On January 1, 2018, new mortgage rules were introduced by the federal government that will affect many potential home buyers.
Would-be home buyers with a down payment of 20% or more will now be subject to additional qualifying criteria. Also known as a “stress test”, home buyers will have to prove that they could still afford to make their mortgage payments should interest rates increase by either 2% or the Bank of Canada’s five-year benchmark rate (which is currently 4.99%) – whichever is higher. This effectively reduces the size of mortgage that borrowers can qualify for.
Stress tests were previously mandatory for mortgages with less than a 20% down payment. The new rules also make the stress test determination mandatory for mortgages with down payments of 20% or higher, to ensure that all borrowers can cope with interest rates should they rise.
The stress test will also apply to mortgage refinances, meaning that borrowers will have to qualify at the higher stress test rates rather than the existing contractual mortgage rate.
The new rules do not, however, apply when clients are renewing an existing mortgage with the same financial institution. This means that if home owners fail the stress test, they will likely have to renew with their current financial institution rather than look for better mortgage rates from a different institution.
Of note, the new regulations do not apply to credit unions as they are regulated provincially rather than federally. Therefore, credit unions may be able to offer larger mortgages to borrowers who can afford a down payment of 20% or more than their federally regulated competition. Of course, credit unions may decide to adopt the new stress test rules themselves in time.
If you have already entered into a contract to purchase a property or you are pre-approved for a mortgage, we recommend checking with your lender to see how the new rules may affect you.
Author: Jane Otterstrom
This information is general in nature only. You should consult a lawyer before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (250)448-2637 or any of our lawyers practicing in the area of real estate law at the following:Una Gabie: firstname.lastname@example.org Jennette Vopicka: email@example.com Danielle (Dani) Brito: firstname.lastname@example.org Jane Otterstrom: email@example.com