With the media's news release of the intended mortgage rule change for 2018, we are sensing the 'stress' before the test. What consumers may not realize is that this 'stress test' is designed to protect homeowners should interest rates continue to rise. TFN is prepared to eliminate the unknown from the newly implemented 'Stress Test' for uninsured borrowers and educate our clientele on how to be prepared.
OFSI put an end to all of the speculation last week and has released the new guidelines for the mortgage industry. On January 1st, 2018 the prerequisite 'Stress Testing' will affect not only those who require mortgage insurance but also uninsured borrowers. Similar to the CMHC borrowers, buyers will have to be deemed eligible for the qualifying rate.
All federally regulated institutions are required to follow the new guideline for residential mortgage underwriting. These rules will apply to borrowers with or without a down payment or equity equal to 20%. Lenders will be obligated to qualify new mortgages at the greater of the Bank of Canada's benchmark rate (currently 4.89%) or the contracted rate plus 2.0%.
(Example: if your contracted rate is 3.49%, you will be tested to qualify at a rate of 5.49%)
So what does this all mean for you? Different consumers are subject to different outcomes. Here are a few scenarios to help the public better understand what this all means in different circumstances.
Scenario #1: You have equal to or more than 20% down payment for your mortgage.
Your payments are based on your contracted rate, therefore, this new rule will not cost you more, however it may change the size of the loan you qualify for. This may result in having to save a larger down payment, seeking a property of lesser value and definitely reducing any outstanding debt.
Looking at a variable rate mortgage with an option to convert to a fixed rate is another alternative, as it could mean qualifying at a lower rate (if the rate plus 2% is less than the benchmark of 4.89%).
Scenario #2: You want to refinance and consolidate your debt.
Refinancing can be a positive financial move only if it means reducing your mortgage payment, shortening the term of your loan or increasing your equity at a faster pace. If a refinance is something you have been strongly considering to secure your financial wealth, reviewing your options in the balance of 2017 could help avoid having to accumulate more equity. Keep in mind once the new regulations are in place, it may slow this process by making it difficult to qualify for your refinance.
Scenario #3: Your mortgage renewal is coming due next year.
It seems entirely unfair that after ‘x’ amount of years making every monthly payment in full and on time, that you should now have to re-qualify. Well, here is some good news; this rigorous qualifying requirement will not apply to mortgage renewals if you remain with the same lending institution. Our advice: stay put.
Scenario #4: First Time Home Buying
Keep saving, and then save some more. The higher your down payment, the less loan you require and the more house you can afford. Whatever you do, ensure your clear understanding of what amount you qualify for under the new regulation. Get pre-approved before you start house-hunting to avoid any surprises or disappointment that shocks you halfway through the buying process. Obtaining a co-signer is still an option for you as additional income will aid the qualification process.
While TFN Realty is certainly well informed with all of these scenarios, we are also stocked with a vast network of connections and industry professionals who can further assist you, address your concerns, and refer you to some of the best Mortgage Specialists around. The Stress Test does not necessarily mean you will no longer be able to afford a home, however, when changes do occur we are here to help find a solution with you. We encourage you to reach out before these changes take place.