How Do the New Mortgage Rules Affect You?
We first talked to Mortgage Advisor Rebecca Awram a few weeks ago for her insight on mortgage tips. This week, she’s guest blogging for us again in a post about the upcoming mortgage rules. Read on for some valuable mortgage news!
In October, the Office of the Superintendent of Financial Institutions announced more rules, coming into effect on January 1st, 2018, that tighten up mortgage borrowing power. Of these, the one getting the most attention will reduce the borrowing power of many Canadians.
If you are purchasing with less than a 20% down payment, these new rules don’t change much for you. Your borrowing power was already scaled back dramatically last year. Ditto, if you are renewing an existing mortgage with the same lender on the same property, and not adding any new funds.
If you are over-qualified and purchasing well below your top-limit (the amount your bank or broker provided during pre-approval), then you are also probably not affected.
The new rules will affect those who are planning to purchase, port, or refinance at the upper-end of their affordability – as defined by the federal government, of course.
These new qualification guidelines target those who are borrowing 80% or less than the value of the home, and are very similar to the ones imposed last year on high ratio, insured borrowers. At that time, it was referred to as a ‘stress test’. It is, essentially, a ‘test’ of your qualification at a much higher interest rate – the 5-year, fixed, posted rate, rather than the actual contract rate that you are paying your lender on the mortgage.
Now, however, the federal government has made this new test for conventional borrowers an even tougher standard than the one previously introduced for high ratio, insured buyers. They must qualify at the 5-year, fixed, posted rate or at a rate 2% greater than the Contract rate, whichever is higher.
Whether you agree with the new rules or not, or even if you don’t understand them, the net outcome to remember is: there will be a reduction in your top purchasing power of about 20%.
For example, if you are pre-qualified to a maximum purchase today of $720K, then in the new year that will drop to approximately $580K.
If you think these new rules affect you, take action well before December 31st. Lenders will be implementing the new rules early – they always do. While no firm announcements have been made at the time of writing, many industry veterans are predicting application submission deadlines ranging from December 1st to 15th with most lenders.
To qualify under the current rules, you must complete an approval prior to your lender’s specific deadline, or December 31st, whichever comes first. It does not matter when your purchase completes. It matters when you get your firm approval, with a rate guaranteed until your completion date. If your lender or broker cannot hold a rate that long, find one who specializes in new-builds and pre-sales, and can hold an extended rate for you.
A firm approval with a guaranteed rate to completion protects you not just from the new mortgage rules, but also from rising rates, changes in your personal situation, and changes in appraised values. It’s a prudent course of action in any environment, not just one where the approval guidelines are about to change.
Get in touch with Rebecca if you’d like to know more!