On Monday, October 3, 2016 the Bank of Canada announced that as of October 17, 2016 any insured mortgage applications must be qualified at the benchmark rate (which is currently set at 4.64%). As of right now only variable mortgages, or mortgages with terms shorter than 5 years, are qualified at the benchmark rate. All mortgages that are 5 years or longer are currently qualified at the contract rate (which is the actual mortgage rate your mortgage is subject to).
What Do The Changes to Mortgage Approval Requirements Mean?
These changes can potentially impact a wide variety of home buyers.
Home buyers that are currently pre-approved and are at their maximum qualifying ability based off the five-year rate may be affected. These home buyers will need to submit accepted purchase agreements to their lender(s) no later than October 16, 2016 in order to qualify for a mortgage under their pre-approval terms.
Home buyers that do not have an accepted offer by October 16, 2016 will need to have their pre-approval terms re-assessed and adjusted to meet the new guidelines.
Essentially, insured borrowers (mortgage applicants with a down payment of less than 20%) must now qualify at an interest rate that is currently 2% higher than today’s actual competitive rates. While these changes do not affect how much your mortgage costs (since your mortgage will still be funded at the competitive rate) it does change how high a mortgage you qualify for.
Current Deals In Progress That Are Approved By Your Lender Are Not Impacted
Home buyers that already have a home purchase underway, and have secured the approval of their lenders, will not be affected by these new changes. However, these changes do affect pre-approvals. In order to qualify under the old terms, you must have a property tied to the deal on or before October 16, 2016.
How Does This Impact Mortgage Renewals?
Individuals with high-ratio mortgages (that is, mortgages where you still owe more than 80% of your home’s value) may find their options for their mortgage renewal are impacted by the new rules.
Individuals who are renewing with their existing lender are not subject to these new requirements. However, individuals who are seeking to refinance with a new lender will need to qualify based on the new rules.
How Do The New Mortgage Qualification Rules Impact Home Affordability?
The new rules impact the size of a mortgage an individual is allowed to take on. For example:
Under the old rules
A household with an income of $70,000 currently qualifies for a home with a purchase price of $450,000 with a 5% down payment of $22,500 at a 5 year fixed rate of 2.39%
Under the new rules
The same household now qualifies for a purchase price of $360,000 ($90,000 less than before) with a 5% down payment of $18,000 at the Bank of Canada benchmark rate of 4.64%.