On January 1, 2018, Canada’s mortgage rules for purchasing a home changed. This may leave many of you wondering how these changes will affect your mortgage. We summarized the rule changes to help you understand what’s going on.
Implemented by the Office of the Superintendent of Financial Institutions (OFSI), all mortgages now require a stress test. A stress test is a mortgage calculation using a greater interest rate. Banks run this test to make sure a homeowner can pay their mortgage loans, even if rates increase. Currently the stress test would use the rate set by the Bank of Canada OR your lender’s rate +2%, whichever is greater.
Let’s deal with some numbers to make things easier. A potential home buyer is looking to be approved for a $400,000 mortgage loan at a rate of 3.44% (i.e. $1,985 monthly payment). In the past, to be approved for the loan, this person would need to earn $70,000 a year or more in order to afford the monthly payments. However, with the new rule, this person would need to pass the stress test to be approved. To be approved for the $400,000 loan with the stress test rate of 5.44% (3.44% + 2%), a home buyer would need to earn $85,000 a year and afford a monthly payment of $2,427. That leads to a $15,000 difference between the previous and current minimum income, and a $442 difference in monthly payment.
Previously, stress tests were used only for certain qualifying buyers. As of January 1st, all potential homebuyers must pass the stress test. This could change the amount of a mortgage for which a person can be approved. As a result, people who are at the upper limit of their loan may find themselves having some difficulty getting a mortgage.
Don’t get discouraged over the new regulation; there are definitely reasons to be optimistic about your home-buying future.
1. Even with the recent minor uptick, interest rates are at historic lows. In today’s market, the rate available is 3% lower than only ten years ago, and 17% lower than the peak in the 1980s. This means you’re paying less interest than you ever would have before, as rates remain amazingly low in comparison.
2. These new regulations only apply to federally regulated financial institutions, i.e. banks, and do not apply to credit unions, which are regulated by the province. While credit unions, such as PACE Credit Union, often voluntarily follow these regulations, they may be able to provide you with a wide variety of financial options.
3. Real estate is still a worthwhile decision, generally with a return on investment for those who ride out the highs and lows of the market. Get into the new home market as soon as possible to begin earning equity.
It is important to talk through your options with your mortgage provider to help you achieve the home of your dreams. Remember that the new rules on obtaining mortgages will affect each home buyer differently.