What are the changes that have been made in the past two years?
- Effective October 17, 2016, all home buyers must qualify for mortgage insurance (if down payment is below 20%) using an interest rate that is the greater of their contract mortgage rate or the Bank of Canada’s conventional five-year fixed posted rate. The only exception was the 5 year fixed rate mortgage, the contract mortgage rate was used for qualification. After this change the 5 year fixed conventional mortgage (more than 20% down payment) continued to be qualified using the contract mortgage rate.
Note: This was already in place for high-ratio insured (less than 20% down payment) and uninsured (20% or more down payment) mortgages with variable interest rates or fixed interest rates with terms less than five years.
-Other changes to insured mortgages that were already in place (changes from 2016 and 2015):
- Maximum amortization 25 years for insured mortgages (less than 20% down payment).
- Insured mortgages restricted to properties with a purchase price below $1 Million.
- For insured mortgages-5% down on the first $500K of the purchase price and 10% on the rest of the purchase price up to $499K (total purchase price not to exceed $999,999.
- Refinancing an existing mortgage cannot be insured (taking out more than 80% of the equity from a home).
- Announced October 17, 2017 and effective January 1, 2018, when qualifying clients, federally-regulated financial institutions (FRFIs) will be required to approve conventional or uninsured residential mortgages (20% or greater down payment) at the greater of the contract rate plus 2% or the 5-year benchmark rate published by the Bank of Canada. This change applies to conventional / uninsured mortgages only.
What do these changes mean effectively?
The new mortgage rules require a lender to “Stress Test” borrowers with uninsured loans to make sure that if interest rates increase significantly, they can withstand the higher rates. This “Stress Test” is a simulation of what it would mean if the borrower would have to pay back their loan at a bank’s posted average…not at whatever rate they are able to negotiate.
If a borrower has an existing loan and they are in good standing and plan to stay with their lender…they can just renew with no issue. If they plan to switch lenders, they will be subject to the new criteria.
I strongly believe that it is a good idea to protect prospective homeowners from committing themselves to what might become crippling debt in the event of increased mortgage rates!
If you would like more information, please contact me at 416-834-3688 or firstname.lastname@example.org