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Canada's New Mortgage Rules and How They Affect a Homebuyer
Thursday, 15 February 2018, 10:30:00 AM

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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