Breaking News – Qualification Guidelines Drastically Changed
By now, you will have seen the October 3rd announcement from Finance Minister Morneau outlining mortgage insurance and qualification changes effective October 17 2016.
To sum up the most important change to borrowers:
All ‘insured’ mortgages will now need to qualify at the Bank of Canada benchmark rate, currently 4.64% instead of the contract rate offered on their commitment and they must qualify at a 25 year amortization regardless of the actual contract amortization. This change is scheduled to come into effect on October 17, 2016, but more practically you will need to have the lender and insurer approval by October 14, 2016 if you are planning to qualify at the contract rate and amortization for a fixed rate mortgage, current ranging from 2.34% to 2.49%.
What does this mean in a practical sense? Here are some of the scenarios in which you might be effected:
1/ This means that if you are considering any purchase or refinance where you need a fixed mortgage with and extended 35 year amortization calculated at the contract rate to qualify, you need to proceed with approval immediately.
2/ Also if you are considering a purchase or refinance with a fixed rate mortgage where you need to qualify at the contract rate to make your debt service ratios align, and you want to avoid the possibility of huge prepayment penalties you need to proceed with approval immediately.
3/ If you are requiring any mortgage that is insured you will be affected by this change. Notice that this is not exclusive to ‘high-ratio’, (less than 20% down payment) mortgages. This is for all insured mortgages, including most new to Canada, self employed stated income, extended amortization, small market and other specialty insured mortgages.
The qualification changes requiring all ‘insured’ loans to meet 25-year amortizations and be qualified at the Bank of Canada benchmark rate, currently 4.64%, will force many would-be homeowners, even those with a large down payment, into the sidelines or at minimum, offer them a significantly reduced purchase budget. The benchmark rate is generally 2% higher than actual rates available in the market and will require anywhere from a 20-40% exaggeration of actual mortgage payments to be used to meet servicing ratios.
This means in a very practical example that $180,000 in buying power is removed from a typical borrower with $80,000 income. What was a possible mortgage approval of $480,000 with a 35 year amortization at the contract rate is now being reduced to $302,000 using the identical property, income and debt levels.
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