The Office of the Superintendent of Financial Institutions or OSFI, regulator of federal banks in Canada, recently released new mortgage rules which will take effect first day of January 2018. The rules were made in order to provide protection to the housing market and to likewise help prevent economic risks that come with a slight increase in mortgage interest rates. The Bank of Canada together with the OSFI are concerned about the level of household debt in the country thus providing these new rules that will help prevent possibilities of financial crisis.
The new mortgage qualifying rules
- Expanded stress tests. This will be used to determine if mortgage applicants will be capable to make payments even with increased mortgage interest rates.
- Banning of alternative lending arrangements. This will include the likes of bundled and co-lending mortgages. These arrangements were used in the past especially when the applicant is classified as high-risk applicants.
- Dynamic loan-to value or LTV ratios. Lenders should use this when approving mortgage amounts for mortgage applicants. As an applicant, you must have a higher LTV in neighbourhoods where home prices are inflated.
The stress test
The expanded stress test is a cause of concern for many buyers. They are already feeling the stress even without undergoing the stress test yet. At present, it is a practice in Canada for home buyers to get home mortgage insurance if they will not be able to give at least 20% down payment. The mortgage insurance will protect the lender in case the buyer defaults on payment. There is also an existing stress test given specifically to those who applied for larger mortgage amounts. The new mortgage qualifying rules, however, do not exempt anyone from undergoing the stress test.
Apart from this specific salient point in the expanded stress test, it has to be pointed out that borrowers who stick with the same lender do not have to undergo this test. Only those who choose a new lender will have to undergo it since another batch of paperwork and financing will be required. This makes a lot of people very much worried for the possibilities of not being able to get the lowest rate possible during renewal time. This is why it is very much important to talk to an expert before mortgage renewal.
Failing the stress test
Failing the stress test should not be a cause of alarm on the part of the homebuyer. There are still other options that will make you qualify for a mortgage application. The first thing you can do is ask the help of someone who has solid financial standing and ask him to be your co-signer. It will also be good to allot more money for your down payment so that you get higher chances of passing the stress test. You may also need to delay the home purchase up until such time that you are capable of paying for the mortgage. If you intend to buy now, opt for less-costlier homes like town homes and condominiums.
You do not actually need to delay your idea of buying a new home because you are afraid you will not pass the stress test. Get expert advice and you will be able to make the best out of the application whether it is for a second mortgage in Montreal