New Mortgage Rules 2018: A practical guide
Canadians getting, renewing or refinancing a
mortgage might have to prove that they would be able to cope with interest
rates substantially higher than their contract rate.
New rules by Canada’s federal financial
regulator announced in October mean that even borrowers with a down payment of
20 per cent or more will now face a stress test, as h
Some 10 per cent of Canadians who got an
uninsured mortgage between mid-2016 and mid-2017 would not have qualified under
the new standards, a recent analysis by the Bank of Canada suggested.
To put a number
on it, the rules will likely affect about 100,000 homebuyers, who would qualify
for a mortgage for their preferred house today but will likely fail the stress
test for an equally large loan next year, according a report published
by Mortgage Professionals Canada, an industry group.
Here’s how the
new guidelines might affect you:
If you’re planning to buy
a house with a downpayment of 20 per cent or more next year
The stress test
means that financial institutions will vet your mortgage application by using a
minimum qualifying rate equal to the greater of the Bank of Canada’s five-year
benchmark rate (currently 4.99 per cent) or their contractual
rate plus two percentage points.
The rules might
force Canadians to set their eyes on homes that are up to 20 per cent cheaper.
But since few homebuyers are stretching their finances to the limit when
applying for a mortgage, the average target price reduction will likely be
smaller, $31,000, or 6.8 per cent, according to Will Dunning, chief economist
at Mortgage Professionals Canada.
Of the 100,000 or
so prospective home buyers that will hit a snag because of the stress test next
year, Dunning estimates that about half will be able to make a different
purchase than they had planned. The rest will give up on a home purchase.
If you’re renewing your
mortgage next year
Lenders don’t
have to apply the stress test to clients renewing an existing mortgage.
This means that
if you fail the stress test, you’ll probably get stuck renewing with your
current financial institution, without being able to shop around for a better
rate.
In some cases,
“renewing borrowers may be forced to accept uncompetitive rates from their
current lenders,” Dunning noted.
If you’re refinancing
your mortgage
If you’re
planning on refinancing your mortgage, you’ll have to qualify according to the
higher stress-state rates rather than your existing contractual mortgage rate,
explained James Laird, president at Toronto-based CanWise Financial.
Say, for example,
that you bought a $400,000 home and have a $100,000 mortgage balance left.
You’d like to borrow $50,000 more for a renovation. You have a five year
fixed-rate mortgage at 3.3 per cent.
Last year, your
lender would make sure that you can take on a $150,000 loan at 3.3 per cent,
said Laird.
Starting Jan 1, 2018,
your financial institution would have to vet that $150,000 loan using a 5.3 per
cent rate. If you’re close to the borrowing limit today, you might have to
settle for a smaller loan.
Four cases in which the
rules likely won’t affect you
As they generally
do, financial regulators have allowed for measures that will ease the
transition, making sure the new rules don’t disrupt transactions that are
underway by not yet completed in early 2018.
If you sign a
purchase agreement on a new home before Jan. 1., lenders won’t have to apply
the stress test even if you apply for a mortgage in the new year, said Laird.
This holds for
pre-construction sale and purchase agreements, too, he added.
“Usually there’s
eventually a cutoff,” said Laird, though in this case it’s not yet clear
when that will be.
If you are
pre-approved for a mortgage, some lenders will give you 120 days starting Jan.
1 to buy your new home without worrying about the new rules.
The same holds
for mortgage refinancing. If you have a mortgage refinance commitment in place
by Dec. 31, you have 120 days to follow suit, said Laird.
Of course, the
stress test won’t have much of a concrete impact on you if you pass it.
Borrowers with plenty of spare financial capacity will be able to go about
their business.Source:https://globalnews.ca/news/3897942/new-mortgage-rules-2018-canada-guide/
by Erica Alini
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