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Mortgage changes in Canada, now impacting uninsured mortgages

A new round of mortgage regulations is about to hit the ground as part of a long line up of changes to how mortgages are written in Vancouver and Canada. The government began its regulatory tightening campaign nearly nine years ago to reduce the risk of a U.S.-style housing bubble in Canada. We got introduced to a stress test for high ratio mortgages last October. This policy enables lenders to measure the borrowing ability of high ratio mortgage holders in case of interest rate hikes. 


New Rules  


Some time ago, the Office of the Superintendent of Financial Institutions (OSFI) revealed their proposal for changes to mortgage rules once again. The biggest proposed change is an introduction of a stress test for all uninsured mortgages (home buyer’s with greater than 20% down payment). Currently only insured mortgages, variable rates and fixed mortgages less than five years must be qualified at Bank of Canada’s posted rate.  The extension of stress testing to all uninsured mortgages will have a large impact on home buyers and will drive many borrowers into the arms of credit unions or sub-prime lenders or simply out of the market. Consequently, this will probably reduce the demand and switch some of the house hunter to condominium hunters. These changes will probably also effect a portion of pre-sale clients with properties that are under construction. It is very important to contact us as this will effect you at completion. However, at this point, these changes will not apply to mortgage renewal for existing borrowers (remaining with current lender) but this can change in the near future.  The guidelines will take effect Jan. 1, 2018 and apply to new uninsured mortgages, as well as mortgage renewal applications if borrowers switch lenders. The stress test requires all borrowers to qualify at either the greater of the Bank of Canada benchmark rate, or 2% higher than the actual interest rate given by the lender. 


The Impact  

Here are couple of examples of an uninsured mortgage affordability with and without the stress test and the impact in both scenario. Keep in mind we simplified the steps to demonstrate the difference. There are more measures to consider in the process of mortgage qualification. 


Senario 1 :  

Annual Income : $120,000, 

Interest Rate offered : 2.59%, 

Amortization : 30 years  

The Bank of Canada Benchmark Rate : 4.89% (This interest rate offered plus 2% is less than Benchmark Rate so the lender will use benchmark to qualify the borrower) 


Affordability : 


Under Current Rules : $1,100,000*  


Under New Rules : $900,000* 


*With 20% down payment in both cases 


Senario 2 :   


Annual Income : $120,000, 

Interest Rate offered : 3.09% , Amortization : 30 years  

The Bank of Canada Benchmark Rate : 4.89% (This interest rate offered plus 2% is greater than Benchmark Rate so the lender will use benchmark plus 2% to qualify the borrower - 3.09%+2%= 5.09%) 


Affordability : 


Under Current Rules : $1,080,000*     


Under New Rules : $850,000* 

*With 20% down payment in both cases 


This is an almost 20% reduction in affordability in both scenarios. This will naturally cause a lot of borrowers to pursue cheaper homes or push them to consider condominium instead. Rental market also will be effected by this change as well. Considering the state of the market, as well as ongoing changes to the mortgage rules, its more important than ever to consider speaking with an independent mortgage consultant. We will play an even bigger role after the Jan 1st changes, as we are the only professionals that have access to a variety of lenders and mortgage products under the same roof. This will enable us to provide more options to clients.  Please fill free to contact me if you need further clarification of the up coming rule changes or would like to know how much you can qualify for. 


We are able to qualify clients within 24 hours and provide all the guidance needed in order to speed up the process and provide you with the advantages required in the search for your next property.  





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