The New Mortgage Rules: What do they actually mean?

The federal government recently implemented new mortgage rules to reduce the risk of potential buyers losing their homes if there’s a shift in the economy or rise in interest rates.

The new rules are directed at anyone with less than a 20% down payment, where their mortgage is called high ratio, and must be insured versus conventional financing. Leading up to the October 17th deadline, we saw a flurry of activity from mostly first time buyers, as they scrambled to get into the market before the new rules took effect. Here’s a summary of the new rules and how they affect a buyer and the market, courtesy of my in-office Dominion Lending Centres representative.
How does this affect a home buyer with less than 20% down payment? 
 
The biggest effect will be on the amount that the home buyer will be able to qualify for. Previously, qualification was based on the individual lender’s rate, but now the buyer must qualify at the Bank of Canada (BOC) rate. For example, the buyer was previously qualified on the banking institution’s posted five year fixed rate of let’s say 2.4%. Now they must go through what they’re calling a “stress test”, which means they qualify for the mortgage at the BOC’s posted rate, which is currently 4.46%, even though the mortgage will actually be at the lower rate.
How does this affect a home buyer for purchase price of a home?
 
Before October 17th, if buyers with a combined annual income of $100,000 had the minimum down payment of 5%, they would have qualified for a home purchase of approximately $560,000. With the new rules, they now only qualify for a purchase price of $445,000.
 
Do these rules affect home buyers with a down payment of 20% or more?
 
Not at this time. However, National Bank is now using the BOC stress test for all buyers, regardless of how much they have as a down payment. There are fears the other major lending institutions will follow.
My mortgage is coming up for renewal. Will I still be able to refinance my home?
 
Yes! You will still be able to refinance your home up to 80% of the value of your property. Specifics may differ from lender to lender.
Will these new rules lead to a decline in home sales?
 
It’s still a bit early to determine. However, these rules are aimed at the entry level buyer and the high sales we’ve seen in this segment have helped fuel the middle and upper end of the real estate market.
If you have any further questions about these new mortgage rules, or the real estate market in general, please call or email me.
Des