New Mortgage Qualifying Rules

There were major changes in mortgage rules in 2016. There is a new mortgage landscape in Canada. Let’s recap the basics and clear up any misconceptions.

Down Payment
You can still buy a home with 5% down – whether you are a first-time purchaser or this is your fifth. For some reason, people think this changed but we remain at minimum 5% down. The down payment can come savings, investments, RSPs and gift from immediate family members.

Only 5% down is required when buying a cottage or a second home to be used by a family member. For investment properties, you require a full 20% down.  Family gifts are typically not allowed when purchasing rental properties.

Stress Test for Mortgage Qualifying
Debt and mortgage payments are compared to your gross income to determine how much you can borrow.  Instead of using the actual mortgage rate, the government now requires you to qualify using the higher “stress test interest rate” or prescribed rate. They want to ensure your home is affordable at renewal after interest rates start to climb. The stress test rate today is 4.64% even though mortgage rates are mostly under 3%.

If you were pre-approved in 2016, you should contact your broker or lender to update that pre-approval as this change has reduced most people’s maximum mortgage by around 20%. You should also use the stress test rate in any “what would I qualify for” calculators.

Amortization
If you have less than 20% down payment, then the maximum amortization is 25 years. If you have 20% or more down, then there are still a few options at 30 yrs.

Refinancing Limits
If you were thinking about refinancing your mortgage to payout some of your other debt, the maximum new mortgage you can get is 80% of the value of your home. For example, if your home is currently appraised at a value of $300,000, the maximum mortgage you can put in place would be $240,000.

CMHC Premiums Increased
CMHC, Genworth and Canada Guaranty are Mortgage Insurers. Their fees increased March 17, 2017. The mortgage must be insured when you have less than 20% down and the one-time premium gets added to your mortgage balance. It starts at 4% of the mortgage balance with 5% down payment and gets smaller as you move toward 20% down, when it goes away. If this is a new concept, ask us for more details or request our Guide To Mortgages book.

Beware of Interest Rate Marketing Tactics
New government regulations have resulted in the lowest rates being available when you have less then 20% down payment. So, while 20% down on a purchase can save you the CMHC premiums, it will typically lead to higher interest rates.

Note, however, that some lenders also play games and advertise no frills mortgage rates without disclosing the hidden hooks or lost features in that no frills product. Don’t be fooled or lured into believing that mortgage rates are all that make mortgages different. Often the cheapest mortgages become the most costly when you decide or need to make a change during the tern or at renewal. Go in with eyes wide open.

Credit History & Savings
An ideal credit report has at least two types of credit that have existed for at least two years with combined limits greater than $5,000.  New credit scoring algorithms with the credit agencies like Equifax have become more sensitive to repeated late payments.  They don’t really care how big the late payment is – just that it is late.

On the credit side, always make minimum payments no matter what. Keep the balances owing less than half the limit. Pay cards and lines of credit to zero as often as possible.  And, if you happen to miss a payment, don’t miss another one for at least a year or you risk your credit score dropping.

We’ve also noticed lenders and mortgage insurers becoming more focused on what you will have left over in savings after paying for your down payment and legal fees. They want to know you have a safety net – a cushion – should something go wrong with your house, your car or your employment. If you are looking to purchase, build your savings.

Summary
Mortgage approvals have become more difficult to get. Recent rules have made mortgages more expensive and have reduced the amount you can qualify for over past years. The intent behind these changes is to make the housing market more stable in the longer term.  This is a good thing once you are a home owner.  It can be frustrating, causing you to manage expectations until you can get there.

Bottom line – there have been a lot of changes recently and its quite possible more are coming.  Connect with a mortgage professional you are comfortable with and be informed.