2018 has brought with it another change in the Canadian mortgage rules that have a direct impact on anyone who currently owns a home or is planning on owning in the near future. The new rule will affect anyone looking to purchase, refinance, or even in some cases renew their mortgage.
Applying for a mortgage in Canada in 2018 means that applicants must undergo a stress test implemented by Canada’s federal finance regulator. This stress test, an extension of the same test introduced in January of 2017, will now apply to all applicants instead of the previous limitation to those coming to the table with a down payment of less than 20% This means that that the financial institutions must vet all mortgage applications using a minimum qualifying rate that is equal or greater than the Bank of Canada’s five-year benchmark rate, which is currently 5.14 percent, plus 2 percentage points. This new rule will essentially make it harder to afford the home of your choice, and those who are in the market for a new home may need to settle for less even if they pass the stress test. For those looking to stretch their budgets thin, this could mean a loan reduction of as much as 20 percent, but for the average buyer it will most likely translate to around 6.8 percent.
Lenders are not required to apply the same stress test to clients who are looking to renew an existing mortgage, but may do so if they wish. Failing the stress test when renewing your mortgage does not mean you are no longer eligible for the required loan amount, but may translate to more unfavourable interest rates as well as limiting the options available to the applicant. In this case, the client may be bound to their current mortgage provider at the less than favourable rate, without the ability to shop around.
If you are planning on refinancing, you will also need to qualify under the new mortgage stress test rather than your existing contractual mortgage rate. Take the following situation as an example of the new 2018 mortgage rules vs those of 2017. When applying for a refinance in 2017 mortgage lenders would only be required vet the refinance value against the current offered mortgage rate. In 2018 however, lenders would be required to take the offered rate, add 200 basis points, or an additional 2%, and vet the refinance value against the sum. Depending on how close one is to their borrowing limit, this could substantially affect the amount of the refinanced loan.
As with the introduction of many new financial rules, there is generally a transition period to ensure transactions that are currently under way are not affected. If you’ve signed a purchase agreement on a new home before Jan 1, 2018, these new rules won’t affect you. Lenders are not required to apply the stress test to those who are already in an agreement, even if they apply for the mortgage in 2018. If you’ve been pre-approved for a mortgage in the latter part of 2017, many lenders have gracefully offered a 120 day extension into the New Year to purchase a home without being affected by the rules. The same leniency has been also applied to refinance commitments in place by the end of 2017. And it goes without saying that if you pass the stress test, then you have nothing to worry about.
If you are unsure how these new rules will affect you give us a call at (780) 431-5600, and the team at Dominion Lending Centres Lender Direct will walk you through what you need to know.