The new rule changes for mortgages set out by the federal government beginning January, 2018 will effect anyone with an “uninsured mortgage”. This means any mortgage in which a person is not paying mortgage default insurance on (also known as CMHC fees, although there are 3 insurers in Canada, not just CMHC). Beginning Jan 1, 2018, uninsured mortgages will have to qualify at the contract rate (the actual interest rate you are getting) plus 2%. For example, if the interest rate is 3.19% for a 5 year fixed mortgage, a person would have to qualify as if the rate was 5.19%, even though the rate they get is 3.19% and payments are based on 3.19%.
Prior to Jan 1, uninsured mortgages only had to qualify at the rate they were getting, in this case, 3.19%, which allows for a higher maximum mortgage amount.
Purchases with 20% down or more, anyone looking to refinance, and mortgages that are coming up for renewal that were not previously insured are going to be effected by the new qualifying rule.
When purchasing a home with 20% down or more, a person does have the option to pay the mortgage insurance which would allow them to qualify at 4.99% and likely get a lower interest rate since insured mortgage have more favorable rates. The hefty premium of 1.25% of the mortgage amount will likely turn a person off from opting for the insured mortgage if you have the full 20% down. The savings in interest by getting the lower interest rate is usually offset by the mortgage premium added to the mortgage and lumped in with higher payments. One of the biggest benefits to having the full 20% down is the ability to amortize the payments over 30 years, rather than 25 years (which is the max for insured mortgages) which significantly reduces the payments.
If your mortgage comes up for renewal and you simply sign the renewal forms sent by your current lender, you will be unaffected by the changes. If you see a lower rate offered elsewhere and wish to switch lending companies (which is FREE to do!), and your mortgage isn’t insured (IE you didn’t pay “CMHC fees” originally, then you would have to qualify with the new rules.
Refinancing automatically places you in the category of qualifying under the new rules. This, in my humble opinion will be the group most noticeably effected by the new changes. Typically when someone is refinancing, it is to take equity out of their home to pay off debts, or purchase a second property (second home, rental, cottage at the lake, etc) which means the debt servicing ratios are going to be higher than others (in non-mortgage lingo, that means a higher percentage of a person’s income goes out towards debts than others with little or no debt) which means they are closer to the max of their borrowing power and qualifying at a higher interest rate will reduce that max mortgage amount.
The changes aren’t all doom and gloom. Keep in mind absolute MAXIMUM purchase price is reduced, so if you are not at your max and you have 20% down, chances are, you can still qualify for the home you have your eye on, but your debt servicing will just be slightly higher on paper. Let me do the worrying about how to get you qualified for the mortgage you want.