Written by Owen Thompson on April 10, 2018
January 1, 2018 ushered in new mortgage rules for those looking to purchase homes or refinance their mortgage in Canada. These rules could affect the size of the mortgage a person or couple may qualify for, or even if they can secure a mortgage at all.
The rules include a new “stress test” that is designed to ensure that borrowers can afford the mortgages they are taking out even if interest rates rise. Formerly, when borrowers were purchasing a home, they only had to have a 20% down payment and the ability to qualify for the amount of the mortgage they wanted to borrow at the interest rate the lender was offering. The new stress test requires that lenders evaluate a mortgage application by using a minimum qualifying rate equal to the greater of the Bank of Canada’s five-year benchmark rate, or their contractual rate plus two percentage points. Essentially, borrowers will have to be able to demonstrate that they can pay back the mortgage at an interest rate higher than the actual contract interest rate of the loan.
Homebuyers that do not have a 20% down payment will continue to be required to purchase mortgage insurance from Canadian Mortgage and Housing Corporation (CMHC) through their lender. This insurance protects the lender should the borrower default on the mortgage loan. This insurance is generally available with a 5% or greater down payment on a property to be purchased.
People who already own a home but are looking to refinance to pull equity out for renovation or other projects could be affected as well. The new “stress test” applies whenever a borrower changes lenders. For example, if a couple owes $100,000 on their current mortgage and wants to refinance and use $50,000.00 of equity, increasing their mortgage to $150,000.00, they will be subject to the new stress test if they change to a new lender. A current lender does not have to apply the stress test if a borrower refinances with the same financial institution. This could mean that people find themselves stuck with their current lenders at unfavourable interest rates if they cannot qualify with a new lender based on the stress test, but require access to the equity in their homes.
Keep in mind these rules apply only to federally regulated financial institutions, so provincially-regulated credit unions, as well as private lenders, are not required to abide by these rules at this time. Credit unions often adopt the rules that federal banks apply, but they can be an option if shopping for a mortgage amount close to or exceeding the new stress test rules.
If you need assistance with a mortgage refinance transaction, contact us!