Effective June 1st 2021:
On May 20 2021, the Office of the Superintendent of Financial Institutions (OSFI) released revised guidelines for residential mortgage underwriting at all federally regulated financial institutions. Beginning June 1, 2021, a new ‘stress test’ will be applied to all new conventional mortgages – and not just those mortgages that require mortgage insurance (downpayment or equity of less than 20%).
The so-called “stress test” is created and designed to “hopefully protect homeowners” (according to OSFI) should interest rates rise. Institutional Lenders will be obligated to qualify all new conventional mortgages at the greater of 5.25% interest rate, OR the institutional mortgage commitment rate plus 2%. So if your mortgage commitment rate is 3.29%, you will be qualified at 5.29%.
Here’s what that might mean for you:
To buy a home with more than 20% down, your payments will always be based on your mortgage commitment rate so this new rule isn’t costing you more. However, the new rule might change how much mortgage you qualify for. If that’s the case, you may need to look at a less expensive home, save up for a larger downpayment, or reduce any other debt. Or we can take a look at a variable rate mortgage that lowers your qualifying rate (if the rate plus 2% is less than the 5.25%) and has the option to convert to a fixed mortgage.
You want to refinance to pay off debt or buy an investment property. Here too, your actual mortgage payment will not be affected. But the new rule could slow you down by making it more difficult to qualify for your refinance. You may need to wait and accumulate more equity, or look at a lower-rate variable mortgage. If that refinance is important to securing your own financial health, get in touch ASAP.
Your mortgage comes up for renewal next year. This more stringent qualifying requirement will not apply to mortgage renewals. If you go shopping for a better deal with a new lender, however, that will require that you re-qualify… and the new rule will kick in for you too. It still is very important that we review your options together.
Please contact us for a no-charge consultation to find out what mortgage type is best for your individual situation. For comparative information we are providing you with a link direct to the Bank of Canada exchange rates: www.bankofcanada.ca/rates/daily-digest/
NOTE: Before January 1, 2016, if your mortgage is for $300,000 or less, the Mortgage Brokerage cannot accept or require you to make an advance payment or deposit for any expenses or services that will be offered by the Mortgage Brokerage or one of its employees. You do not need to make any payment or deposit until you sign your mortgage agreement (for new mortgages) or enter into a new mortgage renewal agreement (for mortgage renewals).
Conventional Mortgage
High-ratio Mortgage
Second Mortgage
Variable vs. Fixed Mortgages
Variable Rate Mortgages
Residential mortgages can be divided into conventional or high-ratio mortgages.
A conventional mortgage is usually when a borrower can cover 20 per cent or more of a home’s purchase price with the down payment. This means the loan they are paying down is equivalent to 80 per cent or less of the value of the home. In this case, the borrower does not require mortgage insurance. However, a particular lender may request mortgage insurance, even if the home buyer is putting more than 20 per cent down (low ratio mortgage.)
As of November 30, 2016, home buyers applying for low ratio mortgages on which the lender requires insurance must meet certain rules to get insured, including a mortgage amortization of 25 years or less, a home purchase price of less than $1 million and a credit score of at least 600. They must also plan to live in the home.
A high-ratio mortgage is when the borrower contributes less than 20 per cent of the purchase price in their down payment. The minimum down payment is five per cent on the first $500,000, 10 per cent on any amount over that. High-ratio mortgages are more risky for both the home buyer and the lender. As the mortgage will account for more than 80 per cent of the purchase price, the home buyer must obtain mortgage insurance. The insurance premiums are calculated based on the loan-to-value ratio of the mortgage: the lower the down payment, the higher the insurance costs will be.
All home buyers with an insured mortgage, regardless of down payment amount, are subject to a stress test that assures mortgage lenders that the home buyer would still be able to afford the mortgage if house prices or rates increase in the future. As well as qualifying for the mortgage loan at the rate offered by the lender therefore, you will also need to qualify at the Bank of Canada’s five-year fixed posted mortgage rate, which is usually higher.
A high-ratio mortgage is when the borrower contributes less than 20 per cent of the purchase price in their down payment. The minimum down payment is five per cent on the first $500,000, 10 per cent on any amount over that. High-ratio mortgages are more risky for both the home buyer and the lender. As the mortgage will account for more than 80 per cent of the purchase price, the home buyer must obtain mortgage insurance. The insurance premiums are calculated based on the loan-to-value ratio of the mortgage: the lower the down payment, the higher the insurance costs will be.
This usually has a higher interest rate and shorter amortization than a first mortgage. Secondary financing is often used to make renovations to a home, or eliminate excess credit debts showing up on a credit report.
A fixed rate mortgage means the interest rate will stay the same for the term of the mortgage agreement (one, three or five years) regardless of whether market rates go up or down. When the term finishes, borrowers can search again for different rates. Fixed rate mortgages are popular when rates are low but expected to rise in the near future.
With a variable rate mortgage, the interest rate will fluctuate over the course of the term based on market conditions. However, one popular misconception about variable rate mortgages, is that this means your payments will also vary. In fact your payments will remain the same for the term of the mortgage.
What varies is the percentage of your payment that goes against the interest and what percentage goes against the principal. If the interest rate is higher and your payment is $500 a month, $400 might be applied against interest and $100 against the principal. If the interest rate is lower, $250 might be applied against interest and $250 against the principal.
A variable rate mortgage will be reviewed on a regular basis – daily, monthly, quarterly, semi-annually or annually – and the rate you are charged will be adjusted accordingly. Variable rate mortgages are popular when rates are expected to go down and borrowers do not want to lock themselves in to the current rate.
Capped rate variable mortgages set the maximum and minimum rates a borrower will pay regardless of fluctuations.
A convertible mortgage starts at a variable rate and the lender provides the home owner the option to change it to a fixed rate at specified times.
More on Variable vs. Fixed Mortgages
With a variable rate mortgage, the interest rate will fluctuate over the course of the term based on market conditions. However, one popular misconception about variable rate mortgages, is that this means your payments will also vary. In fact your payments will remain the same for the term of the mortgage.
What varies is the percentage of your payment that goes against the interest and what percentage goes against the principal. If the interest rate is higher and your payment is $500 a month, $400 might be applied against interest and $100 against the principal. If the interest rate is lower, $250 might be applied against interest and $250 against the principal.
A variable rate mortgage will be reviewed on a regular basis – daily, monthly, quarterly, semi-annually or annually – and the rate you are charged will be adjusted accordingly. Variable rate mortgages are popular when rates are expected to go down and borrowers do not want to lock themselves in to the current rate.
Capped rate variable mortgages set the maximum and minimum rates a borrower will pay regardless of fluctuations.
More on Variable Rate Mortgages