Life and the City | Toronto Real Estate Team

Q&A Series: How the New Mortgage Rules Might Affect You

This post is a part of our ongoing Q&A Series in which we address various hot topics relating to the GTA real estate market, about real estate in general, or about our Team.   

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In 2017, Canada posted year-over-year residential price gains across most regions. Now in 2018, many housing markets could see reduced purchasing power resulting from the new OFSI mortgage rules (or the so-called "stress test") that took effect on January 1st. We highlighted the changes in a previous Q&A Series post.

Here’s the condensed version of the new mortgage rules, how they may affect you, and how to forge ahead with purchase plans.

Last October, Canada’s federal financial regulator announced that all uninsured mortgage borrowers (those with a down payment of 20% or more) must now qualify against the Bank of Canada’s five-year benchmark rate (currently 4.99%), or at their contractual mortgage rate, plus 2%. This, in an effort to ensure borrowers can service their mortgage debt when interest rates rise – which experts predict will happen this year.

The new mortgage qualification rules follow a similar stress test that was applied to insured mortgages with less than 20% down payment, in October 2016.

These new rules are expected to have the greatest impact on first-time homebuyers in many major areas across the country, including the Greater Toronto Area. But not everyone will be affected.

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The mortgage rules may not affect you if:

  • you qualify at the higher rate – as of now, 6.99 per cent;
  • you were pre-approved for a mortgage before on or before December 31st, 2017;
  • your mortgage refinancing agreement was arranged on or before December 31st, 2017;
  • you signed a purchase agreement on or before December 31st, 2017.

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Mortgage Professionals Canada reported that 18% of homebuyers, or approximately 100,000 people, will not qualify for a mortgage on their preferred home under new rules. Between 50% and 60% of them will be able to adjust their expectations – and budget.

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Tips on building a budget to purchase a home

  1. Maintain a financial buffer of at least three to six months, to soften the blow of interest rate increases and unexpected bumps in the road.
  2. The mortgage you qualify for and what you can actually afford are two very different things. Look at your lifestyle, now and in the future, and consider how your mortgage payments and ongoing home costs will impact you. When buying a home, you might have to make some compromises on lifestyle in the interest of homeownership, so decide on what you'd be willing to compromise, should the need arise.
  3. Buying a home involves more than just mortgage payments. Make sure to factor in ongoing expenses, including maintenance, home insurance, property taxes, and utilities, when deciding how much to save for a home. Check out our guide to organizing your finances for a home purchase to get you started.

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Once you've established a budget, here's what else you should consider to ensure that you're in the best position to handle the new mortgage qualifying regime.
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Clear your debts

Any debt you are carrying will affect the mortgage you can qualify for, so you should do your best to eliminate any credit card or outstanding loan debt before trying to arrange a mortgage.

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Check the fine print

Some experts had urged clients who were going to hunt for a new home early in 2018 to lock down a pre-approval for a mortgage before January 1st. Some lenders offered an exemption to the new stress test if you bought a home within 120 days of being pre-approved.

If you were pre-approved at that time with the 120-day window, you should talk to your mortgage broker to get a clear understanding of the deadline and what it will take to meet it.

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Make adjustments

All levels of buyers - whether they are first-time, repeat or move-up buyers, and at any budget - will likely have to make some adjustments to their plans.

Many have to accept that they can afford “a little bit less house” than previously.

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Timing is key

You may be exempt from the new rules if any of the following applies:

  • If you signed a contract to buy a pre-construction condo before January 1st that you have yet to move into, you’ll still fall under the old rules.
  • If you purchased a property prior to January 1st (even if you close after January 1st), you will be grandfathered into the old mortgage policy, but you need a firm offer to purchase prior to January 1st
You may also be able to circumnavigate the stress test if you nabbed a mortgage from an alternative lender, such as a credit union, which doesn’t have to apply the test because it falls outside the regulations covering banks and other traditional lenders.

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Each buyer's situation is unique. Don't let the new mortgage rules put you off from considering a purchase this year - we can help you understand your options. Fill out the form below or call us at 416.465.7850.

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