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Canada’s New Mortgage Rules 2018

It’s been a year since the Minister of Finance made the previous rule changes (Oct 2016) to home purchases for down payments that were less than 20%. These purchases required stress testing and to be able to debt-service at the Bank of Canada benchmark rate (which is currently 4.89%).There is a new rule being implemented exclusively for down payments or equity of 20% or more. On January 1st, 2018 Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), is implementing a new minimum qualifying rate for uninsured mortgages. Those who are getting uninsured mortgages (borrowers with a down payment of 20% or more) will have a larger minimum qualifying rate. This rate will be either the Bank of Canada’s 5 year benchmark rate or contract rate + 200 bps (whichever is higher).

Who Is Affected By The New Mortgage Rules?

There are two groups of borrowers who will be affected.

Current homeowners with more than 20% equity and who would like to refinance and access the equity they have built up over the years.
New home buyers that have a down payment of 20% or more.

Borrowers who are simply renewing an existing mortgage with their current lender will NOT be affected, nor will borrowers buying with less than 20% down payment. A change was made last year (October 2016) that affected this group of home buyers.

How Will This Affect Affordability?

Below are 2 examples of how the new changes will affect affordability as of January 1, 2018. Let’s take a household annual income of $100,000 with a 20% down payment and a 5-year fixed mortgage rate at 3.09%. *Assuming amortization of 25-years, monthly heating costs of $150 and monthly property taxes of $300. Qualifying at the current contractual rate (3.09%), a buyer would qualify for a $755,000 purchase. Qualifying at 200 basis points above the contractual rate (5.09%). A buyer would qualify for $616,000 purchase. OSFI also announced an additional 2 changes:

First,

As housing markets and the economic environment evolve, mortgage lenders* must adhere to proper loan-to-value (LTV) ratio limits that are reflective of risk. This means that lenders must have internal risk management protocols in higher priced markets. These higher priced markets are also called “hot real estate markets” for example, the current state of Vancouver or Toronto’s real estate market. Many lenders have been following this policy for the last 10 to 12 months, the changes are simply a continuation of this.

*Please note that credit unions and private lenders are excluded in this change.

Second,

“Bundle partnerships” or “bundling” are now prohibited. This means that mortgage lenders cannot arrange a mortgage or a combination of a mortgage and other lending products through partnerships. Anything that circumvents an institution’s maximum LTV ratio or other policies including law and underwriting is prohibited. This means that if a lender can only approve of a portion of the loan, they cannot seek out a partner for the remainder of the mortgage. For example, if a consumer applies for 80% LTV mortgage, and a lender can only approve 70%, they are not allowed to partner with a second lender for the additional 10%.

With these changes being implemented soon, it’s important to reach out to a mortgage broker who can walk you through this process and explain the changes. Mortgage brokers represent you and your needs when recommending lenders. Mortgage brokers have access to plenty of lenders and therefore they will give you a variety of choices that suit your situation. Navigate these waters with a professional mortgage broker, and you can be sure that it will be smooth sailing with Tim Lacroix.

Questions?

Are you in one of the demographics that these new mortgage rules will affect? Don’t hesitate to ask me any questions.
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