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2018 Mortgage Rule Changes

What are the Changes?

As of January 1st, 2018, every mortgage applicant has to qualify for their mortgage using at the benchmark or qualifying rate. A benchmark rate is set by the Bank of Canada and used as a guideline for stress testing variable or fluctuating rate mortgage clients, generally at a rate of about 2% higher than market rates (currently 5.34%). This is done to ensure that if the Prime rate increases over the client’s term, they will still be able to debt service their mortgage payments. For conventional lending on fixed rate mortgage products of any term, the qualifying rate is the greater of the Bank of Canada’s benchmark rate (5.34%), or their contract mortgage rate plus 2%. This Government implemented “stress-test” on average reduces the average borrower’s maximum qualified mortgage amount by 15% – 20%.

Why is the Government Making These Changes?

There are two reasons for the new regulations. One of them is that the “stress-test” will ensure that homeowners can afford their mortgage even if rates go up in the future. The other reason, is that the demand for buying homes will decrease, because less people will qualify for a mortgage. The lower demand will then naturally slow down the increase in the price of homes.

Qualifying for a Mortgage Now (After January 1st, 2018)

To determine if a borrower qualifies for a mortgage, two ratios are used: The Gross Debt Service Ratio (must be lower than 39%) and the Total Debt Service Ratio (must be lower than 44%). The new rules require lenders to use the qualifying rate to calculate the mortgage payments used in the formulas. The formulas are the following:

As explained above, the qualifying rate for conventional lending is the greater of either 2% above the contract rate, or the Bank of Canada’s five-year benchmark of currently 5.34%. All insured mortgages will continue to be qualified the Bank of Canada five-year benchmark rate.

A borrower’s mortgage payments over the term will be calculated on the actual contractual rate, and will remain the same over the secured term.

Before and After, an Example:

Situation:

  • Annual Household Income: $100k
  • Interest Rate: 3.39%
  • Amortization: 25 years
  • Down Payment: 20%

Before January 1st, 2018:

  • Max. Purchase Price Approximately: $647k
  • Approximate Property Taxes: $7,100
  • Mortgage Amount: $517,600
  • Down Payment: $129,400
  • Approximate Monthly Mortgage Payment: $2,554

After January 1st, 2018:

  • Max. Purchase Price Approximately: $547k
  • Approximate Property Taxes: $6,000
  • Mortgage Amount: $437,600
  • Down Payment: $109,400
  • Approximate Monthly Mortgage Payment: $2,159

Do you have questions about how the stress test will affect your borrowing ability? Leave a comment below or connect with us through our online chat!