New Mortgage Qualification Rules

October 9, 2016


You may have heard that the Department of Finance recently announced that as of October 17, 2016 the rules for qualifying for a “high ratio” mortgage will change.

You can view the entire announcement HERE.

The part that will affect most people is:

Applying a Mortgage Rate Stress Test to All Insured Mortgages

Today, the Government announced a change to the eligibility rules for new government-backed insured mortgages. Effective October 17, 2016, all insured homebuyers must qualify for mortgage insurance at an interest rate the greater of their contract mortgage rate or the Bank of Canada’s conventional five-year fixed posted rate. This requirement is already in place for high-ratio insured mortgages with variable interest rates or fixed interest rates with terms less than five years.

The Bank of Canada’s conventional five-year fixed posted mortgage rate is the mode (i.e., the most common occurring number) of the conventional five-year fixed mortgage rate advertised by Canada’s six largest banks. The rate is updated weekly and is available on the Bank of Canada’s website (CANSIM table 176-0043). The Bank of Canada’s posted rate is typically higher than the contract mortgage rate most buyers actually pay. As of September 28, 2016, the Bank of Canada posted rate was 4.64 per cent.

For borrowers to qualify for mortgage insurance, their debt-servicing ratios must be no higher than the maximum allowable levels when calculated using the greater of the contract rate and the Bank of Canada posted rate. Lenders and mortgage insurers assess two key debt-servicing ratios to determine if a homebuyer qualifies for an insured mortgage:

o    Gross Debt Service (GDS) ratio—the carrying costs of the home, including the mortgage payment and taxes and heating costs, relative to the homebuyer’s income;

o    Total Debt Service (TDS) ratio—the carrying costs of the home and all other debt payments relative to the homebuyer’s income.

To qualify for mortgage insurance, a homebuyer must have a GDS ratio no greater than 39 per cent and a TDS ratio no greater than 44 per cent. Qualifying for a mortgage by applying the typically higher Bank of Canada posted rate when calculating a borrower’s GDS and TDS ratios serves as a “stress test” for homebuyers, providing new homebuyers a buffer to be able to continue servicing their debts even in a higher interest rate environment, or if faced with a reduction in household income. 

The announced measure will apply to new mortgage insurance applications received on October 17, 2016 or later. This measure will not apply to mortgage loans where, before October 3, 2016: a mortgage insurance application was received; the lender made a legally binding commitment to make the loan; or the borrower entered into a legally binding agreement of purchase and sale for the property against which the loan is secured. Mortgage loans for which mortgage insurance applications are received after October 2, 2016 and before October 17, 2016 are also not affected by the rule change, provided that the mortgage is funded by March 1, 2017. Homeowners with an existing insured mortgage or those renewing existing insured mortgages are not affected by this measure.

Basically, what it boils down to, is if you are putting less than 20% of the purchase price down as your down payment, you have to be qualified at the “stress test” Bank of Canada 5-year posted rate which as of writing this is 4.64%. So even though the lender will give you a mortgage at say 2.39%, you have to be qualified at the higher rate.

So, what does this all mean? Essentially, you will be approved for a lower mortgage amount. The numbers I was given from a mortgage professional were that mortgage approval amounts would be approximately 15-20% lower than before.

If you are wondering how the new mortgage rules will affect you, let me know and I will put you in touch with a great Mortgage Professional.

*I am not a Mortgage Professional. If you would like more information about the mortgage rule changes, I recommend speaking with a qualified Mortgage Specialist.*