New Mortgage Rules : Hoe does it affect the end consumer?
Ottawa will move again to tighten mortgage rules, this time requiring stress tests for all insured loans as part of a package of new measures designed to put the brakes on overheated housing markets.
This move is aimed at tightening mortgage rules to ensure Canadians can cope with a theoretical hike in interest rates and aren’t borrowing more than they can afford.
Finance Minister Bill Morneau in an official statement “Overall, I believe the housing market is sound, But I want to make sure we are proactive in assessing and addressing the factors that could lead to excess risk.”
He says Ottawa is going to tighten rules around mortgages and close a series of tax loopholes around principal residences that some experts say have been abused by foreign buyers. The sweeping changes primarily address concerns over record-low interest rates as well as foreign buyers and speculation which are often pegged as key drivers propelling house prices to astonishing heights in Toronto and Vancouver.
How will it effect the end consumer?
One of the key changes means that all homebuyers seeking an insured mortgage, regardless of how much they have for a down payment, will be subject to a mortgage rate stress test beginning Oct. 17. Before now, those with less than a 20 per cent down payment were required to pass a stress test and have mortgage insurance backed by the federal government through the Canada Mortgage and Housing Corporation.
But those putting down more than 20 per cent who were seeking an insured mortgage through a private insurer were not subjected to the stress test.
The test measures whether the buyer could still afford to make payments if mortgage rates rose to the Bank of Canada’s posted five-year fixed mortgage rate.
That rate is usually significantly higher than what a buyer can negotiate with banks or other lenders. For instance, TD has a five-year fixed rate mortgage at 2.59 per cent, while the Bank of Canada’s rate is 4.64 per cent.
The stress test also sets a ceiling of no more than 39 per cent of household income being necessary to cover home-carrying costs such as mortgage payments, heat and taxes.
Until now, buyers with more than a 20 per cent down payment opting for mortgage insurance have escaped such scrutiny. They were able to obtain low-ratio insurance sold through two private insurers, but backed by the federal government, subject to a 10 per cent deductible. Starting Nov.30, new criteria for low-ratio insurance will take effect. To qualify, the mortgage’s amortization period must be 25 years or less, the purchase price be less than $1 million, the property be owner-occupied, and the buyer have a credit score of 600 or more.
It’s worth noting, the new measures don’t affect current mortgages or mortgage insurance applications received before October 3rd.