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Canada's New Mortgage Rules and How They Affect a Homebuyer
Posted on Thu, 15 Feb 2018, 10:30:00 AM  in Home buying tips
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Canada's New Mortgage Rules and How They Affect a Homebuyer

Canada’s new mortgage rules will cause hardship for some new and existing borrowers. These rules went into effect on January 1 and applied to all new or refinanced home loans. Anyone who applies for a new or refinance loan will have to pass a stress test to ensure they can afford the mortgage.

In January of 2017, applicants who did not put at least 20% down when buying a home are required to have mortgage insurance. With these new rules, applicants who put 20% down or more are required to still face a stress test. These rules make it seven times since 2008 that the mortgage market has seen new regulations to limit the amount of debt a Canadian can assume.

Canadas New Mortgage Rules and How They Affect a HomebuyerThese guidelines will affect people in a variety of ways. If an individual is purchasing a home with a down payment of at least 20% or more, he or she will need to pass a stress test. This stress test requires the financial institution to qualify the application by using a minimum qualifying rate.

This rate must be equal to the greater of the Bank of Canada’s five-year benchmark rate. This rate can also be the Bank of Canada’s contractual rate increased by two percentage points. This stress test may require the buyer to wait to purchase the home with a more substantial down payment or choose a less expensive home. The average reduction would be around $31,000 or approximately 6.8%.

If the individual is renewing a mortgage, he or she does not have to face a stress test. However, if he or she do not pass this stress test, it limits his or her choice in lenders. He or she will have to stay with the current financial institution and will not be able to look for a lower interest rate. It is even possible that individuals who do not pass the stress test will be forced to agree to the uncompetitive rates from their current loan providers.

If the person is refinancing a current mortgage, he or she will have to qualify at a higher stress-state rate than the current contractual mortgage rate. An example is a home purchased for $500,000 with only $50,000 is owed. A person wants to borrow $20,000 for home repairs and renovations. The current loan was financed at 5.0% and is a fixed rate mortgage.

The lending institution would evaluate this loan using the new mortgage rules. The investment would be for $70,000, but the individual would have to be able to pass the stress test at 7.0% instead of the 5.0%. If the person does not meet this requirement, he or she may not be able to get the loan, or he or she may have to decide on a smaller loan amount.

People who signed a purchase agreement before January 1, 2018, will not have to pass this stress test. This fact is true even if the mortgage is not applied for until after January 1, 2018. This loophole applies to new construction and pre-construction sales also.

If the individual was pre-approved before January 1, 2018, he or she might receive 120 days starting on January 1 to purchase a home without the new rules being applied. If a mortgage refinancing commitment was signed before the last day in December, the borrower might receive this same consideration. The only way to ensure a person gets the home of his or her dreams is by successfully passing the stress test which means he or she needs to be able to financially afford the loan or have a more substantial down payment.


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Deciding if Home Refinancing is Right for You
Wednesday, 30 August 2017, 09:20:00 AM
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Buying a home in the first place is a major decision for any family. A given home can cost six-figures on average. Once the financing is in place, you're presumably happy with this payment for many years. However, changes in the marketplace make it tempting to refinance the loan after a decade or more. Refinancing isn't right for every property, but it's an option that should be explored before you make any permanent changes. Get to know the situations where refinancing is either good or bad so that you can make an educated decision.

 

Nearing the Mortgage's Final Payment Date

Your current mortgage is nearly paid off with only a few more months to go. In this situation, refinancing is the worst choice to make. You'll add extra costs to theright home for you loan while lengthening out its terms. The amortization process also starts the loan off again with paying mostly interest. Your ideal decision in this case is to finish paying off the original mortgage. Owning the property free and clear is an achievement that shouldn't be postponed. You can tap into the home's equity with a line of credit if extra funds are necessary now or later.

 

Exploring Lower Interest Rates

Homeowners with a fixed interest rate may have locked in their value at a higher point in the past. Current rates are now one or two points lower than your mortgage. Refinancing to drop the interest rate downward is a common reason to seek out this service. It's possible to change the monthly payment by several hundred dollars. For this reason alone, it's valuable to explore a refinance. Be honest about your credit so that you can receive the lowest rate possible.

 

Investing Back Into the Property

Refinancing is almost always a right choice when you're investing back into the home. You might pull several thousand dollars out of the home's equity in order to add an addition, remodel the kitchen or paint the exterior. Improvements to the property will only add value to it if you ever decide to sell. Your bank will often approve of certain withdrawals that might be declined otherwise. Investing in the home benefits you and the lender so make your intentions known during the application process.

 

Understanding Closing-Cost Calculations

Be aware that closing costs can negate the value of refinancing the home in the first place. These costs cover the paperwork fees and appraisal processes that must occur before loans can be transferred and repackaged. You might pay down the interest rate through points too, which can lead to thousands of dollars of extra costs. Carefully examine the costs associated with your home loan. If you have too many charges to make the refinance a bargain, you may want to keep your original loan.

 

Paying off Other Debt

You might have a lot of equity in your home, and credit-card bills are growing larger by the day. Consolidating debt is another way to approach home refinancing. Ideally, using your home to pay off unsecured debt isn't a financially sound idea. If you have a small balance, paying the card off may not be too detrimental to your financial livelihood. In most cases, you want to maintain as much equity in the home so that your loan amount isn't too inflated.

Refinancing any loan is serious business. Ask for several quotes from various lenders who have good reputations in the marketplace. Their quotes should be relatively similar as they offer their best plan. Select a lender that offers you a fair deal in the end. You'll be working with them for many years to come.


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Please ask me your question by filling out this form. You will receive an answer to your question at the first opportunity I have to reply. I appreciate the time you have taken.

 

 


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