I thought I Would kick off the New 2018 Year with a longer article that details a change which effects the typical home buyer.

Today, January 01 2018 the New Canadian Mortgage Rules went into effect. Many of you may have some idea of what this entails as it has been in the news – You have heard words like “stress test” been thrown around; however do you actually know what the new rules are and how they affect you? Let’s simplify the rules for the average home buyer/investor.

The general idea behind the “stress test” is to make sure that you as the home owner can afford the property if there are drastic increases to the interest rates. Can you afford the property if rates suddenly increase to 5%? 6%?

Here are the top 5 facts on the New Mortgage Rules:

1. If you were able to get an approval before the rules came into effect the rules will not affect you and your approval will be honoured. You must make sure that you close your transaction before the expiration date. Most approvals usually last for a finite amount of time, typically 120 days.
2. New Mortgage: If you want a new Mortgage, you will be subject to the stress test. This means that the bank/financial institution will check to see what amount you can afford at a specified interest rate – NOT at the posted rate (rate shown on website).

The interest rate you will be pre-qualified at will be greater of two of the following:

• The Bank of Canada rate
• Posted Rate + 2%.

Example: I am looking at purchasing a $500,000 condo.

The mortgage at my posted rate of 3.15%, 5 year fixed mortgage comes to $2000/month. You might be thinking great! This is within the range of the unofficial 25-40% gross income I make a month and I’ll be approved!

No – You will be checked at a rate of 3.15% + the 2% “new stress checker” for a rate of 5.15%- This would come to a theoretical $2400 a month. Can you afford $2400? If the answer is now no, you will not be qualified and no longer deemed to qualify for the $500,000 condo.

3. Renewing Your Mortgage: If you Mortgage is up for Renewal in 2018, you have two choices:

• Staying with your current institution- If you decide to stay with your current financial institution you will not be subject to the new stress test rules and can proceed to negotiate freely.
• If you decide to “shop around” and change institutions it will deemed as if you are applying for a new Mortgage and you will be stress tested with the new rules.

4. What If I pay At Least 20% Down Payment, or a Higher Amount?

Increasing your down payment or paying down at least 20% may not make you pay insurance premiums, it however will not have a big effect on whether or not you are stress tested. You will be stress test regardless of how much you have put down. It will help you in the already established ways, such as decreasing your payments monthly, such to fall into the 25-40% gross income, however even this could ‘price you out ’.

5. What if the New Rules no longer quality me for my Dream Property?

If due to the new rules you no longer can obtain the property you wanted- there is unfortunately little you can do. The rules effect buyers, and are meant to decrease risk from the lenders perspective. Lenders however are always looking to decrease risk. Perhaps look at a creative way to decrease their risk- Have a co-signatory? Lenders might see this as you being financially overstretched and an even bigger risk. You might be better off if you look at a lower cost property.

Conclusion:

I hope that through these 5 points, you have a better understanding of the new mortgage rules, and how they affect you as the average home buyer/investor. I will leave it up to you to decide whether or not you believe these changes or for the betterment of the Canadian society or not.

Remember this – To the average home owner mortgage payments are usually one of the highest bills you will pay per month and studies have shown usually the most ‘worried about’ payment. Be cautious and financial responsible.