October 17, 2016 Mortgage Qualification Changes
On Monday October 3, 2016 the Bank of Canada announced that as of October 17, 2016, any insured mortgage applications must be qualified at the benchmark rate (currently at 4.64%). As it sits today, only variable mortgages, as well as any term shorter than 5 years, are qualified at the benchmark rate; any mortgage 5 years or greater is qualified at the contract rate (actual mortgage rate.)
What Do The Changes to Mortgage Approval Requirements Mean?
- If someone is currently pre-approved and they are at their maximum qualifying ability based off the 5 year rate they will need to submit an accepted purchase agreement to the lender(s) no later than Oct 16, 2016 to qualify
- If a pre-approved client (above) does not write an accepted offer by Oct 16, 2016 the pre-approval will need to be adjusted
Essentially, by forcing insured borrowers (any mortgage applicant using a down payment of less than 20%) to qualify at an interest rate a full 2% higher than today’s actual competitive rates. While this doesn’t impact how much your mortgage costs (your mortgage will still be funded at the competitive rate available today), it does change how much home you can “afford”.
Current Deals In Progress That Are Approved By Your Lender Are Not Impacted
If you have a home purchase underway, with an approval in place by your lender, that transaction will continue unaffected. However, this does impact pre-approvals: you must have a property tied to the deal on or before the 16th to avoid being subjected to the new rules.
How Does This Impact Mortgage Renewals?
If your mortgage is still a high-ratio mortgage (you owe more than 80% of the home’s value), this change may influence your available choices when it comes time to finalize your mortgage renewal.
It’s important to note that renewing with your existing lender will not subject you to these new requirements. However, if you are seeking to refinance with a different lender, you will need to qualify based on the new rules.
How Do The New Mortgage Qualification Rules Impact Home Affordability?
- Today: a household income of $70k would qualify for a purchase price of $450k with a 5% down payment ($22,500) at a 5 year fixed rate of 2.39%
- As of October 18, that same household income would qualify for a purchase price of $360k with a 5% down payment ($18k) at the Bank of Canada benchmark rate of 4.64%
Who Do These Changes Impact?
Unfortunately, the biggest segment of the market that will feel the impact of these mortgage changes are first-time homebuyers. To avoid these new qualification requirements, you will require at least a 20% down payment. On a typical $450,000 Calgary home, this means using $90,000 as a down payment.
Understandably, the far-reaching implications of these changes are causing many people to express their concerns.
The Devil is in the Details… And They Aren’t Out Yet
We are still awaiting clarification from the Department of Finance and the Bank of Canada regarding some of the finer details- as we learn more we will update our partners and clients.