New Mortgage Rules as of October 17th

As you may have already heard, Ottawa has dropped quite the bomb on the mortgage market with new mortgage rules. Their latest attempt at taking some risk out of the country’s housing markets has put first-time homebuyers in a losing position.

The rule they have put in place is tied to mortgage insurance (so it doesn’t affect everyone). It is only if you make a down payment of less than 20 per cent of the home’s purchase price, or are refinancing when you have less than 20 per cent equity in your property. This is considered to be a high-ratio mortgage, which requires mortgage insurance.

As of October 17, all insured mortgages (those with less than 20 per cent down) will be “stress tested” at a much higher interest rate than the one being offered by your lender. This stress test rate is based on the Bank of Canada’s posted five-year fixed rate which currently sits at 4.64 per cent. This means even if your lender is giving you a lower rate (let’s say 2.49 per cent), you will still be tested at the higher rate (4.64 per cent) in order to qualify for the mortgage.

 

What do these new rules mean?

 

In the end, if you pass the stress test based on the Bank of Canada’s posted five-year fixed rate, you will still only be charged the rate that your lender has offered you. Ottawa is saying the new measures are aimed at reducing high household debt, and making sure families buy homes they can afford if interest rates go up or if incomes go down.

What does that mean for a homebuyer that is putting less than 20 per cent as a down payment on a home purchase after October 17?  Well to be honest, it means that you may need to lower your expectations when it comes to how much “house” you will be approved to buy.

 

Here is a chart to illustrate the impact of these changes:

As you can see, for some buyers the changes may mean that they will have to settle for a less expensive property, save for a larger down payment or just wait until they are earning more in the future. It may take some of the younger people out of the market temporarily, but not forever.

As for those that are considering refinancing, ensure you have 20 per cent equity in your property otherwise you will be subject to these new rules as well starting Oct 17.

If you have any further questions about this, please feel free to contact me.