With the Minister of Finance Bill Morneau announcements on October 3rd, 2016 Canadians may have a harder time getting into the house of their dreams and may only qualify for a purchase price that is much lower. Before this announcement fixed rate mortgage borrowers would apply based on the discounted rates contracted rates, now they must apply based on the posted rates. The contracted discounts rate were typically between 1.99% and 2.99%, while the posted rates were around 4.65% in 2015.
What does this actually mean?
It means you’ll be approved for a house with a lower purchase price. Let’s go through an example for a clear picture.
Based on:
- $100,000 annual income
- Down payment of $40,000
- 5 year fixed rate of 2.17%
- Property tax $400 and powe $150/month
Prior to change you’d qualify for a home worth $665,435
After the change you now qualify for a home worth $505,762
That very large difference, amounts to $159,673 or 24%.
When does it start?
This change is effective October 17, 2016 and will be applied to all new mortgages created that day forward.
Why?
According to Minister of Finance this was done to protect Canadians, should interests rates increase. In other words you must pass the stress test in order to qualify for the mortgage, or you need to have enough income to cover an increase in interest rate, when you go to renew your mortgage.
An increase in interest rate could have a significant impact on your monthly payments. For example, if we use a $650,000 house with 10% down payment the difference in interest rate from 2.4% to 4.65% produces an increase of monthly payments of approximately $700. So you need to prove to banks you can handle this increase of $700/month to qualify for your mortgage.
Contact me today with any questions you have if you are about to get a new mortgage in the greater Toronto area and need some help regarding these new rules. My next blog post will discuss ways around these new rules so stay tuned for that.
