2018 Forecast: New Mortgage Rules Beginning January 1st

Latest News Krishna Menon 17 Nov

According to the Royal Bank of Canada, new mortgage rules expected next year with lead borrowers into the arms of unregulated federal lenders. Beginning on January 1, 2018, Canadian homebuyers will be required to meet stricter guidelines if they hope to qualify for a mortgage with an Canadian mortgage lender.


The Office of the Superintendent of Financial Institutions Canada (OSFI) has now confirmed that as of January 1st, all borrower will have to qualify for a mortgage with interest rates 2 percent higher than the rates they are applying for. This applies to “all” borrowers, even if you have a 20 percent down payment.


This new rule will be enforced in hope of decreasing household risks as interest rates continue to rise, especially for households with a high level of debt. In the long-term, risks will be reduces as a result. However, in the short-term, these rules will definitely rock the market, because most people don’t have insured mortgages, including nearly half of bank mortgages.


It’s hard at this point to predict the impact on the housing marketing, as the impact is really dependant on how many borrowers switch to unregulated federal lenders, that are exempt from this new rule. This include lenders such as credit unions and Caisses Populaires.


Until the end of 2017, RBC does expect there to be a rush of homebuyer activity, as homebuyers attempt to qualify for mortgages before these new rules take effect. After, it takes effect, RBC also anticipates that the rush in traffic will die down with minimal impact on the Canadian housing market.


According to a study released by the Fraser Institute, loan prices will increase and less people will be eligible to qualify for mortgages, resulting in doing more harm than good.


With this rule, also comes a requirement for a “stress test” which all borrowers must complete to ensure they could remain undamaged or unaffected by the higher interest rates. Only insured buyers with less than 20 percent down were tested previously, however now all borrowers will be tested. The stress test is meant to ensure that borrowers would be able to pay their loans if interest rates become higher.


Basically the test will simulate the financial situation of a borrower, assuming they’d pay back their loan at the posted average, instead of the negotiated. Borrowers will be tested at 2 percent higher than their actual mortgage rates or at the 5-year average posted mortgage rate. It all depends on whichever is higher.


If your mortgage is up for renewal in 2018, stick with your existing lender. Then there is no need to worry as you will not have to undergo stress testing, as these new rules would not apply to you.


The new rules will now also require that lenders be more critical in observing and examining loan-to-value (LTV) ratios of the loans they approve. This requirement will be in place to ensure that mortgage loans aren’t higher than LTV of the home itself.


When and How to Get a Mortgage Pre-Approval in Ontario

First Time Home Buyer Krishna Menon 1 Nov

In order to save time and avoid issues that arise when buying a home, you need to get a mortgage pre-approval. It’s a vital step in the home buying process that should not be overlooked. This step is basically the determining factor of how much you can afford to spend on a home, which will provide you with your shopping budget. Mortgage rates can sometimes increase during your home search, so another great benefit to get pre-approved for a mortgage is you can lock in your mortgage rate.


Mortgage Pre-Approval: What Is It?


To put it simply, a pre-approved mortgage is a process, that gives you access to the vital information you’ll require during your home search, such as:


  • How much you can afford to spend on a home
  • The amount on your monthly mortgage payments (based on your maximum purchase price)
  • First term mortgage rates


There is no cost to getting pre-approved for a mortgage in Ontario, and there is also no requirement to commit to a particular lender. However, it’s important to keep in mind that just because you get pre-approved, that doesn’t mean your mortgage interest rate is guaranteed. You need to lock in your rate. This will protect you, should interest rates rise. Also, just because you lock in your rate, that also doesn’t mean that if rates drop, you won’t reap the benefit. Most times your lender will honour the rate drop too.


Why You Need a Mortgage Pre-Approval


There are several benefits to getting pre-approved for a mortgage, including:


  • Saved time during your home search allowing to only search for homes that are within your price range
  • It shows your real estate agent that you’re serious about buying a home
  • Makes your service experience more pleasurable, as it’s both faster and extremely targeted
  • Tells sellers that you won’t have an issue in financing the sale, improving your chances to compete with other offers on the table
  • Allows you to lock in a rate, while still having the ability to get a lower rate if rates fall during your home search


How-to Get a Mortgage Pre-Approved


In order to get a mortgage pre-approved, you’ll first need to meet with a mortgage broker. A mortgage broker has access to a network of lenders and they are the best resource to have on your side. They’ll help you determine your budget and collect or gather any supporting documentation you’ll require.


  1. Your Credit Score. Lenders will want to measure your financial health so they can determine the level of risk associated with lending you money for your home purchase. Quite often if your credit score falls between 680 and 900, you can qualify for a mortgage. You’d qualify to borrow from an “A” lender, which could be a well-known financial institution such as BMO, TD Canada Trust, etc. However, if you’re credit score falls between 600 and 680, then lenders may look at other financial details in order to determine if you’ll qualify for either an “A” lender, or a “B” lender. Now, should your credit score fall below 600, you’d only qualify to borrow from a “B” lender, and you most likely won’t get the best mortgage rates offered today.
  2. Your Down Payment. Your down payment requirement could range from 5 to 20 percent. If you pay down 20 percent or more, then you won’t have to purchase mortgage default insurance. But, anything less than a 20 percent down payment would require an additional mortgage insurance purchase, for lender default protection.
  3. Your Debt Service Ratios. Lenders will determine your maximum monthly mortgage payment by calculating your debt service ratios. These calculations include factors such as you income per month, monthly expenses and your monthly debt payment amounts and over, as well as overall debt. They basically want to ensure your can afford your monthly mortgage payments.
  4. Supporting Documents. The documents you’ll need to provide to your mortgage broker for your mortgage pre-approval can vary. It all depends on the mortgage broker and lender you choose to work with. However, just to give you an idea, here are some of the documents you may be asked to provide:


  • Your ID
  • Income proof such as pay stubs, an employment letter, or your income tax assessment
  • Banking financial and other investment statements – shows you have your down payment covered and that you can cover any closing costs
  • Proof of any/all assets
  • Any/all documentation in relation to your debts


To start your pre-approval now, get in touch with us today.