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New Year, New Mortgage Rules

The start of 2018 kicked off with the new mortgage stress test becoming effective on January 1st.  The media has covered the reduction in buying power but virtually nothing on the impact of renewing or refinancing mortgages.  In a nutshell, this change will lead to reduced competition, and reduced competition typically leads to higher prices. 

Recap of Stress Test Rules implemented by OFSI

With a down payment of 20% or more, borrowers must qualify at the higher of either the Bank of Canada benchmark rate (currently 5.14%) or 2% above the contract for the mortgage. If the contract rate on a 5-year mortgage is 3.39%, borrowers must prove their income can support payments at 5.39%. On average, clients now qualify for 20% less than they did before the stress test.

What it Means for Refinances & Renewals

A borrower who wants to refinance to obtain extra money – for example for home renovations – will have to qualify under the new stress test (2% above the offered interest rate), so they may have to wait until their income increases, or pay off other debts first to qualify.

Previously, when refinancing or renewing a mortgage, clients could survey lenders’ rates and features to decide on the best mortgage for their next term.  This healthy competition for business resulted in lenders keeping their renewal rates attractive, benefitting borrowers financially with a lower rate and lower overall interest paid. 

Now, if you want to move your mortgage at renewal you have to qualify at 2% above the offered rate, but won’t have to requalify if renewing with your current lender.  This gives your current lender more power since there may be fewer options available to switch lenders.  With a captured market, existing lenders won’t need to offer their best rate. However, there is a loophole which may apply to you, see below!

Loophole to the New Stress Test at Renewal

If your property was purchased prior to October 2016, certain lenders will allow you to transfer/switch your mortgage from your current financial institution and avoid the new stress test requirements by qualifying you under the old rules. This means you may be able to get a better rate or mortgage product with this new lender option than renewing with your existing lender.

There are a few more requirements for this scenario to work but the first step is to confirm your purchase date was prior to October 2016.

What You Can Do

If you have a mortgage coming up for renewal, or are considering purchasing, don’t assume that you will not be able to move your mortgage, and are stuck where you are. Contact me and we’ll run the numbers to see if you qualify for the renewal loophole or under the new stress test rules. Additionally,  some lenders are exempt from the new rules altogether so you may still qualify with one lender but not another.  We can let you know your options.

On a positive note, the threshold for qualifying for the Home Owner Grant ($570 towards your property taxes) for 2018 has increased to 1.65M from $1.6M.

Please feel free to contact me with any mortgage inquiries you may have so we can plan together!