The Federal Government has recently changed the qualifications for insured mortgages.
Effective October 17, 2016, all home buyers will now have to qualify at the 5 year posted rate, as opposed to the way it has previously been where you’d only have to qualify for the variable rate, or even for a rate that was given for a term less than 5 years.
Currently, home buyers would need to qualify for the Bank of Canada posted rate of 4.64% for a 5 year term. That is considerably higher than the best rates banks are offering, which are around 200 basis points lower.
Qualifying for mortgage insurance means that a buyer’s Debt Service Ratio must be lower than:
- Gross Debt Service – 39% of the household income (The percentage of gross annual income required to cover payments associated with housing. Payments include mortgage principal, interest, property taxes and sometimes include secondary financing, heating, strata fees or pad rent)
- Total Debt Service – 44% of the household income (all of the above, PLUS any other debt payments you may have)
These changes will apply to NEW mortgage applications received after October 16th.
They WILL NOT apply to mortgage loan applications where:
- The application was received before October 3rd
- There’s a legally binding deal between the lender and the buyer already in place
- The buyer is already in a legally binding deal to purchase a home in which the loan is secured
Mortgages for applications received between October 2 and October 16th 2016 are also not affected as long as the mortgage is funded before March 1, 2017.
As a side note, home owners that have an existing insured mortgage under the previous rules, or those renewing existing insured mortgages are also not affected.
For those of you that are low ratio (more than 20% down payment) but still need their mortgage to be insured, the Federal Government will be instituting new rules as of November 30th and new mortgages must meet the following requirements:
- A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan;
- A maximum amortization length of 25 years;
- For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once every five years to conform to the original amortization schedule;
- A minimum credit score of 600 at the time the loan is approved;
- A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent at the time the loan is approved, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate; and,
- A property that will be owner-occupied.
The Bank of Canada hopes that these new criteria will help to lessen the load on Canadian taxpayers for insured mortgages that are defaulted on, but will also make it tougher for first time home buyers to get into the market.
Time will tell if it’s a good move.