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19th
Nov

New “Stress-test” for Canadian Mortgages – Buyers Be Aware!

Posted by Nicholas Searle ot 12:24 PM

The new minimum qualifying rate or “stress test” will take effect January 1st, 2018 and apply to all buyers including those with larger down payments of 20 percent or more**.

What does this “Stress Test” really mean?

The best way to explain the new stress test is using an example*:

Lets say you are a Buyer with good credit making $100K/year with a $50K deposit:

You are currently approved for a 2.89% fixed* mortgage at:            $460,000

So your budget you can shop for a new home or condo is:               $460K + $50K = $510,000

After January 1st, you will only be approved for approx:            $370,000

So your budget you can shop for a new home or condo is:               $370K + $50K = $420,000

Difference between what you can afford now and after January 1st is:     $90,000          

 

Why?

What happens to the affordability of Buyers after the stress test gets applied?

The new guideline use a minimum qualifying rate equal to the greater of the Bank of Canada’s five-year benchmark rate or their contractual rate plus 2 percentage points.

In most cases, the stress test will check the Buyer’s debt service ratio at 4.99% not 2.89% and this makes a huge difference in what Buyers will be able to purchase!

What can Buyers do?

Firstly, if you are a Buyer and have a 10-20% downpayment ready, it’s a good idea to see your bank or mortgage broker right away and see if you qualify for a mortgage pre-approval. Many banks may be able to honour the mortgage pre-approval into January if the deal is signed before December 31st.

10% vs 20% downpayment – whats the difference?

Besides the fact that the 20% will make your monthly payments lower because you are borrowing less from the bank, there is another reason why 20% is a magic number.

By law, borrowers with a down payment of 20% for a home do not need to purchase mortgage insurance. These insurance premiums usually paid to CMHC (Canada Mortgage Housing Corporation) can be thousands of dollars, on top of the cost of a home, ranging from 0.6 to 4.5 per cent of the mortgage, depending on the size of the down payment and the price of the property.

25 years or 35 years - whats the difference?

A longer amortization period reduces the monthly payment at a given interest rate, meaning loan providers could extend amortizations from 25 to 35 years, potentially create a smaller monthly payment that would qualify more buyers.

The government did not regulate the length of the amortization period used in the qualifying calculation, so try to see if your lender can provide a 30 or 35 year amortization period. This will push up the amount you can afford to buy indirectly.

 

* Calculations are approximate. Amortization period of 25 years and using sample data from the Canadian Mortgage App https://canadianmortgageapp.com

* Assumptions made include: Yearly property taxes of $2,800. Condo fees of $450. Monthly heat and hydro of $50. Other monthly debt of $200 per month.

** It also applies to mortgage renewal applications if borrowers switch lenders.  

 

References:

https://globalnews.ca/news/3807946/mortgage-rules-stress-test/

http://business.financialpost.com/real-estate/mortgage-industry-sees-amortization-loophole-in-osfis-new-stress-test-rules

http://www.cbc.ca/news/business/osfi-mortgage-rules-1.4358048


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