As of January 1^st this year The Office of the Superintendent of Financial Institutions (OSFI) implemented new rules increasing the minimum qualifying rate for uninsured mortgages. For those Canadians trying to qualify for a mortgage, the rules are more commonly know as The Stress Test.

For first time home buyers or renewing homeowners these new rules can have a significant impact on their purchase decisions and/or which lending institution they can use.

The new rules require homeowners to qualify using an additional 2% above the rate they are receiving from their lending institution (e.g. 5 year fixed rate today: 3.39% + 2% = 5.39%) or the five-year benchmark rate published by the Bank of Canada (currently 5.34%) whichever the greater. In this scenario the minimum qualifying rate would be 5.39%; the higher of the two.

This is the seventh change Ottawa has made since 2008. Why? The goal is to limit the amount of debt Canadians and financial institutions can take on. The new stress test will impact approximately 100,000 people or 10% of homebuyers. These are Canadian who would have qualified for an uninsured mortgage last year, but under the new rules will likely fail the test and miss out on their preferred home.

First time home buyers will be required to qualify using the new rules regardless of the amount of money they have saved for a down payment. In most cases, this will result in a 20% reduction in affordability, forcing some buyers to forego their dream home and settle for a smaller model.

What if you don’t pass the test!?!

If you don’t pass the test, don’t freak-out, you still have a few options. You can put more money down on your down payment to pass the test; or wait a little longer until your income increases to the point where you are able to qualify. Another option would be to purchase a smaller home, a condo instead of a semi-detached, or a townhome instead of a detached house. If willing, a family member or close friend could be added as co-signer; someone with enough income to qualify on their own.

What if you are Renewing or Refinancing your Mortgage?

Some good news for those concerned about their upcoming mortgage renewals, lenders don’t have to apply the stress test if you are staying with the same financial institution.   However, this means if you do fail the stress test you won’t have the luxury of shopping around for a better rate. Worst case scenario, you may have to accept a higher rate from your current lender.

If you are refinancing your mortgage because you want to borrow additional funds for renovations, it’s likely you will have to pass the stress test on the full amount. This means you will have to qualify for a higher rate on the full amount of the outstanding debt; rather than just on the additional amount being borrowed. (e.g. You own a home valued at $600,000, your current mortgage is $200,000 and you want an additional $50,000 for renovations; you will likely have to qualify for $250,000 at the higher rate.)

The bottom line is, make sure you understand the new rules and how they will affect your purchasing power. It is a good idea to get pre-approved before you start house hunting. The last thing you want is to find the home of your dreams and then find out you don’t qualify for the mortgage.

Have a great weekend,

Tracey

 

Source: Original article by Christine Hauschild, Sales Representative, Royal Lepage Ottawa, Ratesupermarket.ca, The Bank of Canada

Image courtesy of Stuart Miles at FreeDigitalPhotos.net