Changes in Canadian Mortgage Laws

Changes in Canadian Mortgage Laws

It is vital to make sure you’re up-to-date on the new mortgage law in Canada whether you’re a first-time homebuyer, or an existing homeowner planning to switch or refinance. Consider these following tips if you’re looking for a new home. 

Mortgage Stress testing in Canada

In January 2018, the Canadian government introduced the stress test which required banks to determine whether borrowers could make their payments at a higher rate than they will actually pay. The stress test was used to see whether a borrower can handle an increase in the interest rate on their mortgage.

An applicant must pass the stress test to qualify for a bank loan regulated by the federal government. Buying a home at a qualifying rate requires homeowners to prove their ability to repay it. 

Current mortgage qualification rates are derived from either the Bank of Canada’s five-year benchmark or the lender’s interest rate plus 2%, whichever is higher. Therefore, it’s important to find the best private mortgage lenders in Canada.

When a homebuyer has a down payment of less than 20%, the interest rate they qualify for is the interest rate offered by their lender plus the five-year benchmark interest rate set by the Bank of Canada.

Stress tests are also conducted when a homeowner refinances, takes out a secured line of credit, or changes mortgage lenders. Stress tests however is not be required for those who renew with the same lender.

Below we have broken down the recent changes made in Canadian mortgage rules.

Qualification rate

In the new CMHC rules, borrowers with default-insured mortgages will be able to carry less debt. Once other debt is taken into account for mortgage applications, mortgage borrowers will only be able to borrow up to 42% of their gross income as opposed to 39% and 44% previously.

Credit score

Borrowers will also have to have at least a 680 credit score (good). Purchasing a home with a partner requires having a 680 credit score. This is an increase from the previous requirement of a 600 credit score (fair score).

Down payment

A down payment must now be paid with the buyer’s own funds instead of borrowing. Hence, unsecured personal loans, unsecured credit cards, and unsecured lines of credit can no longer be used to fund a down payment on a home.

Insured mortgage defaults are required for home buyers with less than 20% down payment. Mortgage default insurance is not available for properties valued at more than $1 million.

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Total monthly housing costs

You should not exceed 39% of your gross income as your total monthly housing costs. A gross debt service ratio is also called the gross debt service ratio (GDS). Even if you have a slightly higher GDS ratio, you may still qualify for a new mortgage law. 

In other words, if you have a high GDS ratio, you are more likely to take on more debt than you can pay off.

Mortgage loan insurance pays back the mortgage lender if you do not meet your mortgage payment obligations. When you purchase a house, it is possible to pay the mortgage loan insurance premium, which is usually incorporated into the amount of the mortgage loan.

Closing Thoughts

People will have different perspectives on the recent mortgage law. Many first-time homebuyers, sellers, and realtors will despise the added hassle.

In my opinion, it’s a mixed bag: on the one hand, a healthy and stable housing market is preferable; on the other hand, many young people and new immigrants may have a more difficult time becoming homeowners. Overall, a slower housing market will benefit qualified new home buyers.

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