The Federal Government is proposing new guidelines which will again make it more difficult to secure a mortgage. These guidelines expected to be issued in the fall will come into effect shortly after being issued. Rather than tell you about them after the fact we will elaborate on the proposed changes in the event you are thinking of purchasing a home or refinancing your home in the next few months. These proposed changes will seriously impact the amount of a mortgage you will qualify for.
The new changes will affect you if you are purchasing and have a down payment greater than 20% or if you are refinancing and have 20% or more equity in your home. With the recent increase in property values in Kelowna many of you may now have more than 20% equity in your home and not even be aware of that. With the new changes mortgages secured with at least 20% down payment or 20% equity will be subject to the same stress test that was introduced last fall for hi ratio (mortgages with less than 20% down payment). You will be required to show you can withstand an increase on your mortgage rate of 2%. Let’s say the rate you are being offered is 3% – you will be required to qualify for a payment based on 5%! This applies to fixed and variable rate mortgages regardless of the term you opt for.
Let’s put it into perspective – if you have an annual (or combined annual) income of 75,000.00 using a property valued at 600,000.00 as an example, prior to the new rules you would qualify to carry a mortgage of 480,000.00 with a monthly payment of 2018.89 (based on 3% rate) When the new rules come into effect you will then be required to qualify for your 480,000.00 mortgage at a rate of 5.00% and prove you will qualify to make a payment amount of 2,561.72 when your actual payment is only 2018.89. Based on your 75,000.00 income you will not qualify. The amount of a mortgage you will then qualify using the stress test will be substantially reduced to 380,000.00 or lower depending on property taxes which also play a factor in qualifying. In the scenario above keeping with your 120,000.00 down payment you will now only qualify to purchase a home for 500,000.00 – 100,000.00 less!
As previously stated this stress test was put in place last fall for mortgages with a down payment of 20% or less. These mortgages require mortgage insurance and CMHC say the new regulations decreased the size of the country’s insured mortgage market by about 33% year over year to June 30/2017.
To add insult to injury the Bank of Canada is very serious about another rate increase and speculation is the increase could come as early as September but more likely in October. Coupling that with the new stress test and the high cost of a home today many will struggle to attain home ownership going forward.
Feedback with regard to the proposed changes can be sent via email to B.20@osfi-bsif.bc.ca
The tougher rules and qualification standards are creating a lot of confusion and misunderstanding out there. There has never been a time more when the average consumer really needs the clarity that a mortgage professional can provide. The majority of you still head to your bank but more and more people are turning to mortgage brokers because with the new rules a broker is in a much better position to offer you so many more options.