Sorry everyone, but it’s going to get a lot harder for some first-time buyers to get a mortgage now. This is all thanks to the Office of the Superintendent of Financial Institutions decisions to introduce new rules on mortgage lending. These new rules will hit first-time buyers, and those thinking of refinancing their homes, the hardest.
What you need to know:
1. Stress Test
Before this new, tougher rule, only buyers that had a down payment of less than 20% had to make sure they could pass a stress test. Now, it’s all buyers.
With the new stress test, potential home buyers need to qualify for a mortgage at a rate that is the greater of two indicators:
- 2% higher than the mortgage rate you qualified for, or
- The Bank of Canada’s five-year benchmark rate.
Regardless of how much money you save, if you don’t pass the new stress test, you won’t get a mortgage. Sucks, right?
One positive is that if you are renewing your existing mortgage, the new rules do not apply as it is not a new loan agreement. However, if you’re choosing to refinance your mortgage, the new rules will make it more difficult to negotiate terms.
2. Enhanced Loan-To-Value (LTV) Measurements
Traditional mortgage lenders need to ensure the LTV ratio remains dynamic — meaning it needs to be adjusted to local market conditions. This ratio is a number that describes the size of a loan compared to the value of the property, and is used to determine how risky the loan is.
The LTV ratio could be affected by things, such as property values decreasing following a housing bubble.
3. Certain Restrictions Placed to Avoid LTV Limits
Mortgage lenders are not allowed to arrange a mortgage with another lender that gets around the maximum LTV ratio, or other limits placed on residential mortgages. Previously, you could partner with a second lender to achieve a higher LTV ratio. Under the new rules, you can’t do that anymore!
With the tests in place, it is estimated that it could lower a family’s purchasing power by up to 21%. It’s important you contact a professional should you have any questions or concerns about your personal finances. We at KBH could help you consider options on something besides a detached house, such as a townhouse house or a condo. Or, have you thinking about acquiring a co-signer to qualify under the newer, stricter rules.
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