Back To The Mortgages! 5 Things To Remember

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We are now in 2018 – and the real estate market in Canada has brought fresh changes to the way we will be buying houses now and for the many years to come. And it’s not just an issue of very high prices anymore…

On New Years’ Day, a new mortgage rule was approved that is now making it harder for homebuyers to take out any mortgage they wish. Anyone wishing to take out a mortgage for a new home will have to be properly vetted, as only the most qualified ones financially will play the new game of loans.

So, again, what is a stress test?

Lenders will be asking ‘test-takers’ many What if? questions about their current financial state if interests rates were to spike randomly.

We believe this process will not be smooth in its beginning because it has just been born. Lenders and banks have to deal with this life and career changing concept whose system will likely require tweaks as we go on, to ensure it is fair to everyone.

Why put buyers to a test?

Debt levels are frightening amongst Canadians and Ottawa feels the need to control the market a bit more so that it doesn’t get chaotic and that the currency isn’t badly affected. They have to think about the economy.

Canada wants to stay as far away as possible from an American-like housing crash, which happened a decade ago. Samantha Gale, CEO of a mortgage brokers’ association, said that “Generally speaking, people want to stay in their home. They find a way to pay their bills, to pay their mortgage.”

What is the test?

Potential buyers will be tested against either the five-year benchmark rate (now 4.99 per cent) of the Bank of Canada, or the rate offered by a lender plus another two per cent.

MBA’s CEO Samantha Gate added, “For example, if they were to get a mortgage with an interest rate of three per cent, they now need to qualify to show that they can afford five per cent.”

What if the bar is too high?

Failed the test? Then you’ll have to look for a cheaper home, within your earnings and budget.

“If you were to buy a home worth $700,000 last year, this year you might only be able to afford a home worth $560,000. That’s quite a big discrepancy,” Gale said, adding that it could be essential to consult a mortgage broker as the options will be clearer.

Why put buyers to a test?

The federal government is concerned about Canadians’ debt levels, Gale said. Because it has the tools to regulate banks, it is easy for Ottawa to impose mortgage rules rather than rules on other forms of borrowing, she said.

Gale said she did not believe a housing crash like that experienced in the U.S. a decade ago is in the cards. “Generally speaking, people want to stay in their home. They find a way to pay their bills, to pay their mortgage,” she said.

What if the new rules affect you?

The reason why it has made the news since 2016 is because it will quite possibly affect everyone. If you are buying and need to a loan, they will affect you, and they will also apply to anyone looking to refinance.

On a positive note, those seeking to renew mortgages under existing terms will not need to re-qualify and be stress tested, but those looking for a better rate will. “One of the challenges might be that a certain lender might not offer a competitive rate at renewal time, knowing that buyers can’t really shop around,” Gale finished.