benchmark rate of 4.64%. The end result is an approximate 20% reduction in purchasing power, or qualifying for about 20% less mortgage amount.

 

HOW does this affect a home buyer with more than 20% down payment? There is no significant impact anticipated for home buyers placing 20% or more down payment. The Mortgage Advisors have many options available with a variety of solutions for most home buyers and home owners.

 

WHAT about refinancing my home? YES you can still refinance your property up to 80% of the home’s appraised value. Particulars may vary from lender to lender.

 

QUALIFY RATE: Is the Bank of Canada Conventional 5-year fixed posted rate.

CONTRACT RATE: Is the rate you pay on the actual mortgage.

 

Time to start a NEW conversation, and get pre-approved with the new stress test calculations. Look for a home in the new budget range or increase down payment if needed.

 

WILL LENDERS BE IMPACTED? Some lenders take out insurance on mortgages with less than 20% down payment, they may be impacted by higher costs of funds which in turn could increase their interest rates. Brokers can work with lenders that do not require this to help home purchasers qualify.

 

IT IS NOT THE END

Let’s put this into perspective. In 2008, interest rates were 5.99%. This is still much higher than the current BOC qualifying rate of 4.64%.

INTEREST RATES THAT YOU ACTUALLY PAY ARE STILL EXPECTED TO REMAIN LOW

 

NEW: Low Ratio Insurance Restrictions

 

NEW CRITERIA for loans with less than 20% down that are insured by some lenders will now by required to meet the following criteria that previous was only for high ratio. Conventional mortgages that are not insured can still be qualified under the previous guidelines at the contract rate and not the BOC rate.

 

  • Property must be owner occupied (Rentals are now excluded)
  • A maximum 25 years amortization (previously 30 and 35 were available)
  • A maximum property purchase price below $1,000,000
  • Minimum credit score of 600
  • Maximum gross debt service (GDS) of 39% of purchaser’s income and a total debt service (TDS) of 44% calculated using the Bank of Canada (BOC) 5-year fixed posted rate

 

A MORTGAGE BROKER WILL HELP YOU NAVIGATE THESE CHANGES TO FIND THE RIGHT MORTGAGE

 

New: Capital Gains Reporting

 

NEW REPORTING Any financial gains from selling your primary residence must be reported at tax time to Canada Revenue Agency. Although tax on capital gains is still waived for your primary residence sale, it is aimed at closing a loophole preventing foreign buyers who buy and sell homes from claiming them for a primary tax exemption for which they are not entitled.

 

What can I AFFORD TO BUY Qualified at 4.64% ??

 

$50,000 GROSS ANNUAL INCOME

5% Down Payment
Maximum Home Purchase of $250,967
10% Down Payment
Maximum Home Purchase of $266,857
20% Down Payment
Maximum Home Purchase of $306,218

 

$75,000 GROSS ANNUAL INCOME

5% Down Payment
Maximum Home Purchase of $376,450
10% Down Payment
Maximum Home Purchase of $400,285
20% Down Payment
Maximum Home Purchase of $459,328

 

$100,000 GROSS ANNUAL INCOME

5% Down Payment
Maximum Home Purchase of $501,933
10% Down Payment
Maximum Home Purchase of $533,714
20% Down Payment
Maximum Home Purchase of $612,437

 

$150,000 GROSS ANNUAL INCOME

5% Down Payment
Maximum Home Purchase of $752,900
10% Down Payment
Maximum Home Purchase of $800,571
20% Down Payment
Maximum Home Purchase of $918,655

 

Notes: 32% of gross income is used to calculate the borrower’s maximum shelter expense such as mortgage payments, taxes, heat and condo fees. Chart assumes that borrowers spend no more than 8-10% of their gross income on non-shelter debt obligations. This data is for information purposes only and should not be relied upon for qualifying for a purchase without contacting a Mortgage Agent/Broker from The Mortgage Advisors. The above can not be used as a rate commitment or offer. Ifnromation is based on a 25 year amortization. 

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