On Monday (October 3) federal Finance Minister Bill Morneau announced changes to the mortgage qualifying rules to obtain a mortgage in Canada. Specifically:
- All high-ratio mortgage borrowers must meet an eligibility requirement measured against the Bank of Canada posted rate, effective October 17, 2016;
- A low-ratio or conventional mortgage from a lender that bulk insures their loans must also be calculated using the Bank of Canada posted rate, effective November 30, 2016.
As of September 28, the Bank of Canada rate is posted at 4.64% (updated weekly). For comparison, rates through lenders we work with were between 2.24% and 2.99% on a 5-year fixed rate mortgage evaluated during the same period.
What do these changes mean in practical terms?
Let’s take an example of a $500,000 house – typical for a single family home in Victoria.
For most people, a sudden increase in income is unlikely – if not impossible – and so the reality is that you will have to lower the price of houses you are considering. In the above examples, a high-ratio applicant with an income of $78,000 would be able to purchase a $400,000 house. A low-ratio refinance would be able to qualify for only $280,000 of their mortgage.
How do the new rules apply to my situation?
- If you have recently applied and been approved for a mortgage, you don’t have to worry. The new rules only apply to applications received on or after October 17.
- If you have recently applied but are NOT yet approved for a mortgage and have a down payment of less than 20%, you may qualify under the current rules as long as your application is approved before October 17 and will be funded by March 1, 2017. Note that if your debt-service ratio is already tight, a lender may still choose not to approve your application during this time. If your application is considered on or after October 17, the new rules will apply and you will simply not qualify for a mortgage in the price range you’re currently shopping in.
- If your mortgage is up for renewal or you are considering refinancing, you may have fewer options after November 30 as lenders must assess how they insure their loans against the new criteria. At this point, we believe the only exception to this situation is if you’re looking to renew/refinance your existing insured mortgage without any changes (i.e., no new money, no increase in amortization): the new rules won’t impact you. Our understanding is that this renewal would be with your existing lender; we are seeking clarification on whether it would apply to switch/transfers as well. If the case is that a switch/transfer falls under current qualifying criteria, then it’s a bit of good news for consumers, ensuring they will have some choice at the time of renewal. However, if the new rules apply to switch/transfers, then that’s bad news for consumers as their choices will be severely limited.
- If you are considering purchasing a home in the next 6 months and will require a mortgage, the federal announcement has introduced so many new variables that we are uncertain how or when the market will change. Proper research and planning will be key to any new purchases.
The Bottom Line
The government is labeling these changes as a “stress test” for mortgage applicants, but what they are really talking about is an eligibility requirement. If you fail the “test” you won’t be able to obtain an insured mortgage.
First-time home buyers are most likely to feel the effects of this change – at least in the short term – as more income is required to obtain a mortgage on a property that was previously affordable. This situation could mean that more new home buyers will need co-applicants such as parents or grandparents in order to qualify. They may also choose to wait it out and see where property prices go; realistically, the only way we think they can go is downward. Of course, for some prospective buyers it simply means being stuck in the rental market for longer.
Our team will continue to follow these developments and stay up-to-date on what these changes mean for you in real, practical terms. If you’re wondering whether you will qualify for your mortgage, contact Auxilium Mortgage to speak with one of our planners. Call Toll-Free 1-855-590-6520 or visit us at 307 Goldstream Avenue during regular business hours, Monday through Friday 8:30 a.m. – 5:00 p.m. Our team can also arrange an appointment evenings or weekends to work with you.
Auxilium Mortgage Corporation is based in Victoria, BC and works with clients locally and across Canada. The Auxilium team has over 100 years of combined financial experience and access to dozens of lenders to help you meet your goals.