What Are the Changes?
Starting January 1, 2018, new mortgage rules will reduce the maximum mortgage amount you will qualify for by 15% - 20%.
The new rules were first suggested in July 2017 amidst growing concern of the rapid increase in the price of homes in the Greater Toronto Area.
Starting in January, the major rule change is that all mortgages will need to qualify using a 'qualifying' rate. Previously, only insured mortgages, variable rate mortgages, and terms less than 5 years were required to qualify using a different rate than the actual contract rate. This is called a “stress test”.
Why is the Canadian government making these new rules?
One of the reasons for the new “stress-test” rule is to ensure homeowners can continue to afford to pay their mortgage even if rates go up in the future.
Another reason is to balance out the supply and demand for housing. With the new rules, fewer people will qualify for a sufficient mortgage to purchase a home, and therefore the demand for buying homes will naturally decrease. The lower demand will slow down the rapid increase in the price of homes.
The Canadian Real Estate Association’s next forecast is due out in December 2017.
The new rules also seek to slow down the increasing indebtedness of Canadian households.
Qualifying for a Mortgage Now vs. After January 1st 2018.
When qualifying for a mortgage, two ratios are used: Your Gross Debt Service Ratio (GDSR), and your Total Debt Service Ratio (TDSR). These must be below 39% and 44% respectively.
With the new rules, the mortgage payment used to determine the two debt service ratio will be calculated using the qualifying rate.
The 'qualifying rate' for conventional lending ( 20% down / equity) will be the greater of either 2% above your contract rate (if the rate is 3.2% the qualifying rate used will be +2 = 5.2%), or the Bank of Canada's five-year benchmark rate (currently 4.99%).
For insured mortgages, the qualifying rate will continue to be the Bank of Canada's five-year benchmark rate (currently 4.99%).
Your mortgage payment will be based on what your actual contract rate is.
Before and After: for Homebuyers:
- $100K household income
- Rate 3.39%
- Amortization 25 years
- 20% down payment
Now: Maximum Purchase Price approximately: $647K Approximate Property Taxes: $7100 Mortgage amount: $517,600 Down Payment: $129,400 Approximate Mortgage payment: $2554 monthly
After January 1st: Maximum Purchase Price approximately: $547K Approximate Property Taxes: $6000 Mortgage amount: $437,600 Down Payment: $109,400 Approximate Mortgage payment: $2159 monthly
_____________________In this example, buying power decreases from $647K to $547K. This is a difference of $100K or 15%.
Overall, homebuyers will be able to afford 15%-20% less home.
The deadline for the new rule is tied to when the lender provides the mortgage approval or pre-approval, and not when the transaction takes place. If you plan to purchase you should get your approval before January.
For purchasers with 20% down or when refinancing with 20% equity, there have not been any changes to amortization. This means your mortgage can be amortized over 30 or even 35 years. A higher amortization makes your payments lower, and therefore allows you to qualify for more mortgage. This is a way to increase your purchasing power.
Before and After: for Homeowners Refinancing:
- $85K household income
- Home Value: $500K
- Maximum equity take out is 80% = $400K
- Property Taxes: $5500
- Current Mortgage $350K
- Rate 3.39%
- Amortization 25 years Now: Maximum mortgage = $446K The new mortgage of $400K (the maximum for a $500K house) would pay out the current mortgage of $350K and leave you with $50k left over for paying out debt, doing home improvements, investing etc.
After January 1st: Maximum Mortgage = $364K Therefore, NOT able to take out the maximum. The new mortgage of $364k would pay out the current mortgage of $300K and leave you with only $14K left over for paying out debt, doing home improvements, investing etc.
As you can see the amount of equity you can access will be dramatically reduced after January’s rule changes.
The maximum mortgage as of now would be $446K and in January the maxmimum will be reduced $364K, in this example. A difference of $82K or an 18% difference.
If you want to refinance or access your home equity - do it before January.
If you are currently carrying high-interest debt you should consider consolidating it into your mortgage. This will improve your cash flow and save interest costs. Contact us today to get started.
If you already have a mortgage and it is coming up for renewal don’t worry. You will not need to qualify again to renew your mortgage. However, if you change lenders or refinance at your renewal time, you will need to qualify with the new rules.
- Mortgage rules will lower affordability by 15-20% for everyone.
- Qualifying rate to be used is the greater of: Your rate + 2% or 4.99% (Bank of Canada Benchmark rate).
- The purpose of new rules is to slow down increasing housing prices, add a cushion for consumers in case mortgage rates increase, and reduce Canadian overall debt levels.
- If purchasing soon, get your pre-approval and rate hold now. (Update: Nov 29th Rate hold will be honored using the 2017 rules with your rate hold if done before January.)
- If refinancing soon, get your approval now - it's uncertain when lenders will set their deadline for underwriting under current rules.