After years of lobbying the government for more reasonable and relaxed stress testing for mortgages, the real estate and mortgage industry has succeeded to affect some change.
Announced on February 18th, 2020 the Ministry of Finance has outlined their plan to relax mortgage qualification rules helping Canadians qualify for a little more mortgage.
The changes only impact insured and insurable mortgages
It’s very important to keep in mind here that the changes only affect insured, or insurable, mortgages. Some of the critical factors to determine if a mortgage is qualified as insured/insurable include:
- The purchase price is less than $1,000,000.
- Having a down payment of less than 20% for an insured mortgage. This means that you will require mortgage default insurance from CMHC, Genworth, or Canada Guaranty.
- If there is more than 20% down payment then the mortgage must be amortized over 25 years. (No 30-year amortizations permitted)
- No refinances permitted.
Mortgage rules governing all the excluded mortgage types i.e purchases over $1M or refinances are set by the Office of the Superintendent of Financial Institutions (OSFI). Who at the time of writing has already expressed interest in following the Ministry of Finances cue to relax mortgage qualification rules.
6 things to know about the mortgage stress-test changes:
- The new rules will impact insured & insurable mortgages. The Office of the Superintendent Financial Institutions governs uninsurable mortgage rules. At this time, they haven’t announced any changes. (Not sure what the difference between an insured, insurable or uninsurable mortgage is? Read more about it here.)
- Borrowers will qualify based on the average weekly insured 5 year fixed rate + 2%. Not sure what the average weekly insured 5 year fixed rate is? Neither are we. The government has introduced new terminology that will require more clarification. Based on a quick look at current rates I would guess the current average is about 2.69% to 2.79%. So the new qualify rate based on today’s rates could be as low as 4.69%.
- The current qualifying rate is calculated by the posted 5-year fixed-rate average. For example, this rate is 5.19% today.
- The lower qualifying rate means that a borrower will qualify for ~8%-10% more mortgage money.
- Broker Pro-Tip: Assuming no significant consumer debt today borrowers qualify for roughly ~4.65 x household income. However, in April that number goes up to ~ 5 x household income.
- New rules will come into effect on April 6th, 2020.
The full Ministry of Finance press release can be read here.
As always, I’m here for you if you have any questions about these exciting new changes.
Overall, I see the changes to the stress test as a step in the right direction to help home buyers compete in a challenging market however I doubt it will have any real or significant impact on the housing stresses felt by many households in the GTA.
Stay tuned for more.