A detailed breakdown of the strict new rules arriving in January and how they will affect buyers – and homeowners
Earlier this fall, the Office of the Superintendent of Financial Institutions (OSFI), which regulates all federally regulated financial institutions, announced new mortgage qualification rules that come into effect on January 1, 2018.
The upcoming changes will not affect anyone who is renewing their existing mortgage (assuming they don’t make any changes to their existing mortgage) and anyone who is purchasing a home with less than a 20% down payment on an insured mortgage (as those people already had to qualify under the same stress test, as of one year ago).
So who will the changes affect this time?
The new mortgage rules are being extended to all new borrowers who are purchasing a property and have more than 20% as a down payment (therefore taking out an uninsured mortgage). The rules will also apply to homeowners with more than 20% equity in their home who are looking at refinancing their current mortgage.
The new rules require the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada (currently at 4.99%) or the contract mortgage rate +2%. This means if the agreed-upon contract rate is 3.34% (the interest rate that your mortgage payments are based on) then you would qualify at the greater of 5.34% or 4.99%.
This means that the biggest impact to you will be the initial amount that you will be able to qualify to borrow. You will still make your monthly payments based on the contract rate.
Discounted vs Posted Rates
To clarify the difference between the posted rate and discounted rates: When you see rates showing 2.99%, 3.14%, etc., these are discounted rates. The posted rate is the rate set by the Bank of Canada before the banks offer a discount on their rates to the public. The posted rate is currently 4.99%.
From now until December 31, 2017, when people qualify for a home purchase or refinancing with more than 20%, the lower discounted rate is being used when assessing how much applicants can qualify to borrow, based on their income. Because those applicants will be paying their mortgage back at a lower interest rate, this allows them to borrow more money. When the posted (higher) rates are used to qualify, as they will from January 1, the refinance amount or purchase price you qualify for will be significantly less than what you can currently qualify for. This reduction in purchasing power is could be as much as 20% for some buyers.
A Typical Buying Scenario
Here is a scenario looking at the impact of the upcoming mortgage rule changes.
Let’s imagine a family earning $120,000 and putting a down payment of 20%, on a home with a mortgage at 3.34% five-year fixed rate, amortized over 25 years. Under the current rules, that family could qualify for a mortgage of $680,000, with a 20% down payment of $170,000, and buy a house priced at $850,000.
However, after the new rules take effect in January 2018, that same family would only be able to qualify for a house priced at $750,000, based on a 5.34% stress test. That’s a $100,000 reduction in their purchasing power and could make a big difference in what kind of home they buy, or its location.
Does Getting Pre-Approved Help?
So can you simply get pre-approved for a mortgage before the new rules come in, and use your 90- or 120-day rate hold to qualify for a larger mortgage at a lower rate?
It’s important to note that a “pre-approval” or rate hold is not the same as the “final approval” of the mortgage on the actual home you are buying – and if your final approval happens after January 1, it will most likely be subject to the new qualifying rules.
This means the new mortgage rules might require you to rethink your strategy and get pre-approved again with the stress test factor included (unless you are getting final approval on your mortgage in the next couple of weeks). This means you will likely have to either increase your down payment or start the process of looking for a home all over again within your new restricted budget.
Considering these new mortgage rule changes, it’s going to be even more important now to talk a mortgage expert, so we can assist you with our expertise and guidance as there are many differences between all the various mortgage lenders. Also, we will ensure that you will get the best lender and mortgage based on your individual needs.