If you are a first-time homebuyer searching for a mortgage or a current homeowner looking to move or refinance, you should be aware of the latest mortgage laws in Canada.
Mortgage Stress Test
It is a way to find out if your finances might get affected by sudden financial turmoil. In the case of mortgage, the stress test is used to determine whether a borrower (or a potential homeowner) can tolerate a rise in their mortgage rate.
The stress test is required for Canadians to apply for a federally controlled bank loan. Homebuyers must be able to afford a mortgage at the rate prevalent in the market.
The mortgage stress test for buyers putting done 20% or more as the down payment needs to withstand the qualifying rate calculated using the lender-provided interest rate, based on the Bank of Canada’s five-year benchmark with an additional 2% mark up.
If the home buyer puts down less than a 20% down payment, The qualifying rate under the stress test will be higher than the lender provided rate and the Bank of Canada’s five-year benchmark rate.
Homeowners considering refinancing secured line of credit or switching mortgage lenders will have to go through this stress test.
What are the new mortgage laws?
Canada Mortgage and Housing Corporation introduced a set of reforms in July 2020 to guarantee high-ratio mortgages. The mortgage Ratio is the ratio of the purchase price to the down payment amount. Lower the down payment compared to the purchase price, the mortgage ratio is higher.
Let us have a look at the recent changes.
1. % Of people who qualify (Qualification rate)
The new CMHC rules would limit how much debt borrowers with a default insured mortgage can take. Mortgage borrowers will be able to spend no more than 35 percent of their gross income on housing, and they will only be able to repay up to 42 percent of their gross income once other debts are factored in. This is down from 39 percent and 44 percent previously.
2. Down Payment required as a deposit
It is preferred to use out of the pocket money for the down payment instead of borrowing. In line with this, Homebuyers cannot use money from credit cards, unsecured personal loans, or lines of credit for down payment.
Mortgage default insurance is provided for homebuyers who make a down payment of less than 20% of the purchase price. Mortgage default protection is not available for properties worth $1 million or more.
3. Credit rating
The creditor must also have a minimum credit score of 680 under the new rules (considered a good score). If you are buying a house with a partner, one of you must have a 680-credit score. This is an improvement over the previous minimum of 600. (Considered a fair score).
4. Canada Mortgage and Housing Corporation (CMHC) & the Canadian Real Estate Association (CREA) Forecasts
CMHC forecasted that the home prices from June 2020 to June 2021 will reduce between 9 to 18 percent because of the pandemic-driven employment losses, company closures, and a drop in immigration. This prediction did not hold good.
The chair of the Canadian Real Estate Association, Costa Poulopoulos reports suggests 2020 recording a surge in Canadian resale housing.
Low interest rates and an improving economy are expected to boost sales activity in all provinces except Ontario through 2021, according to the CREA. The CMHC is sticking to their initial forecast.
We recommend researching well before going for a mortgage. The above updates and amends, along with the knowledge of how mortgages and stress tests work, can surely turn out to be a gamechanger during your mortgage journey.