Changes to Federal Financing Rules Will Affect Your Clients
| October 04, 2016
On October 17, 2016, new federal mortgage financing rules come into effect, including a higher qualification rate, which will apply to all borrowers seeking insured mortgages. The federal government designed the changes as a “stress test” to ensure borrowers could continue to make their mortgage payments in the event interest rates go up in the future.
Basically, this change means that buyers applying for an insured mortgage have to prove they can afford mortgage payments at the Bank of Canada posted rate, even if their lender is offering and has approved them for a lower mortgage rate. Since many Canadian residential mortgages, especially for first-time buyers, are high-ratio, insured mortgages, this change may affect many of your buyer clients.
Even if a lender qualifies or pre-approves your client for an insured mortgage at a rate significantly lower than the Bank of Canada posted rate, that client must qualify for their mortgage at the higher rate. If they can’t qualify at the higher rate, they won’t be approved for their mortgage.
Let’s do an illustration to show how this could affect your buyer clients.
Imagine a $400,000 property. The buyer has $60,000 to put as a down payment; that’s less than 20% of the purchase price – so it’s a high-ratio mortgage that requires mortgage insurance. As such, it’ll be subject to the new qualifying rules.
A lender approves your buyer for a mortgage rate of 2.5%, locked in for five years, with a 25-year amortization period. At their approved mortgage rate, their monthly mortgage payment is $1523.08. An affordability calculation assuming $2,400/year for property taxes and $200/month for heating costs shows that buyer would need an approximate annual income of $57,500 to afford and be approved for that mortgage.
Under the new rules, a lender needs to make sure your buyer can “afford” that mortgage at the Bank of Canada posted rate, which, right now, is 4.64%. For that $400,000 property, with a $60,000 down payment at the higher rate of 4.64%, the monthly mortgage payment is $1,908.36. Doing an affordability calculation at the higher mortgage rate/monthly payment, the buyer would need an annual income of $69,000 to be approved for that mortgage.
That 2% difference in mortgage rate makes a huge difference in the monthly mortgage payments and therefore, the ability of borrowers to qualify. You are likely working with buyers right now who have pre-approvals for a mortgage, but they may find that pre-approval withdrawn by the lender given these changes.
Speak to your clients about this change as soon as possible. Encourage them to talk to their lender or mortgage broker, and go through the process of using the new qualifying rules to find out if they still qualify for the mortgage they want and need.
See the Department of Finance Announcement on the Government of Canada’s website.