By: Jean Boynton

Dreaming of Homeownership…

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Canada’s new mortgage rules: Will they affect affordability?

 



The affordability of Home ownership has been helped in recent years by low interest rates and the availability of high loan-to-value mortgages backed by mortgage insurance. But what would happen if those interest rates were to jump? Concerned by that scenario, the government introduced tougher stress-test criteria in fall 2016, with the aim of reducing mortgage default among home buyers. What does that mean for you? More likely than not, less money to work with. Here’s why.


Changes to the stress test

Two big changes to stress-test criteria have had an immediate effect on affordability.


NO. 1: THE NEW BANK OF CANADA INTEREST RATE BENCHMARK REDUCES THE AMOUNT OF MORTGAGE YOU QUALIFY FOR

While you may qualify for a fantastic five-year fixed mortgage rate from your bank (2.94%, for example), the new rules use the Bank of Canada’s five-year fixed mortgage rate (4.64% in late 2016, for example) to determine whether you can afford your mortgage payments.

This tougher affordability standard was put into place to ensure you can still afford to make your mortgage payments were rates to rise dramatically.

 
RESULT: The new rules say you can afford less house for your income – approximately a 20% to 30% reduction in the mortgage amount you qualify for.

 
Did you know that you can qualify for a mortgage sooner with a lower down payment  by using mortgage insurance?
No. 2: The Bank of Canada interest rate extends to debt service ratios
Lenders and mortgage insurers look at two debt service ratios when qualifying you for a mortgage and mortgage insurance.

Gross debt service (GDS)
The carrying costs of your home, such as mortgage payments, taxes, heating, etc., relative to your income.
Total debt service (TDS)
Your home carrying costs (mortgage payments, taxes, heating, etc.) plus your debt payments (credit cards, student loans, car loans, etc.), again relative to your income.
To qualify for mortgage insurance, the highest allowable GDS ratio is 39% and the highest allowable TDS ratio is 44%.
Here’s the tricky part: when calculating the GDS and TDS ratios, the new rules indicate that lenders and insurers must assess your hypothetical carrying costs using the higher, Bank of Canada interest rate. That means many buyers who would have squeaked through under the old rules, will push past the 39% and 44% thresholds using this higher Bank of Canada rate.
RESULT: Higher carrying costs (as assessed under the new stress-test criteria) will make it harder for first-time home buyers with less than 20% down to qualify for a mortgage.
What can you do?