The Government has just released the final version of Guideline B-20. The most significant change that they have added is the "stress test' to uninsured mortgages.
What is an uninsured mortgage? One where there is no default insurance secured to the mortgage. If you are putting less than 20% down, your mortgage currently has to be insured through CMHC, Genworth or Canada Guaranty. What most consumers don't realize is that even when putting more than 20% down, many lenders have still been obtaining this default insurance, they just cover the cost it. This is called portfolio insurance and it essentially allows lenders to finance mortgages with lower interest rates to the consumer. As of last year's set of rule changes, the following types of mortgages can no longer be insured:
- Refinances
- Rental properties
- Properties valued over $1M
- Mortgages with longer than 25 year amortizations
- Mortgages with 20% down where the contract rate is required to qualify
What is this new "stress test" and when does it apply? Uninsured mortgages will have to be qualified at "the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%"
Examples:
One a $300k uninsured mortgage*, borrowers will be required to earn almost $12,000 more in income annually to qualify for the same mortgage.
Let's say a borrower earns an annual income of $60k*. Their maximum mortgage will now be reduced by $85,000! That is approximately 21%.
The new rules will take effect on January 1, 2018. I will continue to provide information on the new rules as they become available. For the full press release, read here.
For more information on this or for any mortgage questions, I'm always happy to help.
*Estimates based on an annual income of $60k and a GDS of 35%
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