If you have watched any major Canadian News outlet over the past 24 hours, you have likely heard that the Federal Finance Minister Bill Morneau announced some rather unexpected changes to mortgage lending guidelines which will have a significant impact on Canadian Home Buyers.
Presently, the current lending rules for Default (CMHC/Genworth) Insured Mortgages in Canada requires that any home buyers applying for a 5 year fixed rate mortgage, must qualify for that mortgage based on a mortgage payment calculated at the rate being offered to the client. Based on current mortgage lending guidelines, here is what a current mortgage qualifying scenario would look like:
- Annual Household Income: 100,000.00
- 5 Year Fixed Rate: 2.39%
- Qualifying Rate: 2.39%
- Amortization: 25 Years
- Potential Max Purchase Price: $525,000.00
- Down Payment: (5%) $26,250
The new rules that come in to effect on October 17th 2016, would require that any home purchaser looking to qualify for a 5 year (or longer) fixed rate mortgage must now qualify for that mortgage based on a qualifying rate stress test. The qualifying rate used for qualifying purposes will be the Bank of Canada Qualifying Rate, which as of today sits at 4.64%. Here is what a home buyers new potential max purchase price will look under the new guidelines announced today:
- Annual Household Income: 100,000.00
- 5 Year Fixed Rate: 2.39%
- Qualifying Rate: 4.64%
- Amortization: 25 Years
- Potential Max Purchase Price: $425,000.00
- Down Payment: (5%) $21,250
The effective impact on home buyers in Canada can and will be significant. The scenario listed above shows how requiring home buyers to qualify based on the qualifying rate, rather than the contract rate, reduces the purchasing power of the buyer by upwards of 100,000.00.
There are two very important dates to note with respect to these changes:
October 17th 2016 – Any mortgage application approved prior to this date, can qualify for a mortgage based on existing mortgage lending guidelines. Any application submitted and approved on or after October 17th, 2016 will be required to qualify for a mortgage based on the newly announced mortgage lending guidelines
March 17th, 2017 – Any mortgage application that is approved prior to the cutoff date of October 17th 2016, must also close on or earlier than March 17th 2017. If you are approved for a mortgage prior to October 17th 2016, however you do not take possession of your new home until after March 17th 2017, you will be required to qualify based on the new lending guidelines.
Once again, these changes will impact any Default Insured Mortgage Application anywhere in Canada. A default insured mortgage is defined as a mortgage where the client has less than 20% of the purchase price as their down payment. Any mortgage in Canada with less than 20% down must be insured by a Default Insurance Company such as CMHC or Genworth. These recent changes will directly impact those application.
If you are currently in the process of house hunting or are thinking about house hunting, it is important to touch base with your Mortgage Broker to find out more about how the changes may impact your pre-approval or application.
**The Above mortgage scenarios assumes the following: 1. the clients are not carrying any monthly debt requirements outside of the potential mortgage. 2. It also assumes a max Gross Debt Servicing of 34% 3. Down payment of 5% of the purchase price coming from their own resources. 4. That the clients have adequate credit and credit history.