Qualifying for a mortgage will be much harder as one will be required to qualify at a higher rate than the actual contract rate regardless of how much of a down payment you have.
This Morning the Department of Finance announced that they will be implementing a new Stress Test for uninsured mortgages to come into effect January 1, 2018 that requires everyone to qualify at a higher rate than their actual contract rate.
At present, home buyers with less than a 20% down payment (Insured Mortgages) have been affected by the mortgage “stress test” rule that the government of Canada enforced last October 2016. The “stress test” requires homebuyers putting less than 20% down payment to qualify at the Qualifying Benchmark Rate.
Coming Jan 1, 2018 anyone applying for a mortgage will have to qualify using this Stress Test regardless of their down payment. (Insured or Uninsured Mortgages)
If you were to opt for a five-year mortgage at 3.09%, you would have to prove to the lender that you could make monthly mortgage payments based on the 4.89% Qualifying Benchmark Rate for an insured mortgage (Less than 20% down payment).
If you were to put more than a 20% down payment (Uninsured Mortgage) then you would have to qualify at the greater of the 4.89% Qualifying Benchmark Rate or 2% above your contract rate. In the above example, this would be 5.09%.
How will these changes impact you?
This will reduce one's buying power by 20 – 30%. Meaning every $100,000 you previous qualified for in purchase price will be reduced by $20,000 - $30,000.
For Example: Someone looking at a purchase price of $300,000 will now only qualify for $210,000 - $240,000
For many, it will become very difficult to refinance their existing homes to take out equity or consolidate debts.
What is an insured mortgage?
Lenders are required to obtain mortgage loan insurance for any high loan-to-value mortgage—a loan where the homebuyer’s down payment is less than 20%. It’s pretty much an industry standard for lenders to pass on the cost of this mortgage insurance premium to homebuyers.
How is this 'Qualifying Benchmark Rate' determined?
The Bank of Canada surveys the six major banks’ posted 5-year fixed rates every Wednesday and uses a mode average of those rates to set the official benchmark and is published by the Bank of Canada every Thursday.
If you are considering purchasing a home or wanting to refinance your mortgage, call us today to start the process before these changes are implemented Jan 1, 2018