If you weren’t paying attention to the new mortgage rules that unfolded last fall, the Department of Finance unveiled new policies that have and will continue to drastically affect those looking to qualify for a mortgage and become a homeowner. Though the new mortgage changes aim to stabilize the Canadian housing market and reduce instances of people taking on larger financial commitments than they can handle, the new landscape has also made it harder for ordinary, hard-working Canadians to buy homes.
Here’s what you need to know about Canada’s new mortgage landscape in 2017.
The qualification criteria surrounding mortgage approvals and the “Stress Test” have been bumped significantly higher. The qualification rates that were targeted for mortgages below 20% down payment ratios are now being applied to all new insured mortgages. This change was implemented by the federal government to help prevent mortgage defaults from occurring in the future if interest rates increase.
Now, no one will be exempt from the Stress Test when seeking an insured backed mortgage. And the qualification rate will now be set at the Bank of Canada 5-year fixed posted mortgage rate, which is currently 4.64%.
What does this mean for buyers?
Aside from the sterner qualification rules and rates, the maximum Gross Debt Service Ratio (GDS) is set to change to 39%. This means that you will be restricted when it comes to spending income on home-carrying costs above that percentage. Additionally, there will be an increase to a minimum 44% of the Total Debt Service Ratio (TDS) on gross annual income to cover debt expenses.
Changes to Low-Ratio Insurance
The amortization period will also be decreased from 40 years to less than 25 years, with a maximum purchasing allowance of $1,000,000. This will apply to insurance under the 20% down payment. This means that at least 10% down payment would be required on the portion of property between $500,000 to $1,000,000, should you buy a home in that price range.
Increased Insurance Premiums
Starting this month, increased premiums will also be incorporated into the new mortgage landscape for insured mortgages back by CMHC. Home buyers with a 5% down payment can expect a premium hike from 3.6% up to 4%, while those with 15% down payments can expect a hike of 2.8% from 1.8%. For 20% down payment, you can expect an increase of 2.4% from 1.25%, including a hit of 1.74% from 0.75% for the 25% bracket.
If you are keen to get into the Canadian housing market, it’s important to really take the time to do your research and understand how these new rules and changes will impact you. At VERICO The Financial Forum Ltd., we’re here to help you make sense of the new landscape and secure the best home loan. Give us a call at 905-265-0246 or contact us to learn more.