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Application of “Stress Test” Affects Homeowners

Wednesday October 19, 2016

Buying a Home

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Thinking of buying a home? If so, you should be aware of some new housing rule changes that will drastically affect the borrowing amount for home buyers.

The Introduction of a “Stress Test” to All New Mortgages

The biggest change is the introduction of a “stress test” to all new, insured mortgages – including those with more than 20 percent as a down payment. Not only does the home buyer need to be approved for a mortgage at the negotiated rate in the contract, but they also have to be approved at the Bank of Canada’s five-year fixed posted mortgage rate, which is currently 4.64 percent. The goal of applying the stress test is to ensure that borrowers will still be able to afford their mortgage, even if interest rates were to increase.

The amount that home buyers will now be eligible to borrow is approximately 20-25 percent lower than prior to October 17. For example, before October 17th, someone who makes $80,000 annually and put 5 percent down would qualify for a $530,000 mortgage at a 2.49 percent five-year, fixed rate. With the new mortgage rules and the same 2.49 percent five-year, fixed rate, that same person would now be qualifying for $418,000. The large difference is due to the government now qualifying you against 4.64 percent.

Other “Stress Test” Aspects

Besides having your mortgage be approved at the 4.64 percent, there are other aspects that make up the stress test. For one, the home buyer cannot be spending more than 39 percent of their income on home-carrying costs such as mortgage payments, heat and taxes. In addition, total debt service must not exceed 44 percent.

Why Have a Stress Test?

Although this may sound like bad news to borrowers, this new rule is actually meant to help them out in the future. Testing a borrower’s proposed borrowing against an elevated interest rate will help homeowners avoid massive mortgage debt. Canadians have a high amount of debt, and this safeguard will help ensure that borrowers are taking on a risk that they can afford – even if mortgage rates increase.

Other Changes to Canada’s Housing Rules

In addition to the stress test, there are other new implementations for the mortgage industry. Beginning November 30, those who require low-ratio mortgages will be faced with new restrictions, including a requirement that the amortization period be 25 years or less. In addition, new rules will now make it mandatory for anyone who claims an exemption on capital gains tax when selling a home to report it at tax time. This will help control speculation by foreign investors.

As well, the government is starting consultations on lender risk sharing so that it is not 100 percent responsible if an insured mortgage goes into default.

The Woolcott Group is here to Help!

Confused with all the new changes being implemented for homeowners in Canada? We can help! Call the knowledgeable, experienced professionals at the Woolcott Group today.