I had a text message from a friend as soon as the new mortgage qualifying rules were announced.
“In the least dramatic way of asking this: Does this mean I can never own a home?
Because paying 20% down payment no longer means anything substantial because
of these changes.”
Prior to October 16th, if a buyer had less than 20% down payment, he/she had to pay a premium to CMHC to insure the mortgage. Regardless of the amount of their “locked-in” mortgage rate, the mortgage company would use the Bank of Canada benchmark rate currently 4.89%. Mortgagees with 20% or more down would qualify at the actual “locked-in” rate.
After October 16th, all mortgages, regardless of down payment amount, must now be qualified at the higher of (1) the Bank of Canada benchmark rate of 4.99% or (2) 2% higher than their actual “locked-in” rate.
Even if you are pre-approved by a lender, you must have a firm deal by Dec 31, 2017. You can close in 2018. For refinancing, the closing cannot be more than 120 days later.
Credit unions are not governed by the same OSFI (Office of the Superintendent of Financial Institutions)
regulations, so you may want to seek advice from your local credit union. They are not subject to the same
qualification rules, but they may decide to follow suit.
Another thing to keep in mind, the premium payable for insuring a mortgage less than 20% down can be added to your principal mortgage amount. Sure, it may mean your mortgage payment is slightly higher, but it may mean purchasing now, rather than waiting. In the last year, condo prices were up about 21%, so that means you need to save an EXTRA 21% just to stay where you are now.
If you are a couple looking to buy a 2 BR, 2 BA condo in downtown Toronto for $799,000 with 20% down payment, your combined income would have to be $146,000 at 3.25% to afford the mortgage, but it would have to be $173,000 to qualify at 5.25% with 25 yr. amortization. By extending the mortgage to 30 yr. amortization, the income required would be reduced by $10,000-$12,000.
By looking just a bit further from the downtown core and reducing your budget to $459,900, again using a 20% down payment, your combined income would only have to be $93,000 to afford the mortgage and $108,000 to qualify at 25 years. By increasing the amortization to 30 years, the income requirements would be $86,000 to afford the mortgage and $102,000 to qualify.
Of course, your debt load is important and will affect the amount of mortgage you can afford.
I work with mortgage brokers who represent many different financial institutions and they can tailor a mortgage to your individual needs. There will be a difference, for example, whether you are salaried or self-employed. And, remember, once you are pre-approved; do not add to your credit in any way. It could affect your final approval just before closing.