Current Mortgage Qualification Rules
The Federal Government, via the Office of the Superintendent of Financial Institutions Canada (OFSI), has introduced it’s latest rounds of regulation to the mortgage qualification rules. Some of the terminologies can be a bit confusing so let’s start by looking at the different types of mortgages.
After the last round of changes from OFSI, there are now generally two types of mortgages; Insurable and Uninsurable.
It’s important to note that lenders break down insurable mortgages into two segments:
Insured – less than 20% down payment and the borrower pays the mortgage insurance (CMHC)
Insurable – more than 20% down payment but the lender pays the insurance (CMHC)
The best rates are given to files that are insured, then insurable and finally uninsurable.
New Mortgage Qualification Rules
Under the new Guideline B-20 regulations, all uninsured mortgage will face a “stress test” when qualifying. Starting January 1st, 2018, the new minimum qualifying rate for uninsured mortgages will be the GREATER of the Bank of Canada 5-year benchmark rate or the contract rate + 2%.
It’s important to note that these changes only apply to Federally regulated financial institutions. Think the Big 6; Scotia, TD, BMO, RBC, CIBC & National Bank.
Local credit unions are not governed under OFSI. This means there is a potential for a lot of business to shift to local credit unions. I only see this happening if they don’t adopt the new qualification rules.
How Do The New Rules Affect You?
These changes have a massive impact on the borrowing power of Canadians. Let’s take a look at an example.
For our example, let us look at “Jon Snow,” who makes $100,000 annually. John wants to get pre-qualified before he goes out shopping for his new home. For this example:
- Assume Jon has no other debts such as auto loans, credit cards, lines of credit etc.
- Jon will put down 20% under both circumstances
- 30-year amortizations
- Property taxes of $1,850 / year
- Strata fee of $350 / month with $50 / month for heating expenses
As you can see from our example, the decrease in borrowing power is significant. Jon Snow now has over 20% less borrowing power starting January 1st, 2018.
What Should You Do Now?
As I’ve already stated, the new regulations come into effect January 1st, 2018. However, many lenders change their guidelines ahead to avoid any missteps. If you find yourself with any of the following, we need to talk ASAP:
- Want to access equity and use towards a new purchase, to invest or to consolidate debts.
- A buyer with 20% down ready to purchase in the next 6 months
- Anyone looking to buy a rental property in the next 6 months
If you think you might be affected by these changes or have any unanswered questions, please reach out to me anytime. 778.558.5159.