If you have considered taking a mortgage in the past few years, you will realize that the conditions have changed. The Bank of Canada has hiked up the rates, and it seems subsequent increases are inevitable.
The multiple interest hikes have led to increased rates amongst lenders all around the country. However, the interest rate is not the only feature to watch out for when you are making a purchase. There is more to be mindful of. We will discuss the new mortgage rules that you must know before your next purchase. Come along.
For over a decade now, the government has been making the regulations around mortgage stringent to reduce mortgage debts. More so, the Ontario Fair Housing plan has placed a lot on the table; you need to be abreast with these facts to avoid the mistakes that many persons make and their implications.
Some of the New Rules Include:
- There’s a 15% Non-Resident Speculation Tax:
This change is quite harmless because it is targeted at controlling the housing market. It is only imposed on foreign buyers.
THE INTEREST RATE STRESS TEST
The interest rate stress test is one of the significant changes you must consider.
Before now, the interest rate stress test was only imposed on buyers who have less than 20% down payment. That is because such buyers possess a higher loan-to-value ratio (Since more than 80% of their house loan is not financed). Higher LTV borrowers are considered to be of higher risk and as such, stringent rules applied to them.
A borrower with a low LTV having deposited 20% or more down payment are usually exempted from some of stringent conditions/risks. However, that has changed now.
On the 1st of this year, the Office of the Superintendent of Financial Institutions (OSFI), stipulated that borrowers with 20% or more down payments must also pass the stress test.
What is this test about?
The interest rate stress test is a test conducted to ensure that you, as a borrower, will still be able to afford your home when and if the interest rates increased.
Therefore, when you apply for your mortgage, the institution is not only to consider if you can pay at the current date, it has to determine whether you can afford your payments should the rate peaks later. There are two methods for the test:
- The 5-year benchmark rate and
- 2% plus your current contractual rate.
If you are unable to make the threshold after the test, it means you have failed the test and your mortgage will not be approved, regardless that you qualify in every other way.
One out of five borrowers fails this test. Many of them end up reducing their house budget by 20% or more to get approved. Others postpone entirely.
Assuming that as at last year, you were able to obtain a fixed rate mortgage on a 25% down payment and a monthly payment of $1,979; if you were to take that same in mortgage today, you would have to prove that you can afford a 5.14 interest hike. That is a monthly payment of $2,477, with an additional requirement of $498 addition.
What Can I Do then?
You need to consider the new stress test; otherwise, you will have all your home applications rejected. Especially when you are going for homes, you believe you can afford, that do not fall within your threshold (after the stress test is applied).
Here’s how to practically overcome it:
- Calculate your monthly mortgage payment with a higher interest rate. 5% is a great start.
- Create an allowance when you are planning your finance model
- Consider a low LTV; they attract fewer sanctions.
Additionally, lenders must now implement internal risk management protocols on the higher priced market such as Toronto and Vancouver.
- Opt for a 20% or more down-payment on your mortgage. Otherwise, it is tripling challenging to move into a low LTV rate at 80%. It also saves you the stringent rules attached to higher LTV.
- Consider alternative lending institutions; these are not mandated to comply with the OSFI rules and have adjustable rates.