If you're a new homebuyer seeking a mortgage, or an existing homeowner looking to switch or refinance, it's important that you’re up-to-date on the new mortgage rules in Canada. Here are some of the top things you should keep in mind if you’re looking for a new home.
The Canadian Mortgage Stress test in 2021
The stress test was introduced on January 1, 2018, as a way to protect Canadian homeowners by requiring banks to check that a borrower can still make their payment at a rate that’s higher than they will actually pay. The purpose of the stress test is to evaluate if a borrower (a.k.a. the potential homeowner) can handle a possible increase in their mortgage rate.
For Canadians to qualify for a federally regulated bank loan, they need to pass the stress test. To do this, homebuyers need to prove that they can afford a mortgage at a qualifying rate. For homebuyers who have a down payment of 20% or more, currently the qualifying rate is determined using the Bank of Canada's five-year benchmark or the interest rate offered by the lender plus 2%, whichever is higher. For homebuyers who have a down payment of less than 20%, the qualifying rate is the higher of the Bank of Canada five-year benchmark rate and the interest rate offered by the lender.
This stress test is also performed with homeowners looking to refinance, take out a secured line of credit, or change mortgage lenders. Those who renew with the same lender will not have to undergo the stress test.
Other new mortgage rules in Canada
As of July 2020, a number of changes were implemented for all high-ratio mortgages to be insured by the Canada Mortgage and Housing Corporation (CMHC).
A high-ratio mortgage is one where the borrower has a minimum down payment of less than 20% of the purchase price of the home. A high-ratio mortgage is also referred to as a default insured mortgage. Let’s break down what recent changes have been made.
The new CMHC rules will lower the amount of debt that borrowers with a default insured mortgage can carry. Mortgage applicants will be limited to spending a maximum of 35% of their gross income on housing and can only borrow up to 42% of their gross income once other loans are included. This is down from the previous 39% and 44%.
The new rules also require the borrower to have a minimum credit score of 680 (good score). If you are purchasing a home with your partner, one of you must have a score of 680. This is up from the previous minimum score of 600 (fair score).
Homebuyers are now required to use their own money for a down payment instead of borrowed funds. This means homebuyers are no longer able to use unsecured personal loans, unsecured lines of credit or credit cards to fund their down payment.
Homebuyers with a down payment of less than 20% of the purchase price are required to purchase mortgage default insurance. Properties costing $1 million or more are not eligible for mortgage default insurance.
CMHC and CREA projections
Due to the pandemic, job loss, business closures, and a drop in immigration, CMHC predicted a 9% to 18% decrease in housing prices from June 2020 to June 2021.* However, this prediction hasn’t come to fruition.
Instead, 2020 ended up being a record year for Canadian resale housing activity, according to Costa Poulopoulos, the Chair of the Canadian Real Estate Association (CREA).**
The CREA predicts that all provinces except Ontario will see an increase in sales activity into 2021 as a result of low-interest rates and an improving economy. As for the CMHC, they stand by their original prediction.
Legal Disclaimer: This article is provided for information purposes only. It is not to be relied upon as investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, and other investment factors are subject to change without notice and The Bank of Nova Scotia is not responsible to update this information. All third party sources are believed to be accurate and reliable as of the date of publication and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
All Scotiabank mortgage applications are subject to Scotiabank’s, and if applicable, the mortgage default insurer’s, standard credit criteria, residential mortgage standards and maximum permitted loan amounts.