New mortgage rules are in effect as of January 1st. What does this mean for you if you’re planning to buy a home, refinance or renew an existing mortgage?
Since 2008 the government has changed the mortgage rules 7 or 8 times to temper the hot real estate market and the increasing debt load of Canadians. In 2016, they introduced the “stress test” for new mortgages with less than 20% down-payment.
Stress test rate will be the greater of bank rate plus 2% or the benchmark rate of 4.99%. All homebuyers now have to go through the stress test.
IF YOU’RE BUYING
The stress test is simply about qualifying the amount of mortgage you can borrow and ultimately the price of the house you can buy.
First time buyers will need to come up with more down payment. So in addition to house prices demanding more out of your pocket, the stress test will require even more down payment, more income and less consumer debt. It is estimated that homebuyers will be able to afford 20% less than they could before this new rule.
Lets look at homebuyers, Matt and Jenny, with a combined household income of $100,000 and a $200,000 down payment they will qualify for a $613,000 home or less. The $745,000 home, which they really wanted and would have been qualified for in 2017, will now be out of their reach as it reduces their buying power by 21%.
IF YOU ARE REFINANCING
If you are renewing your mortgage with the same bank, you will be exempt from the stress test. However, if you are switching to a new lender then the stress test applies the same way as if you were buying a new home. This can be devastating if before you were originally qualified at a lower rate and you have not managed to lower your mortgage balance sufficiently to pass the stress test.
There's no easy way around the stress test, here's the reality of what you'll need to do:
1. Save up more down payment
2. Borrow additional down payment from family or friends
3. Negotiate house prices based on your qualification limits
4. Lower your non-mortgage credit balances
5. Buy in affordable locations
6. Use additional income sources to qualify, if possible
7. Change to a higher paying job
8. Stay with your current bank if you can’t pass the stress test
9. Explore alternate lenders through a mortgage broker
10. Have a trusted and qualified mortgage professional help you to plan your purchase or refinance ahead of time and who can offer you more secrets the bank won’t tell you
Qualifying and sourcing a mortgage is becoming more complex than ever before. It’s not in your favour to just pigeon hole yourself to a single bank who will just run your application with a lower chance of getting qualified. Even if you are qualified at the one bank, what about what other banks or alternative lenders can offer?
You would be surprised to know that many are paying more than they should in interest rates because they fail to have a mortgage agent plan and source a mortgage across multiple lenders to get the best rate and terms. With the stress test now at play, there will be more people getting rejected by their banks but still can get approved elsewhere.
Let your Mortgage Advocate guide you through the entire process, making it easy and hassle free. Let’s do it!