Still wondering what all of these mortgage rule changes mean and what they mean for you as a buyer with less than 20% down?
So, what happened?
On Monday October 3rd 2016 the liberal government announced big changes across the board meant to cool down the hot housing market and more so ensure that Canadians were not taking on mortgage payments that were larger than they could afford given a rate increase.
A Buyer with a down payment of 5 per cent of the purchase price but less than 20 per cent must purchase mortgage insurance. This insurance protects the lender in the event that the home buyer defaults. These loans are known as “high ratio” mortgages.
In situations in which the buyer has 20 per cent or more for a down payment, the lender or borrower could obtain “low-ratio” insurance that covers 100 per cent of the loan in the event of a default.
Reduced maximum mortgage qualification through an expanded Stress Test
So, What's Different?
Previously, if you qualified for a mortgage payment on a 5 Year Fixed payment you could select that term and take out a mortgage of that size. If you did preferred a term of less than 5 years or a Variable Rate mortgage you would have to prove that you could qualify at a higher interest rate (called a benchmark rate).
As of Oct.17th all buyers with less than 20% will have to prove that they can qualify at the benchmark rate (currently 4.64% as of Oct.5th 2016) for the amount they want to borrow. (As an aside, this isn't the actual interest rate, yours will likely be lower)
As an example if you have $80,000 Income and $500 or less of other liabilities considering property taxes of $2500 and no strata fees the following chart will show you your maximum mortgage amount.
Maximum Mortgage ($80k Income)
As you can see, given current rules (qualifying at 2.44% on a 5yr fixed) your maximum mortgage would be approximately $411,250 of course your purchase price would depend on your downpayment. As of Oct.17th that maximum drops sharply to $325,150. A difference of $86,100 in borrowing power.
So how do I find out how much I qualify for?
There are a few ways to qualify:
- Find out what your payment is for the mortgage amount you would require at the benchmark rate (4.64%)
- This amount must be less than 39% of your gross income plus property tax, heating costs and strata fees (if applicable) this is also known as GDS (gross debt servicing).
- When adding all of your other liabilities or debt obligations this amount can be no more than 44% of your gross income. This is also known as TDS (total debt servicing).
- If your credit score is below 640 your maximum GDS will be 35% and TDS will be 42%.
- Contact us or your expert Mortgage Broker.
Now, more than ever before it is important to be planning and working with an expert who is focused primarily on Mortgages. As your local mortgage expert we take pride in helping you plan out your purchase and making home buying a reality!