With a new year comes a new mortgage landscape, and the rules have changed! Come Jan 1, 2018, new mortgage rules came into effect that may have a direct impact on what you can do when it comes to your mortgage. These new rules will affect everyone who is thinking about applying for a mortgage, refinancing, or in some cases renewing a mortgage. So let’s break it down!
Mortgage Applications – New rules by Canada’s federal financial regulator mean that mortgage applicants with a down payment of 20 percent or more will now face the same stress test previously introduced in January of 2017 for applicants with a lesser down payment. 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, for high ratio insured mortgage, and for conventional mortgage the committed rate plus an additional 2 percentage points. So what does this translate to? 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. But how much less? For those looking to stretch their budgets thin, this could mean a price reduction of as much as 20 percent.
Mortgage Renewal – 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. So what if you fail the stress test when renewing your mortgage? Failing the stress test when renewing a mortgage not only exposes you to a higher interest rate, but essentially reduces the amount of options a client has when renewing a mortgage. In this case, the client may be bound to their current mortgage lender at a less than favourable rate, without the ability to shop around.
Mortgage Refinancing – 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 how the new 2018 mortgage rules affect rates 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.
Who’s not affected? – As with all 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, you are in luck. These new rules won’t affect you as lenders are not required to apply the stress test even if you apply for the mortgage in 2018. If you’ve been pre-approved for a mortgage, some lender will allow you to complete the transaction under the old rules as long as there is no change to your financial status, and no increase in the pre-approved loan amount. For a refinance, as long as it was approved prior to the rule changes, and closes within 120 days it will complete under the old rules. And it goes without saying that if you pass the stress test, then you have nothing to worry about.
Looking to apply for a new mortgage, or make changes to your existing mortgage but are unsure how these new rules affect you? Give us a call at (519) 777-9374 and the team at iMortgageBroker Inc. can guide you through what your mortgage options are.