Yesterday the government announced huge changes on mortgages. We have been speaking with clients all day regarding these changes and there is a lot of confusion on exactly what the new rules are and how it will affect their buying power. Don't worry, we guarantee the sky is not falling for buyers and we want to clarify any confusion. Below is a breakdown of the new mortgage rules that come into effect as of October 17th.
Current Mortgage Rules
Buyers with a down payment of at least 5% of the purchase price but have less than 20% must be backed by mortgage insurance. The purpose of mortgage insurance is that it protects the lender should the home buyer default on the mortgage. These type of mortgages are considered to be “high ratio” or high loan-to-value”.
If a buyer has a down payment of 20% of more they can obtain “low-ratio” insurance which would cover 100% of their loan should they ever default on their mortgage.
Mortgage Insurance is backed by the government through the CMHC (Canada Mortgage and Housing Corp.) CMHC and two private insurance companies (Genworth and Canada Guaranty Mortgage Insurance Company) can sell the insurance.
New Mortgage Rules
Starting October 17th the government will implement a new stress test in order to approve high-ratio mortgages. The stress test will even apply to buyers that have more than 20% for a down payment. The purpose of this is to assure the lender that the home buyer can still afford their mortgage even if interest rates were to rise. The following will apply:
- The buyer would need to qualify for a loan not only at the negotiated mortgage rate in their bank contract but also the Bank of Canada’s five-year fixed posted mortgage rate. The fixed rate is typically higher than what buyers can negotiate with their bank. For example, the posted rate as of September 28th was 4.64%
- The mortgage lender will have to make sure that home buyer is not spending more than 39% of their income on home carrying costs such as mortgage payments, heat, hydro and taxes.
- There is another measure called total debt service (TDS) which includes all other debt payments and the TDS ratio must not exceed 44%
As of November 30th the government will further implement new Mortgage rules and there will be restrictions on when it will be providing insurance for low-ratio mortgages (when a buyer has down payment of 20% of more). Restrictions on these types of mortgage are going to be based on new criteria:
- The amortization period must be 25 years or less
- The purchase price is less than $1 million
- The buyer has a credit score of 600
- The property will be owner occupied
It is hard to say how this will impact the Toronto Real Estate market. I can guarantee this will have a huge impact on first-time buyers and will definitely drive up the condo market. If you would like to speak with a mortgage broker we have some really wonderful brokers we would be happy to recommend. Contact us anytime at firstname.lastname@example.org