new mortgage rules 2018 stress test

New Mortgage Rules 2018 Stress Test

In July 11, 2018

New Mortgage Rules 2018 Stress Test Review

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.

What Is The Mortgage Stress Test?

In January 2017, the new mortgage rules 2017 were introduced, requiring mortgage borrowers obtaining a high ratio mortgageWhat Is A High Ratio Mortgage? A high ratio mortgage is a mortgage where the borrower puts less than 20% down payment, and 35% down payment if they are self employed. A high ratio mortgage is often accompanied by mortgage default insurance, insured by CMHC Insurance, Genworth Insurance or Canada Guaranty Insurance. The insurance premium for a high ratio mortgage is determined by the down payment amount (less than 20% and 35%). For high ratio mortgages, the default mortgage insurance premium is added on top of the initial amount, and the payment is one with the mortgage payment. Benefit Of... More, 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 mortgageWhat Is A Fixed Rate Mortgage? A fixed rate mortgage or fixed interest rate mortgage is a mortgage where the interest rate is locked in or fixed for the the term of the mortgage, and does not change. Benefit Of A Fixed Rate Mortgage The benefit of a fixed rate mortgage is security and piece of mind for a borrower, knowing precisely how much their mortgage payment will be each month for the entire term of their mortgage. A fixed rate mortgage is often higher than a variable rate mortgage, however in comparison to a variable rate mortgage, the fixed rate does not change during the entire term... More 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 paymentWhat Is A Down Payment? A down payment is the monies a home buyer puts towards purchasing a property. In many cases, the down payment is a minimum of 5% and can be greater. Often times, the home buyer will borrower the remainder of the purchase price as mortgage, which the lender will register the mortgage charge as security on the property. Down Payment Requirements Institutionally, a down payment cannot come for borrowed funds with repayment terms. Banks and lender are governed by anti-money laundering regulations which they must comply with to verify the source of a borrower's down payme... More or greater. The same would apply to existing home owners refinancingMortgage refinancing is changing the term of the mortgage before the maturity date of the mortgage. A borrower refinancing their mortgage will be breaking their current mortgage, and often incurring an applicable penalty for early repayment, and replacing their mortgage with a new mortgage. Home owners are often refinancing their mortgage to get a lower interest rate, consolidate debt, do home renovations, or access equity from their home. Refinancing a mortgage requires a borrower to qualify for the new mortgage with their income and credit. Refinancing a mortgage can be done at any tim... More their mortgage.

Why A Stress Test?

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 termA mortgage term is the time period which the mortgage agreement is in effect. Mortgage terms can range from 6 months and up to 10 years. The mortgage term is set at the time of the approval of the mortgage. The mortgage term shouldn't be confused with the amortization period of the mortgage, as the mortgage term is usually 5 years whereas the amortization period can be 25 year to 35 years. At the time of the mortgage approval, a borrower should determine how long of a mortgage term they would like to take, as there is usually a penalty for repaying a mortgage by refinancing or selling their... More of 5 years, the home owner can afford their mortgage paymentA mortgage payment is the payment amount, usually comprised of principal and interest payments, agreed upon as per mortgage approval documents, which a borrower makes to the lender as repayment for the mortgage. A mortgage payment is calculated based on the interest rate, compounded annually or monthly, as well as the amortization period. Interest rate of a mortgage and amortization period, will determine the amount of interest that is applied to the interest portion, and the amount of principal payment that is applied to the principal portion of the mortgage payment. A mortgage payment ... More, and reduce the chance of mortgage default.

Mortgage Qualification Rules - Debt-To-Income Ratio Requirements

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 borrowerA borrower in a mortgage transaction is also known as the mortgagor. The person, people or entity receiving a loan from a lender or bank, also known as the mortgagee. As a mortgage borrower, there are responsibilities to comply with the terms and conditions of the mortgage commitment agreement before and during the term of the mortgage. A mortgage borrower is responsible for qualifying for a mortgage, making payments, along with many other requirements set out in their mortgage commitment. 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.