How the mortgage rules are impacting Canadians
In the past two years the federal government has made big policy changes to the mortgage rules. This marks the seventh time that Canada has tightened mortgage rules in a decade.
These changes have made waves in the mortgage marketplace. Overall mortgage activity has declined and there are fewer borrowers with excessive debt.
All Canadians are being impacted by these changes, even if they don’t know it. In fact, these changes could have the biggest effect on homeowners who want to refinance to consolidate debt.
TD study shows Canadians are unclear about new mortgage rules
A study by TD early this spring found that a whopping 81% of Canadians aren’t sure how a mortgage rate hike could affect their finances. Overall, most Canadians aren’t sure what the new rules mean and how they impact their homeownership.
Being aware of the new mortgage policies can help you be prepared for future life changes like buying and selling your home, as well as refinancing.
Here’s what you need to know about Canada’s new mortgage lending rules and how it will affect you.
The stress test
Before 2018, borrowers with a small down payment had to pass a stress test to prove that they could financially afford their mortgage even with an interest rate hike of two percent.
But now, even borrowers with a down payment over 20% have to pass the stress test to be approved.
Previously, a household with an annual income of $100,000 could afford a property worth $693,405 (assuming a 5-year fixed rate of 2.84% and 20% down on a 25-year amortization).
Now, by adding the stress test, families would need to qualify for an interest rate of 4.84% (2% on top of the current rate). Assuming the same terms as the example above, a family with an income of $100,000 would be approved for a home worth $591,537 (a difference of 15% or $101,868).
This tougher rule means more home buyers are looking at cheaper homes, and some are just being pushed out of the market. The rule will increase the prices of lower-end properties, and boost rent prices too.
This stress test is also applicable to homeowners looking to refinance their mortgage. That means that although you’ve successfully been paying your mortgage for a number of years, if the bank doesn’t think you could handle a two percent jump, they may not approve your application until you build up more equity.
If you don’t pass the stress test, you may be stuck with sub-par rates. Of course, you can choose to shop around for another lender, but remember that if you switch lenders, you won’t be renewing your mortgage—you’ll be filling out a new mortgage application.
First-time homebuyer incentive
The stress test means that first-time homebuyers can afford 15% less than what they could have afforded before this new rule. That could mean the difference between getting that starter home and not. The government hopes to help fix that with the first-time homebuyer incentive.
The first-time homebuyer incentive made its way into the 2019 federal budget. This incentive hopes to allow first-time buyers to get a home in Canada’s hot real estate market. The program will be offered by the Canada Mortgage and Housing Corporation (CMHC) and will give up to $1.25 billion over the next three years to eligible Canadians.
RRSP home buyers’ plan
In the 2019 federal budget, the RRSP home buyers’ plan will go from $25,000 to $35,000. That means that homebuyers can take out up to $70,000 tax-free from their RRSP to put towards buying a home.
All in all, while the strict new mortgage rules are making it harder for Canadians to get as much house as they could previously, the federal government is trying to provide ways to help Canada purchase properties. Whether or not these measures will ultimately be enough to help Canadians buy homes remains to be seen.
At FCT, we offer more protection, more solutions and more experience before, during and after you purchase property. Visit our website and ask a question. Our team will be happy to assist you!