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Canadians getting, renewing or refinancing a mortgage might have to prove that they would be able to cope with interest rates substantially higher than their contract rate in 2018.
New rules by Canada's federal financial regulator announced in October mean that even borrowers with a down payment of 20 percent or more will now face a stress test, as has been the case since January 2017, for applicants with smaller down payments who require mortgage insurance.
Ottawa has already moved to tighten the rules around the mortgage market six times since July 2008, with a series of regulatory tweaks aimed at limiting the amount of debt that Canadians and financial institutions take on.
Some 10 percent of Canadians who got an uninsured mortgage between mid-2016 and mid-2017 would not have qualified under the new standards, a recent analysis by the Bank of Canada suggested.
To put a number on it, the rules will likely affect about 100,000 home buyers who would qualify for a mortgage for their preferred house in 2017 but will likely fail the stress test for an equally large loan this year, according to a report published by Mortgage Professionals Canada, an industry group.
If you're planning to buy a house with a down payment of 20 percent or more this year you'll have to meet the stress test using a minimum qualifying rate equal to the greater of the Bank of Canada's five-year benchmark rate (currently 4.99 percent) or their contractual rate plus two percentage points.
This qualification may force settling for a less expensive home or waiting to save up for a larger down payment.
Since few home buyers stretch their finances to the limit when applying for a mortgage, the average target price reduction will likely be smaller, 6.8 percent according to Will Dunning, chief economist at Mortgage Professionals Canada.
If you're renewing your mortgage this year, lenders do not have to apply the stress test to clients.
This means if you fail the stress test, you'll probably renew with your current financial institution without being able to shop around for a better rate.
If you're refinancing your mortgage you'll have to qualify according at the higher stress rates.
The Office of the Superintendent of Financial Institutions' rules only apply to federally regulated financial institutions, meaning Canadians might be able to continue borrowing without a stress test if they turn to provincially regulated credit unions.
In the past, however, credit unions have voluntarily adopted new federal standards on mortgage rates.
Still, adopting rules on a voluntary basis means they would be able to make exceptions.
Dominion Lending Centres is Canada’s national mortgage and leasing company with more than 2,300 members offering free expert advice across Canada – taking the hassles out of the mortgage process and simplifying your life. For more information, please visit our website here.