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The Inside Scoop on Mortgage Rules in Canada

The Inside Scoop on Mortgage Rules in Canada

Recently, the Office of the Superintendent of Financial Institutions (OSFI) announced a new set of lending restrictions applying a mortgage stress test to all Canadian home buyers. The new rules, regulating the amount a homebuyer can borrow based on their down payment and income, takes effect January 1st, 2018 and are expected to affect all home buyers. Here’s what you need to know:

inside scoop mortgage rules canada interest rate imageWhat’s Changing? 

Currently, home buyers with less than a 20% down payment or a term of less than five years must undergo a mortgage stress test. Put in place in 2016, these rules were introduced by the government as a way to prevent foreign investment from overheating the Canadian housing market and encourage responsible homeownership.   

The government has now expanded these rules to apply to all homebuyers. This includes new mortgage applications, renewals and home buyers with larger down payments (20% or more). Banks will also now be required to vet borrowers with lower down payments using the greater of their contractual rate plus 200 basis points OR the Bank of Canada’s five-year benchmark rate

Benchmark Qualifying Rate

As per, a family with a yearly income of $100,000 and a 20% down payment on a five-year fixed mortgage (amortized over 25 years at a rate of 2.83%) can afford approximately $726,939 for a home. Under the new rules, the family will need to qualify at 4.89% and can now afford $570,970. 

Contractual Rate Plus 2%

Conversely, if this same family is required to qualify at their contractual rate +200 basis points (five-year fixed mortgage at a rate of 3.09% over 25 years) they will need to qualify at 5.09%. This means they can afford a home at approximately $559,896, whereas prior to the changes, they could afford around $706,692. 

What Does This Mean for Buyers? 

As the new rules mean buyers will likely be able to afford less house, move-up buyers may find themselves second-guessing as to whether they want to move at all. First-time buyers are likely to be the most affected as they will have to save more, for longer. In the event they don’t qualify under the stress test, they will need to save a larger down payment, purchase a smaller home or seek a co-signer for their loan. 

While the new rules will make things a little tougher for first-time buyers especially, experts advise that having a good understanding of the new regulations combined with a solid mortgage pre-approval can reduce any stress or surprises. For more information, be sure to talk to your lender. 

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Jeff S.

Proud father and husband. Loves music, Nine Inch Nails, UFC and inbound marketing.

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