Before we get into the whole concept of stress testing, we first have to understand the term “Mortgage Qualifying Rate”. Also known as the “Benchmark Rate”, this is essentially the average of all the major banks’ 5-year posted rates (the mortgage rates you see on their websites). This number is calculated by the Bank of Canada and is, on average, 2% higher than the rate you would pay on a 5-year fixed mortgage.
Since 2010, the Department of Finance has required banks to “stress test” high ratio buyers (or buyers with less than a 20% down payment) by making sure they qualify under the Mortgage Qualifying Rate. This stress test was reserved for homebuyers who were applying for variable rate mortgages, or fixed mortgages with terms that were less than five years. If you were a high ratio borrower applying for a five-year fixed mortgage, you were exempt.
The ultimate purpose of the stress test was to ensure buyers weren’t caught off - guard if rates went up—either during the term of their variable rate mortgage, or upon renewing their fixed rate mortgage.What's changing?
On November 30, 2016, the government broadened the stress-test requirements. Effective on that date, all insured borrowers (both low and high ratio) will be required to qualify under the Mortgage Qualifying Rate—even those applying for five-year fixed mortgages. Low ratio borrowers (or those with more than 20% down) that don’t require insurance are still exempt from the Mortgage Qualifying Rate.Important Information To Note On Low Ratio Mortgages
The new “stress test” rules only apply to mortgages obtained from lenders that bulk insure their loans. Bulk insurance, or portfolio insurance, is a tool used to protect lender portfolios from defaults. If you obtain a mortgage from a lender that does not use bulk insurance, they will continue to qualify your 5-year fixed rate mortgage according to the contract rate (or the rate you’d actually be paying).
The catch is that it’s hard to tell the difference between a lender that uses bulk insurance and one that doesn’t. Fortunately, your mortgage broker is here to help.
To acquire insurance for conventional (or low ratio) loans, lenders will have to meet an unprecedented number of eligibility requirements. This means a home must be owner-occupied, with a maximum 25-year amortization, and a maximum purchase price below $1,000.000. The buyer’s credit score must be at least 600, maximum gross debt service (GDS) 39%, and total debt service (TDS) of 44% based on the Mortgage Qualifying Rate. Also, refinances no longer qualify—only mortgage loans for purchases and renewals can be bulk insured.
If a lender can’t qualify for insurance, they’re going to be less likely to take on certain loans. Or, the cost for those loans will increase, which means increased rates for the consumer.
Right now, if you make money off of selling your primary residence, you do not have to report it as income—and the capital gains tax is waived. While this is still the case, as of this tax year individuals who sell their primary residence must report the sale to the Canada Revenue Agency at tax time. This move is designed to deter foreign buyers from illegally claiming a primary residence tax exemption for homes that aren’t their primary residence.How will all of these changes impact you?
For many homebuyers—particularly first-time buyers— qualifying for a mortgage just got more dififcult. With access to many different lenders and extensive mortgage knowledge, your Axiom mortgage broker can help you navigate this new terrain. If you’d like to discuss the new rules in detail—or figure out how they may impact your specific home buying or renewal process— please don’t hesitate to contact me. I can help.