New Mortgage Rules Simplified and Explained!
New Mortgage Rules Simplified and Explained!
Happy New Year! And with the new year comes an avid discussion of the future of the real estate market in Canada, and specifically in the GTA. Over the past few weeks I have spoken to countless realtors, clients, family, and friends about the new mortgage rules that were implemented on January 1st. Everyone seems to interpret them differently – some with panic, and some with ease. For this reason, and to keep things clear, I have given my summary below! Hope this helps!
Generally, we can interpret the rules in 3 sections:
New Stress Test
So back in October 2016, the first version of a new “stress test” was implemented for borrowers who were looking to purchase a property with less than a 20% downpayment. This unified the playing field for everyone in that category. Now, they have expanded a modified version of this stress test to borrowers with over 20% down as well. Starting January 1st, if you are purchasing a home with more than a 20% down payment you have to qualify for the loan at either the 5 year benchmark posted rate (currently 5.14%) OR the discount rate + 2%, whichever is greater. For example, you decide to take a 5 year fixed rate of 3.50%. This means you will have to qualify for the loan at 5.50%, since it is greater than 5.14%. On the other hand, if you decide to take a 5 year variable at 2.90%, this means you will qualify at 5.14%, since it is greater than 4.90%. What does this mean for the average person? Essentially, the average family will now qualify for anywhere between 10-20% less of a home with the same household income as compared to before the stress test.
Ensuring Lenders Are Staying Within Lending Limits
Sometimes the numbers can get tight on a file. For example, if we need a certain ratio to be below 44%, sometimes we would be able to get an exception from a lender if the number was at 45%, or 46%. Now, they have clarified that getting these types of exceptions will be much harder as lenders will be regularly audited to ensure they are lending their money within written and regulated guidelines. What does this mean for the average person? We have to make sure that all the “I’s are dotted and T’s crossed” when sending in the application to lenders
Co-Lending
The average person assumes that in order to buy a property with less than 20% down, you have to get mortgage insurance via CMHC. This means that you obviously need to qualify as per CMHC rules, which are definitely not a walk in the park! Previously if we knew a person had bruised credit, a small down payment, and would not qualify as per CMHC rules, we were able to offer them a short term co-lending strategy so that they could still get their foot in the door of home ownership. This would be done via a private second mortgage + a first mortgage with a “B” lender. This is now forbidden as lenders have been given notices to no longer allow second mortgages behind them on purchase transactions with less than a 20% down payment. What does this mean for the average person? In order to purchase a home with less than a 20% down payment, you must qualify at the stricter rules of CMHC.
I hope that this clears any misconceptions of what the new rules are! In all honesty, it is not the end of the world, as some people make it seem. The real estate market in the GTA has outperformed almost every prediction and forecast in the last 5 years. We have had many years of strong growth, success, and lenient lending practices. It was about time that the authorities stepped in to cool things down for the greater good of the economy and market. The common prediction at the moment is that the 2018 market will be smooth and stable!
