How the New Mortgage Rules Will Impact Buyers and Lenders
December 20, 2017 | by admin
On January 1, 2018, new mortgage rules will come into effect across Canada. The goal of these impending changes is to take a significant amount of risk out of the Canadian mortgage lending market for both lenders and buyers. These changes will have a serious impact on the housing market, as well as the purchasing power of buyers. Here, we help decipher the changes and explain how it can impact the purchase of your next home.
Change #1: New minimum qualifying rate
The change to the minimum qualifying rate is the most significant change for home buyers as it is what will impact them most. Also recognized as a “stress test,” this rule now requires the minimum qualifying rate for uninsured mortgages (mortgages for consumers with down payments of 20% or greater) to be the greater of the five-year benchmark rate published by the Bank of Canada, or two percent higher than their contracted rate. If you have an insured mortgage, you must qualify for a mortgage at the Bank of Canada rate, which is currently 4.89%.
This new regulation will have a profound impact on home affordability. Regardless of how much money is put down as a down payment, all buyers will have to pass this new stress test. The change will result in a 20% decrease in affordability. In other words, homebuyers will be able to buy 20% less house in 2018. This doesn’t mean that a buyer must purchase a smaller home, or a home they don’t want; it simply means that more saving may be necessary before making the big move.
Change #2: Lenders must enhance their Loan to Value (LTV) measurement & limits
This change requires mortgage lenders to establish and adhere to appropriate LTV ratio limits that are reflective of risk and updated as the market evolves.
This change is being made to protect lenders from taking on too much risk through mortgage approvals. Internal risk management protocols are crucial for lenders who are operating in higher priced markets. This change will not be very noticeable for buyers, as it has been practiced by most lenders for the last 10-12 months; but it becomes official on January 1.
Change #3: Restrictions will be placed on lending arrangements that are designed to avoid LTV limits
With this new rule, mortgage lenders will be prohibited from making arrangements with other lenders in an effort to circumvent the minimum LTV ratio. This strategy has previously been known as a “bundling partnership.”
In the past, this has been a common practice when one lender was unable to approve the full value of the mortgage due to risk. One lender would approve 75%, and a second lender would approve the remaining 25%. Beginning in 2018, this will no longer be permitted.
At first glance, it may appear as though these new mortgage regulations are a large inconvenience for the housing market in Canada. The reality is that these changes are being made to protect all parties involved. For buyers, these changes will protect them from overwhelming debt, and the risk of becoming house-poor. For lenders, the new mortgage regulations will help them recognize risk and protect them from lending too much to consumers that cannot afford to pay a high mortgage over the long-term.
If you're unsure about any of these terms, or you feel you need a better understanding, check out our previous blog where we decipher all of these tricky mortgage terms here.