As you may have already heard, there are potentially more mortgage rules coming. These new rules could be the most strict yet, these potential rules will affect a great deal of buyers and investors.
The main rule proposed that will affect buyers would be the “Universal Stress Test” that would be applicable to ALL buyers, regardless of down payment amount. October 2016, when they made the “Stress Test” applicable to all insured buyers – those with less than 20% down and buying a home less than $1 million. The “Stress Test” means you have to qualify for the mortgage amount at the 5yr posted rate (4.84%) and a max amortization of 25yrs.
We saw this negatively affect a lot of buyers, particularly first time home buyers, forcing most to try to come up with the 20% down – in most cases from the “bank of mom and dad”.
The reason the 20% down payment became even more important was because with the October 2016 stress test, those who had 20% down or more could qualify for their mortgage at the discounted 5yr fixed rate (i.e.: 2.99%), and a 30 year amortization, which helped increase their buyer power by approximately 18% to 20%. – This exception will no longer exist with the new proposed “Universal Stress Test” – All buyers must qualify based on the 5yr posted rate (4.84% today) and a max amortization of 25yrs, regardless of down payment amount.
So how does this affect those looking to buy now?
If you have a pre-approval in place now, you will have to have a firm accepted offer in place prior to the rule change taking affect, so that means you have a firm approval from your lender. For example, if the effective rule change date is October 16th 2017, you MUST have a firm accepted offer in place prior to that date, and your closing must be within 120 days or 4 months from that date, otherwise, you will be subject to the new rules. After the effective rule change date, any mortgage pre-approvals will have to be redone to make sure the individual is still pre-approved for their hoped-for mortgage amount.
Here is an example of the impact to Canadian’s buying power:
Prior to the new conventional “Universal stress test”:
Someone who makes $100,000 (declared annual income):
Condo purchase: $720,000 – $144,000 (20% down) = $560,000 mortgage (assuming no debt, condo fees of $600 a month and property tax of $3,600 annual – APPROVED!)
After the new conventional “Universal stress test”, that same client making $100,000 declared income:
$580,000 – $116,000 = $464,000 (assuming no debts, condo fees $550 and tax $3200 annual = approved).
That affects their buying power by approx. 18 to 20%%
Speaking with an experienced Mortgage Broker is more important than ever.
If you or your clients have any questions please reach out to us at Mortgages.ca anytime 24/7 – We are here to help you and your clients understand this fully – there are no dumb questions, so please do not hesitate to call:)
1 Government of Canada: Reinforcing Prudent Residential Mortgage Risk Management
2 Global News: “Down payment help: What parents, kids should know before money is gifted”
3 Mortgages.ca: About Mortgages.ca