How to navigate the new mortgage rules
On January 1, 2018 the Office of the Superintendent of Financial Institutions (OSFI) ushered in the all-new mortgage stress test.
The ‘stress test’ requires the qualifying rate for both insured (those who made a down payment of less than 20%) and uninsured mortgages to be the greater of the Bank of Canada’s five-year benchmark rate or the rate homebuyers negotiate with the lender plus two percentage points.
This means even if you were able to negotiate a mortgage at 3%, your finances would still have to show that you would be able to handle mortgage payments should interest rates climb to 5%.
The impact of the stress test is already being felt across the country.
A report by Mortgage Professionals Canada states that since the OSFI rules came into play, homebuyers are having to downsize their borrowing aspirations by as much as 20% (compared to this time last year). No matter where you are on the pay grid, 20% less of a mortgage loan to count on is still significant enough to potentially prevent you from purchasing the place you want.
However, there are ways you can navigate the new mortgage rules to ensure the stress test doesn’t unnecessarily stress you out:
TIP #1: Pay down your debt.
When you’re shopping around for a mortgage, keep in mind that any debt you have will affect the mortgage amount you can qualify for. Don’t have any debt? What about your significant other? According to a recent survey conducted by accounting firm BDO Canada, 47% of Canadians have hidden (or are currently hiding) financial secrets from their spouse or partner—with credit card debt topping the list of hidden financial truths. So if you want to stay one step ahead of the stress test, you and your significant other should come clean about the amount of debt either of you are carrying and then attempt to pay it off before applying for a mortgage.
Learn more about what you need to know about debt and how to pay it off.
TIP #2: Adjust your time frame and expectations.
No matter where you are in your education career or if it’s your first or second home, the reality of having a stress test in place means that all levels of homebuyer may have to make a few adjustments to their initial timeframe and expectations. This is where patience along with a sound financial strategy will be your biggest virtues in today’s home-buying market. Taking an extra year or two to pay off other debts and loans and saving up for a larger down payment will pay off in the long term. If delaying your home-buying plans is out of the question, you may have to accept that your first choice may be out of your price range. So be sure to have a second pick lined up on your home-buying ‘wish list’ that you’d be just as happy with, yet comes at a lower asking price.
Click here to uncover the hidden costs of home buying.
TIP #3: Do your homework.
If you signed a contract to buy a pre-construction home or condo before January 1, 2018 (that you have yet to move into), chances are you still fall under the old mortgage rules—which means not only being able to navigate the stress test, but sidestep it altogether.
You may also want to consider shopping around for an alternative lender, such as a credit union or brokerage that doesn’t have to apply the stress test (because they fall outside the regulations covering banks and other traditional lenders). However, be aware that when your mortgage comes up for renewal, if you chose to switch lenders, you will have to qualify under the new policy that is now in place.
At the end of the day, enhancing your financial literacy is the best way to navigate any kind of changes to the mortgage rules.
Being around since 1975, Educators Financial Group understands how your pay structure works during your working years and in retirement. That means we can provide you with the kind of information and insight to enhance your financial literacy with an educator-specific perspective—which can make all the difference when it comes to achieving your financial dreams and goals.
Brokerage license 12185. The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy.
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