Government of Canada Announces New Mortgage Qualifying Rules
Government of Canada Announces New Guidelines Affecting Mortgage Qualifying Guidelines
The Government of Canada has announced some changes to the guidelines affecting mortgage insurance that can have a significant impact on homebuyers and how much they can borrow for a mortgage loan. With these changes going into effect on October 17th, those who are thinking about purchasing a home may want to get the homebuying process started before the new changes go into effect if they hope to increase the housing options that are available to them for purchase.
Understanding Mortgage Insurance
According to Canadian federal statutes, mortgage lenders are required to purchase mortgage default insurance for homebuyers who do not make a down payment that is at least 20 percent of the property purchase price. Also referred to as high loan-to-value or high-ratio insurance, this coverage protects the lender if the homebuyer defaults on the loan. Providing the lender with this protection helps reduce the risk that the lender takes by loaning money to those buyers with less money available for a down payment. In turn, this makes it possible for homebuyers to purchase a home with a down payment that is as little as 5 percent. The cost of paying the premiums for this insurance coverage is passed on by the lender to the homebuyer.
Changing Mortgage Insurance Guidelines
Starting October 17, 2016, all insured mortgages will be required to undergo a “stress test” from the lender. This means the buyer will be required to qualify for a mortgage as the Bank of Canada posted rate even if they are to receive a different rate as agreed upon in the contract. Currently, the Bank of Canada posted rate is 4.64 percent, which is higher than most contract rates. This effectively reduces the buying power of the person purchasing a home because the homebuyer must qualify at the higher rate.
To better understand how the change in guidelines can affect a homebuyer, it can be beneficial to look at some real numbers. A household with an income of $87,000 per year with a monthly debt payment of $700 and $3,000 per month in property tax payments would qualify for a $450,000 loan with a mortgage rate of 2.49 percent and a 5 percent down payment. That same homebuyer will only qualify for a $360,000 loan after October 17th because the qualification amount is determined by the Bank of Canada rate of 4.64 percent. This, of course, will severely reduce the options that are available to buyers despite the fact that they can realistically afford to purchase a home at a higher price.
To avoid being affected by the new guidelines, homebuyers have an accepted offer submitted to CMHC BEFORE October 17, 2016. The mortgage also must be funded by March 1, 2017 and to qualify under the current rules.