A quick summary of what you need to know about the new mortgage rules: B20 and the Stress Test.
If you’re planning to buy a home and will be applying for a mortgage with an A Lender you will be subject to a Stress Test.
All that means is that the lender will qualify you at 2% higher than the current mortgage rate or at the Bank of Canada's five-year benchmark rate (currently 4.89 %) to find out your ability to pay off the loan in if rates were to increase.
Stress tests were done for borrowers applying for an uninsured mortgage (down payment is less than 20% of purchase price).
But with the new rules, borrowers applying for insured mortgages (down payment 20% or more of the purchase price) will also be subject to the Stress Test.
Stress Test for refinances too
If you’re refinancing your mortgage, you too will have to qualify according to the higher stress test rates rather than your existing contractual mortgage rate.
However, if you are just renewing an existing mortgage the Stress Test would not apply.
B20 is the other new mortgage rule
What does B20 mean? It's the underwriting guidelines for residential mortgages that the Office of the Superintendent of Financial Institutions (OSFI) has imposed on all regulated lenders and the Canadian Mortgage and Housing Corporation (CMHC).
To comply with the new rules, lenders:
- Must have a policy outlining their own risk appetite, governance and oversight mechanisms
- Must carry out a higher level of due diligence on higher risk deals
- Do not write mortgage deals without doing the appropriate risk assessments
- Confirm the borrower’s identity and background, and their ability to pay their debt obligations in a timely manner
- Validate that the value of the property being financed has been confirmed by an independent third party
In general, the rules are designed to make sure that lenders are determining a homeowner’s ability manage higher mortgage interest if they were to rise and thus prevent a mortgage collapse situation, similar to what took place in the United States.
That being said, there are other options for buyers as Credit Unions and "B" Lenders are unaffected by the new rules.
What are your thoughts on the new mortgage rules?