Canada’s New, Tough Mortgage Rules Effective January 1, 2018
The Office of the Superintendent of Financial Institutions Canada (OSFI) announced a number of new mortgage rules which came into effect on January 1, 2018. The new rules, which affect all Canadians renewing or refinancing a mortgage, will require people to pass a stress test to prove that they can handle interest rate hikes that are significantly higher than their current rate—even if they never actually reach those lofty levels. The new, wide ranging changes, apply to all federally regulated financial institutions.
If you’re thinking of refinancing or renewing a mortgage, the new mortgage rules will make it very difficult o renew with a new lender. Even if you stick with your current lender, you may not be able to refinance as much as you were hoping to; you might also get stuck renewing a mortgage with uncompetitive rates.
A stress test helps banks determine how much of a mortgage you can afford under certain circumstances. The stress test doesn’t really work in your favour; it’s the big banks way of seeing how you’d do in a worst-case scenario.
For example, could you still afford your mortgage payments if interest rates increased, your income was reduced, you lost your job, or were hit with an unexpected expense?
According to the OFSI, the stricter stress test will make the Canadian real estate market more stable. But critics say the new stress test will hit those looking to refinance the hardest.1
Federal, provincial, and local government regulations can also damage the broader economy as fewer homes are renovated, purchased, and furnished.
The loan to value ratio is a number that measures the value of a mortgage as a percentage of the total value of the property. Traditional lenders, like Canada’s big banks, need to ensure the loan-to-value (LTV) ratio is adjusted to local market conditions. The higher the LTV ratio, the riskier the loan.
For many financial products, including a mortgage, line of credit, or home equity loan, the LTV ratio had to be lower than 80%. In other words, you could only get a financial product if you had built up at least 20% of equity in the value of the property.
For example, if the total appraised value of a home you were looking at buying was $450,000 and you saved up a down payment of $90,000 (or 20%), the total mortgage loan amount you would want is $360,000 ($360,000/$450,000), or an 80% loan-to-value (LTV) ratio.
If you saved $50,000 (or 11%) for a down payment on the same house, you would be looking at a mortgage of $400,000 ($400,000/$450,000) or an LTV ratio of 88%.
Depending on market conditions, the LTV can either rise or fall. Ideally, it falls because the value of the house increases as you pay off the mortgage. But, if the housing market suffers a correction, the LTV ratio could rise and be higher than the total value of the property.
How Does This Impact Canadians?
Under the old LTV ratio rule, if you were renewing a mortgage, you did not have to pass a stress test. If you were refinancing, the maximum amount of equity you could tap was 80%.
Under the new guidelines, if you’re renewing a mortgage, you technically do not need to pass the more stringent stress test requirements. But the banks could still vet you. If you fail, you could be stuck renewing with the current financial institution or have to accept uncompetitive rates.
If you’re looking to refinance a mortgage to consolidate debt, you’ll have to qualify according to the higher stress test rates; not the mortgage rate you initially secured. This means the lender will stress test your loan adding two percent to the initial five-year fixed rate. If you have a mortgage with a five-year fixed rate at 3.3%, you’ll be stress tested at 5.3%. This means you might be stuck getting a smaller loan.
If you’re looking to refinance a mortgage, the new mortgage lending rules mean it will be a lot more difficult to qualify for your refinance. As a result, you may not be able to refinance until you build up more equity.
Canada’s stricter lending rules will also make it tougher to qualify for a home equity line of credit (HELOC). Again, that’s because the big banks need to stress test you by adding two points to the current “benchmark rate” when you apply.
Canadalend.com, the Mortgage Refinancing Experts
Starting January 1, 2018, all borrowers in Canada have to pass a strict stress test if they’re borrowing from a federally regulated financial institution. Fortunately, Canadalend.com can help circumvent those rules and get you the mortgage or other financial product you deserve.
The licensed mortgage professionals at Canadalend.com are independent. That means they can help you find a mortgage with the best rates and terms. How can Canadalend.com beat what the big banks are offering? Where banks are stuck providing their own financial products and legally need to follow the new OSFI mandated stress test, Canadalend.com has access to hundreds of different private lenders; lenders that do not follow the same rules.
If you’re looking to secure a first mortgage, renew a mortgage, or refinance, contact Canadalend.com today. We’ll evaluate your current financial situation and help you find a lender that can provide you with a mortgage that suits your financial and lifestyle needs. Or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.
1.“New mortgage rules could disqualify 10% of buyers with big down payments: Bank of Canada,” The Globe and Mail, November 28, 2017; https://www.theglobeandmail.com/report-on-business/new-mortgage-stress-tests-could-disqualify-10-of-buyers-bank-of-canada/article37109981/.