How do the New Mortgage Rules Affect You?

The government decided to change the rules around mortgages with a very short timeline. As such lots of people, including experts, are still catching up as the rule creation was a fluid process even after the changes were announced.

Before the conversation I need to ensure you now a few definitions/terms:

  • Benchmark Rate/Qualifying Rate. This is being called the stress test. The Bank of Canada Rate OR the contract rate +2%, whichever is more.
  • Bank of Canada Rate. The current 5 year fixed posted rate (currently 4.99%).
  • Contract Rate. This is the actual rate offered by the lender to you.
  • Insured Mortgage / High Ratio Mortgage. This is for anyone who has less then 20% down payment on the purchase.
  • LTV (Loan To Value). This is the amount of the mortgage versus the value of the property being used to secure the mortgage.
  • Non Insured Mortgage / Conventional Mortgage. This is any mortgage that has a 20% or higher down payment.
  • Total Debt Service Ratio (TDS). This is a debt assessment to determine the percentage of Gross Income that is already spent to cover all your spending. Then the Institutions can determine what is left over.
  • Now on to the meat of the subject, how does this actually affect you?

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    Chris Kotscha

    CHANGE ONE: Lenders will be required to enhance their loan to value (LTV) measurement and limits to ensure they minimize the risk of default.

    Mortgage lenders must adhere to more conservative Loan to Value (LTV) ratio limits. In higher priced markets (hot markets) you often see less than 20% down payments and higher loans as a ratio of salary. This is to be able to afford to buy anything. So if you live in Vancouver, Toronto, Kelowna or other higher markets you may no longer be able to qualify as the LTV is reduced.

    An example: a borrower of a $500,000 mortgage on a home appraised at $700,000 would have an LTV ratio of 71.43% (500,000/700,000).

    CHANGE TWO: Restrictions will be placed on lending arrangements that are designed to avoid LTV limits.

    This is often referred to as ‘bundling’ or a ‘bundle partnership’. A combination of mortgage and other lending items. An example is getting a credit line to use as the down payment on a mortgage. If you add these two up, then you may go over the LTV. Another common approach is a lender can only approve a 65% LTV so they approach a second lender for the 15% difference.

    Change Three: Qualifying Rate Stress Test to All Non Insured Mortgage

    This is the largest implication of the rules change. Non insured Mortgages must now qualify using the new minimum rate. This is your standard bank lending rate PLUS and extra 2%. This is designed to add a buffer to your ability to repay mortgage payments by making sure you are not close to your monthly budget limit.

    How does this affect you? In real terms, it affects you A LOT. The largest impact is the amount that you will qualify for under the new rules.

    In the past you simply needed to qualify for the banks rate over the amortization period. Now you need to qualify at that rate plus the 2%. Two percent does not seem like a large number to most, but at a time with mortgage rates are averaging 2.75%... that is a huge difference. This applies to all terms, fixed and variable rates.

    Given the current average of 2.75% you would need to add 2% to that number and qualify at the new stress tested rate of 4.75%... Except for one additional paragraph. You need to qualify for the HIGHER of the two between the bank rate plus 2% or the Bank of Canada rates, currently 4.99%. So you’d have to qualify at 4.99% instead of the 2.75%. That’s a large difference!

    In simple terms this means you need a higher minimum income to qualify for the same amount of a mortgage loan. If you have a $400,000 mortgage at the current 2.7% then the monthly payment would be approx. $1,832, meaning you need a minimum income of $65,000. Under the new rules: $81,500 minimum income. So if you make $65,000 you will no longer qualify for a $400,000 Mortgage. In Kelowna that means you can no longer afford a detached house as nothing exists below $400,000 in detached.

    If your contract is written prior to the implementation day you can qualify under the old rules. So now is THE time to talk to your broker. Check with your individual lender as the start dates will vary for implementation.

    With the snow falling, lots of people are starting to think about waiting until the spring… Don’t. Under the new rules you likely will not be able to get the house that you love.

    *Assumptions in the math is a GDS Ratio of 35% and a 25 year Amortization period.

    *Any complex over four units is considered commercial and the stress test does not apply.

    *The stress test also applies to alternative lenders who are governed by OSFI (That’s almost all of them).

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