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New Mortgage Rules: Are They Really What They Seem?

by Julie Jaggernath

Wondering what Canada’s new mortgage rules mean in plain English? Understanding the stress test qualifying rate and other regulations is important when trying to buy a house – especially if you’re a first-time buyer. If you’re just starting your research, or have read something and just need a simple explanation to fill in the blanks, that’s what this page is for. But everyone’s situation is different and lenders have many options available when it comes to mortgage loans. When you’re ready to get pre-qualified, talk to a mortgage professional or lender at your financial institution.

Here’s what the changes to these rules really mean and how they may impact you:

Stress Test Qualifying Rate: 5.25% or Contract Rate Plus 2%

New Mortgage RulesThe stress test checks whether Canadians applying for new mortgages could still afford those mortgages if interest rates increase. After the COVID-19 pandemic took hold in 2020, interest rates for mortgages and other forms of credit were soon brought down to near historic lows. Without the stress test, someone who could only afford their mortgage in 2020 because of the low interest rate could be financially unprepared come renewal time, when a higher rate could apply. The stress test helps lessen the risk of this happening by making sure borrowers have room in their budget to afford a higher interest rate than what they were paying when they started their mortgage.

As of June 2021, the minimum qualifying interest rate that all Canadians must meet for the stress test is the higher of either 5.25% or their current mortgage contract rate plus 2%. For most people, this means that they’ll be dealing with 5.25%. This rate is currently the same whether your mortgage is insured of uninsured but any of these details can change at any time.

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Household Debt Ratio Limits: 35% GDS & 42% TDS for Insured Mortgages

Are you wondering how under the new rules, lenders figure out if you can pass the stress test? The answer is that they use 2 numbers to analyze your household debt level: the Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS).

  • GDS is monthly shelter costs (mortgage payments including principal and interest, strata fees, property taxes, and heat) divided by pre-tax monthly income. For example, if George has monthly housing costs of $1000/month and earns $3000/month before taxes, then his GDS is 33%.
  • TDS also divides by pre-tax monthly income, but includes all non-housing debt too. So if George also has to pay $500/month for his credit cards and car loan on top of the $1080/month for housing, then his costs total $1500/month, making his TDS 50% (1500/3000).

In order to get approved for a mortgage at any of Canada’s “A” lenders, your GDS must be at or below 35%, and your TDS must be at or below 42% for insured mortgages, which is higher than the ideal of 32% and 40% respectively. So in George’s example, even though his 33% GDS is under the 35% limit, his 50% TDS goes over the 42% limit. To buy a house at his current GDS, he’d have to lower his non-housing debts first. Lenders can set their own ratios and there are those who accept mortgages for borrowers whose ratios don’t quite fit. They do, however, tend to charge a higher interest rate for that privilege or require a spotless credit history.

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Maximum Amortization Time: 25 Years for Insured Mortgages

Amortization is the whole time you’re given to completely pay off a loan. The shorter this time is, the bigger your monthly payments will be (but the sooner you’ll get rid of the debt). If your down payment is less than 20%, then your mortgage must automatically be insured by CMHC, Sagen (formerly GenWorth Financial), or Canada Guarantee and won’t have an amortization period longer than 25 years. With a down payment above 20%, you might be able to get a 30-year mortgage.

There are advantages and disadvantages to a longer amortization period. It makes your payments smaller, allowing you to buy a more expensive house or make your mortgage payments a little more affordable. In the long run, however, you’ll end up paying a whole lot more interest. A 25-year amortization period is normal for mortgages. After all, who wants to sign up to be in debt for longer? And who knows what your life will look like in 25 years.

Down Payment Minimums: 5% to 20%

Speaking of down payments, the lowest you need for a mortgage is 5% of the home’s purchase price. However, this only applies to properties under $500,000. For home purchase prices between $500,000 and up to $1 million, the 5% applies to the first $500,000 and for the rest it’s 10%. For houses being purchased for more than $1 million, a 20% down payment is required. That means if you want to buy for over $1 million, you must have at least $200,000 on hand for the down payment. Homebuyers are more likely to face this situation in expensive housing markets like the Metro Vancouver and Greater Toronto areas, but even that is changing post-pandemic. If you’re a first-time homebuyer, it’s wise to make your down-payment as substantial as possible, while still keeping money in reserve for all of the other costs that go with buying a home.

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Mortgage Refinancing Limit: 80% of Home Equity

People who typically refinance their mortgage every few years to pay off expensive debt like credit cards, or for other expenses, only have access to a maximum of 80% of their home equity. Your home equity is the value of the home that you own minus what you owe on your mortgage(s). For example, if you owe $100,000 on a home worth $400,000, then you have $300,000 of equity. 80% of that equity is $240,000, meaning that you can refinance (i.e. borrow) a maximum of $240,000 (including the $100,000 you already owe) from your home’s equity to pay for other needs. Remember that this isn’t free money – if you’re not careful with refinancing, you may never pay off your home.

Stressed Over New Mortgage Rules? Get a Free Professional Review

New mortgage rules in Canada have over the years made it harder to buy a home, especially for those who are already dealing with other debt. If the stress test is stressing you out and you’re not sure where to go from here, consider booking a free and confidential appointment with a non-profit credit counselling organization in your area. A credit counsellor can help you review your current financial situation, including your budget and debts, and help you make a plan to reach your goal of homeownership. One of the fastest ways for people to boost their home purchasing power is to get rid of their existing debts, and that’s what credit counsellors specialize in helping with.