With Canada’s banking regulator looking for advice on how to minimize the number of borrowers who are too close to the edge, even stricter qualifications may be put in place for those seeking a mortgage soon.
As alarming as that news may seem, the rules we have were designed to help ensure that Canadians can afford their mortgages and reduce the risk of a housing market crash. According to Peggy Hill, these rules likely saved Canada from suffering through a rash of sellers listing their homes as a result of financial distress.
Here are some facts that anyone applying for a mortgage in Canada today should know:
1. Minimum Down Payments
The minimum down payment for homes priced under $500,000 is 5%. For homes priced between $500,000 and under $1 million, the minimum down payment is 5% of the first $500,000 and 10% of the balance. Homes over $1 million require a minimum of 20% down.
Unless you obtain a loan through a private lender, mortgage default insurance is required if the down payment is less than 20%. You can’t get mortgage insurance for homes that cost more than $1 million. Mortgage insurance is added to the loan amount so you will pay for it over the life of your mortgage.
3. The “Stress” Test
With the last few years being what they were, no one wants to hear the “S” word, however, since 2018, all borrowers in Canada must pass a stress test to prove they can afford their mortgage payments if interest rates were to rise. This means that borrowers must qualify for a mortgage at a higher interest rate (2% more) than the one they will actually be paying (contract rate).
So if your contract rate is 5%, you’ll have to qualify for 7%
4. Credit Score
To be eligible for a mortgage with less than a 20% down payment, you must have a minimum credit score of 600 which is considered a fair, but not excellent, score.
5. The Loan-to-Value (LTV) Ratio
The LTV ratio is the mortgage amount in comparison to the value of the home. Under the new rules, the maximum LTV ratio for a first-time home buyer is 95%, meaning that at least a 5% down payment is required. Keep in mind that the less you put down, the more your insurance premium may be. Click here for a free calculator to help you do the math.
So if you’re shopping for a $650,000 home with a minimum down payment of $40,000, you can expect to pay a 4% premium. But if you put $95,000 down, it drops to 2.8%.
6. Amortization Period
The amortization period is the length of time it will take to pay off the mortgage. Under the new change “new” to “current rules”, the maximum amortization period for a first-time home buyer is 25 years. This means that the mortgage must be paid off in 25 years or less.
7. Debt Service Ratio (DSR)
Banks are now required to ensure that mortgage payments and other debts like car loans, credit cards, etc., do not exceed more than 44% of your gross income. Included in this mix is the cost of servicing any debt you may be incurring to top up your down payment. Watch this video of Peggy Hill and Nick L’Ecuyer explaining this in more detail.
By understanding these current mortgage rules, first-time home buyers in Canada can make informed decisions about their home purchases and will feel confident in their ability to make their mortgage payments comfortably even if rates change.
It is always a good idea to consult with a mortgage professional or financial advisor to make sure that you are making the best decision for you. If you need a recommendation or are looking to get a better handle on today’s real estate market, give us a call. Conversations are always free.