How will the new mortgage rules affect you?

By Alisa Aragon
November 06, 2017

On Oct. 17, the Office of the Superintendent of Financial Institutions (OFSI), an independent agency of the Government of Canada that regulates all federally-regulated financial institutions, released new mortgage rules that will take effect on Jan. 1, 2018.

The new mortgage rules will require borrowers with uninsured mortgages (those who put at least 20 per cent towards a down payment) to qualify at a higher interest rate.

Last October, OFSI introduced the stress test that only applied to insured borrowers, those who put less than 20 per cent towards a down payment. By law, insured borrowers must pay a mortgage default insurance premium. The premium amount depends on the percentage of the down payment.

These new changes will have a major impact on borrowers purchasing a property with more than a 20 per cent down payment or are looking at refinancing their current mortgage.

The new rules require the minimum qualifying rate for uninsured mortgages (putting more than a 20 per cent down payment or refinances) to be the greater of the five-year benchmark rate published by the Bank of Canada, currently at 4.99 per cent, or the contract mortgage rate of plus-two per cent. So, if the contract rate is 3.14 per cent (the interest rate that your mortgage payments are based on) then you would qualify at the greater of 5.14 per cent or 4.99 per cent. This means that the biggest impact to you will be the amount that you will be able to qualify for.

To clarify the differences on what the posted rate is, when you see rates such as 3.04 per cent or 3.14 per cent, these are called discounted rates. The posted rate is before the banks discount their rates to the public. The posted rate is currently 4.99 per cent.

From now until Dec. 31, 2017, when people qualify for refinancing or purchase with more than 20 per cent, the lower rate will be used, allowing you to borrow more money. When the posted (higher rates) are used to qualify, then the refinance amount or purchase price will be significantly less than what you can currently qualify for now.

Here is a scenario looking at the impact of the upcoming mortgage rule changes: A family earning $100,000 is planning to put a down payment of 20 per cent on a 3.14 per cent five-year fixed rate amortized over 25 years. Under the current rules, this family could qualify for a house priced at $706,692. After the new rules take effect in 2018, this family would be able to qualify for a house priced at only $576,896 based on a 4.99 per cent stress test.

It’s important to note that a “pre-approval” is not the same as a “final approval” and may be subject to the new qualifying rules.

The new stress test rules will not apply for mortgage renewals if the borrower remains with their existing lender and there are no additional funds advance and the current amortization period remains the same.

The new mortgage rule changes might require you to rethink your strategy and get pre-approved again with the stress test factor included. This means that you might have to either increase your down payment or start the process of looking for a home within your new imposed budget.

Considering these new mortgage rule changes, it’s even more important now to talk to a mortgage expert, who can assist you with their expertise and guidance, as there are many differences among lenders. They will also ensure that you get the best lender based on your individual needs.

About Alisa Aragon

Alisa Aragon is a mortgage expert who develops short- and long-term strategies that are customized for each client. Her strategies include the best mortgage with the most favourable terms and rates to suit your needs. Email her at aaragon@dominionlending.ca

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