The federal government recently implemented major changes to the mortgage lending process in Canada. A new “stress test” requires applicants to qualify using the Bank of Canada’s posted interest rate, rather than the rate offered by their lender.
The posted rate is currently at 4.64%, while actual mortgage rates are close to half that amount.
This stress test will significantly reduce the maximum mortgage amount that homebuyers can borrow. For example, an individual earning $50,000 per year with a 5% down payment would have qualified for a mortgage of approximately $300,000 under the old rules. With the new stress test, their maximum mortgage will be less than $240,000.
What can a future homebuyer do now to plan around these restrictions?
Increase your down payment. The new stress test only applies to low-ratio mortgages, which are cases where the down payment is between 5-20%. Low-ratio mortgages also require mortgage insurance, from a party like Canada Mortgage and Housing Corporation, which adds a premium to your total borrowed amount. By increasing your down payment, you’ll avoid the mortgage insurance premium and benefit from relaxed underwriting.
Decrease other debt payments. Arguably the most important calculations in qualifying for a mortgage are your debt servicing ratios. These ratios examine how much of your income is allocated to debt repayment, mortgage repayment and other fixed expenses. By decreasing your debt load, you’ll increase your room for mortgage payments.
These new rules will likely hit first-time homebuyers the hardest and delay their entry into the housing market. However, if you take the time to develop a solid plan, that first house may be closer than you think.
- Thomas Johnson is a Financial Advisor with Cascade Financial Group - ThomasJohnsonMB@outlook.com