The federal government recently announced new rules targeted at reducing risks in the housing market by limiting foreign money into real estate and ensuring that borrowers take on mortgages they can afford.
Years of low interest rates and shifting attitudes towards house and mortgage debt have impacted the housing market, most noticeably with escalating prices in some real estate markets.
The new mortgage qualification measures are designed to reinforce the Canadian housing finance system, to protect the long-term financial security of borrowers and to improve tax fairness for Canadian homeowners. So, as of Oct. 17, insured mortgages will be required to undergo stringent “stress testing” by lenders.
Lenders require a mortgage to be insured when the borrower’s down payment is less than 20 per cent of the purchase price or the appraised value of the home.
Under the new rules, insured mortgages with a fixed term of five years or longer will be required to qualify at the five-year benchmark rate of 4.64 per cent, even though their contract rate is significantly lower.
Up to now, only mortgages with variable interest rates or fixed interest rates with terms less than five years were required to meet this rule.
Homeowners with an existing insured mortgage or those renewing existing insured mortgages will not be affected by this measure, and individuals who have already applied for mortgage insurance are also exempt from the new rules.
This will have a significant impact on buyers. For example, a borrower with an $80,000 annual income and a five per cent down payment could qualify today for a house worth $500,000 at a five-year fixed rate of 2.49 per cent. But under the new rules, the same buyer could only qualify to buy a home worth $385,000. The lender will still be willing to offer the lower rate but they are tested as though the mortgage rate is twice as high as it really is.
New qualifying rules for low ratio mortgages or mortgages backed by portfolio insurance will also come into play on Nov. 30. Mortgages that lenders now insure (at their cost) using portfolio insurance and other discretionary low loan-to-value ratio mortgage insurance, must meet the same criteria applicable to high-ratio insured mortgages.
This will quite possibly drive up rates for consumers and cut competition in the lending sector.
An existing mortgage holder who qualified in the past and is now facing mortgage renewal will be forced to renew with their existing lender at the rate offered or move to a bank where competitiveness may no longer exist.
Of Prime Interest is a collaboration of mortgage brokers Trish Balaberde, 250-470-8324, trishb@creativemortgage.ca; Darwyn Sloat, 250-718-4117, dsloat@creativemortgage.ca; Christine Hawkins, 250-826-2001.