In an announcement earlier today, the Department of Finance outlined new measures to maintain the stability of the housing market. They announced that there will be a stress test required for ALL insured mortgages in Canada, beginning October 17th 2016.
Under the current set of rules, a stress test must be implemented for all insured mortgages where the mortgage term is LESS THAN 5 YEARS, or where there is a VARIABLE RATE MORTGAGE in place.
The stress test requires that mortgage lenders must qualify you at the Bank of Canada benchmark rate, not the rate you are paying. The Bank of Canada benchmark rate is currently 4.64%.
Let’s look at an example; say you are purchasing a home and wish to take a 1-year mortgage term at 2.29%. Despite the fact that you are paying 2.29%, I have to ensure that you qualify for the mortgage at the Bank of Canada Benchmark Rate of 4.64%.
Up until, now there was one big exception to the stress test. Anyone taking out a 5-year fixed mortgage DID NOT have to pass the stress test. So, that meant that I could qualify you at the rate you were paying (currently 2.44%). But, this exception only applied to a 5-year fixed term mortgage.
On October 17th the rules are going to change BIG TIME. All insured mortgages will HAVE to pass this stress test, regardless of what mortgage term is chosen.
This means that if you are looking to purchase a home, after October 17th 2016, you will have to qualify for the mortgage at the benchmark rate (currently 4.64%). This is going to GREATLY affect some borrowers.
If you are currently pre-approved, please contact me to discuss how this change will affect the mortgage amount you qualify for as it will be reduced! If you are currently approved for a mortgage and have not taken possession of the house yet, do not worry, this will only affect new applications so you will not be affected. If you have questions, please get in touch and I will explain this change in more detail. If you currently have a mortgage, and are up for renewal with your mortgage lender, this should not affect you. No need to panic.
Here is the official wording on the change from the Department of Finance’s website:
To help ensure new homeowners can afford their mortgages even when interest rates begin to rise, mortgage insurance rules require in some cases that lenders “stress test” a borrower’s ability to make their mortgage payments at a higher interest rate. Currently, this requirement only applies to a subset of insured mortgages with variable interest rates or fixed interest rates with terms less than five years. Effective October 17, 2016, this requirement will apply to all insured mortgages, including fixed-rate mortgages with terms of five years and more. Homeowners with an existing insured mortgage or those renewing existing insured mortgages are not affected by this measure.
I will be posting more information as it becomes available…