[vc_row][vc_column][vc_custom_heading text=”New Mortgage Rules 2018 Stress Test Review” font_container=”tag:h1|text_align:left” use_theme_fonts=”yes”][space height=”25″][vc_column_text]In October 2018, the Canadian Federal Finance Minister announced the introduction of the new mortgage rules 2018 (effective start date of January 1st 2018) implementing a stress test for home owners and home buyers qualifying for a mortgage with 20% down payment or greater. Whether purchasing a home, investment property, refinancing a mortgage or obtaining a debt consolidation loan all borrowers would need to qualify under the stress test.[/vc_column_text][space height=”25″][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”What Is The Mortgage Stress Test?” use_theme_fonts=”yes”][space height=”25″][vc_column_text]In January 2017, the new mortgage rules 2017 were introduced, requiring mortgage borrowers obtaining a high ratio mortgage, to qualify under the newly implemented stress test. The stress test was introduced to ensure home owners are able to manage a mortgage based on an increased interest rate; particularly an interest rate that is at the Bank of Canada’s prime rate, or 2% higher than their contract rate, the greater of the two.
For example, if a mortgage applicant is being offered a 5 year fixed rate mortgage with an interest rate of 3.39%, they would have to qualify for that mortgage as if the interest rate was 5.39%, if 5.39% is higher than the Bank of Canada’s prime rate.
This rule was applied only to high ratio mortgages. The new mortgage rules 2018 stress test requires home owners and home buyers to apply the same rules to conventional mortgages, where home buyer is purchasing a property with 20% down payment or greater. The same would apply to existing home owners refinancing their mortgage.[/vc_column_text][space height=”25″][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”Why A Stress Test?” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”][space height=”25″][vc_column_text]There are a number of reasons the Canadian Finance Minister implemented the new mortgage rules 2017 & new mortgage rules 2018 stress test:
- Debt Management – as Canadian consumer debts are on the rise, when it comes to unsecured debt such as credit cards, line of credits, personal loans, car loans and mortgages, and also due to the fact that we are no longer in a recession, the government makes their effort to control and sustain Canadian consumers and home owners from falling into bankruptcy, consumer proposal, or even worse mortgage default and power of sale from rising interest rate, or a hike in future mortgage rates.
- Cooling Down The Real Estate Market – Between 2016 and mid 2017, the real estate market got out of control. Property values were increasing at a historically high rate, with never before seen type of bidding wars on homes, with almost every property being sold significantly over the asking price. The government saw this as a problem as there were many speculators and an increasing number of foreign investors in the real estate market, purchasing properties and selling them within a short time or a year thereafter for a profit. This became a major problem for the average Canadian, especially millennials and first time home buyers to becoming home owners or moving up the property ladder from condominium or town house, into a house. Detached homes were increasing in value of 20% and higher, making it nearly impossible to get into the housing market for many Canadians.
- Affordability – One of the top reasons the new mortgage rules 2018 and mortgage rules 2017 were introduced, is based on speculation that interest rates will rise in the future. A home owner taking a 5 year fixed mortgage or a 5 year variable mortgage with today’s low rates, qualifying based on the interest rate itself and not applying the stress test, may not qualify for the same mortgage amount if interest rates were to increase. The government wants to ensure if interest rates were to rise, at the time of the maturity of the average mortgage term of 5 years, the home owner can afford their mortgage payment, and reduce the chance of mortgage default.
[/vc_column_text][space height=”25″][/vc_column][/vc_row][vc_row][vc_column][vc_custom_heading text=”Mortgage Qualification Rules – Debt-To-Income Ratio Requirements” use_theme_fonts=”yes”][space height=”25″][vc_column_text]Qualifying for a mortgage with a bank or mono-line lender requires a home owner or home buyer to provide income verification documents and qualifying based on debt servicing ratio requirements.
What Are Debt Servicing Ratios?
Debt servicing ratios are calculations the banks use to qualify home owners and home buyers for a mortgage. Debt service ratios are broken down into gross debt servicing ratio (gdsr) and total debt servicing ratio (tdsr)
Gross Debt Servicing Ratio Requirements
The gross debt servicing ratio takes into account the borrower’s property expenses such as mortgage principal, interest, property tax, heating cost (calculated at $100 per month) and maintenance fees (if applicable). The requirement for qualifying for a mortgage is that no more than 39% of a borrower’s income can be used to service above mentioned expenses, if their credit score is 680 and above. If a borrower’s credit score is below 680, then no more than 35% of their income can be used to qualify to service their property expenses.
Total Debt Servicing Ratio Requirements
The total debt servicing ratio takes into account all of the expenses from the gross debt servicing ratio requirements, and also includes all debts reporting to their credit bureau such as car loans, credit cards, line of credits, personal loans and any other mortgages they carry. If a borrower has a credit score of 680 and above, the bank will allow a maximum TDSR of 44% of the borrower’s income. If a borrower has a credit score below 680 the maximum TDSR allowed is 42% of their income.
Through alternative lenders such as Home Trust Classic, Equitable Bank Prime, Optimum Mortgages and other alternative B lenders, they accept borrowers with lower credit score and allow for GDS and TDS ratios to a maximum of 48% of a borrower’s income.