NEW Mortgage Rules Announced

Announced today:  Effective October 17th, 2016, all new insured high-ratio mortgages will have to qualify using the higher of the Bank of Canada benchmark rate (currently 4.64%) or the lender’s contract rate.  (A high-ratio mortgage is when you have less than a 20% down payment.) Currently if the mortgage contract is for a fixed rate at a term of 5 years or more, the borrower has to qualify at the lender’s contract rate.  If the mortgage has a variable rate or a term less than 5 years, the benchmark rate would already be used for qualifications.  This can make a significant difference in the amount that a borrower could qualify for when the contract rate is say 2.44% (fixed for 5 years) vs the benchmark rate of 4.64%. 
 
For Example: 
Purchase price: $450,000
Downpayment:  5% ($22,500)
Monthly Payment:   Rate 2.44%  = $1,971    vs.    Benchmark Rate 4.64%  = $2,486
That is a difference of $515 per month.  

If a borrower could only qualify (afford) to make monthly payments of $1,971, they would only qualify for a purchase price of $357,000 using the benchmark rate of 4.64% and 5% downpayment.  That is a significant blow to their purchasing power.

The reasoning behind this new rule is a valid concern.  With interest rates at a historically low levels the chances of rates going up are pretty good.  So knowing that you can afford to make the mortgage payments at close to double the interest rate should give borrowers (and lenders) some comfort.
If you have already purchased a home provided the closing date is prior to March 1st of 2017, you will not be affected by the new rules.  If you are in the process of switching a high-ratio mortgage to another lender, please check with your mortgage broker to see if the change will affect you.
To read the full details of the new rules announced today, please click here.