In the fall of 2016, new rules were announced by the Federal Government with respect to home mortgages. The Government implemented these changes in response to the growing concerns about rising home prices in markets like Toronto and Vancouver, with the hope that instituting such rules would help calm hot markets such as these across Canada. For the individual home buyer the rules were instituted in order to help decrease the number of home owners carrying a high burden of debt and who may as a result default on their mortgages should the interest rates increase substantially. The largest and most impactful change was to the rules around stress testing those individuals looking to purchase a new home.
What is the Stress Test
A stress test is used for approving high-ratio mortgages by lenders to ensure that the home buyer can still afford their mortgage should the interest rates increase. Not only would the home buyer need to qualify for the rate negotiated as part of their mortgage contract, they now must qualify at the Bank of Canada’s posted 5 year fixed mortgage rate (which is an average of Canada’s six largest banks) before having their insured mortgage approved.
Additionally they will be required to spend no more than 39 per cent of their income on utilities, mortgage payments, taxes, etc. and ensure that their Total Debt Ratio (TDS) not exceed 44 per cent.
Who Does the Stress Test Affect
The stress test has the greatest impact on those who are seeking an insured mortgage through the Canada Mortgage and Housing Corporation (CMHC). The new rules indicate that all home buyers seeking an insured mortgage, regardless of the size of their down payment, are now subject to a mortgage rate stress test.
Prior to Oct. 17, 2016, only 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 CMHC.
Home owners with an existing or renewing insured mortgage are not affected by the new rule. However, it would still be to their advantage to perform their own stress test to ensure that they are not living outside of their means should they suddenly be impacted by an increase in the mortgage rates.
Long Term Impact of the New Stress Test Rule
Because many new and first time home buyers and those with a higher debt ratio may no longer qualify for the mortgage amounts that they were applying for, it is thought that housing prices will be forced to decrease as fewer people will be able to afford the higher priced homes. It was estimated at the time it was introduced that it could reduce most maximum mortgages by 20%.
These new changes are likely to impact the number of new homes being built and to have an impact on the number of rental units available as more first time home buyers will be forced to rent longer as they build up their savings to increase the size of their down payment.
These changes could also have an impact on the geographical area to which people ultimately buy. For example, someone currently wishing to purchase in Toronto may now choose to move to a community further to the outskirts of the GTA and those who cannot afford the prices in those areas move further into a more rural setting.
Where to Go for Help
You found the home of your dreams and you are now looking for a mortgage. I want to ensure that you get the mortgage that best suits you, your family and your needs, without over extending your budget. Reach out if you need help to understand the new rules and what is involved as part of the new stress test requirements. I can help you to work through what you qualify for and then work to find the best rates and solutions for you.
Get in touch!
By Phone: 613-882-3201 or E-mail: firstname.lastname@example.org.