If you haven’t heard yet, there were some big changes to the way anyone with less than 20% down payment qualifies for mortgages as of October 17, 2016. The main change is that anyone who is getting a mortgage with default insurance will now have to qualify at a rate called a Benchmark rate, which is currently 4.64%. You would still get the lowest rate for your actual mortgage which lets say is around 2.39%.
Default insurance is something anyone with less than 20% down payment must pay. It protects the lender from you if you default, they get reimbursed any shortfalls. It is sometimes called CMHC or Genworth insurance although there are three insurers in Canada (CMHC, Genworth and Canada Guaranty). This is a cost everyone in Canada pays with less than 20% down payment and sometimes for other special programs that charge it above a 20% down payment. Some lenders will pay the insurance premium themselves when a client puts down 20% or more and this is called low-ratio insurance or back-end insuring. You don’t see the cost but the lender is making sure the mortgage is insured. The new rules will also affect the way those lenders do business.
Most major banks such as TD or Scotia do not backend insure when a client puts down 20% or more as they don’t have to. It is mostly mono-line lenders which will be majorly affected, which are lenders who just focus on mortgages and no other products. Most of these you would not be able to walk into a branch. Some of the larger ones are currently First National and Street Capital.
How the new mortgage rules may effect you
This is the main rule change as the government wanted to slow down leading markets such as Vancouver and Toronto.
An example of how this will affect someone is the following:
- $70,000 income
- No debt and great credit
- 5% down payment with a rate of 2.39% on a 5 year fixed, 25 year amortization
- Before October 17 rules would qualify for approximately $450,000 purchase price
- After October 17 rules they now qualify for approximately $350,000
I have included a chart of how much different incomes will qualify for based on no debt with the new stress test. Please see below:
I hope this helps clarify the new stress test rule change. Please don’t hesitate to contact me with any questions.