Are you shopping for a home? Tightening mortgage qualification rules could affect your plans.
Indeed, since 1is June the rules have adjusted to ensure that you will remain a good payer, even if interest rates rise. From now on, if you borrow to buy a home, you must demonstrate a greater ability to repay than in the past.
The Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI), responsible for this tightening of the rules, hope to reduce household indebtedness. They also hope to limit losses for lenders in the event of a possible rise in interest rates. But will this rule change stop you from borrowing?
What is this famous stress test?
When you qualify for a mortgage, the financial institution assesses whether your budget can withstand a increase in interest rates. This simulation, called a “stress test” has already existed since 2016. However, the increase in the interest rate used in the simulation could disqualify you for a new mortgage. Or force you to reduce the amount borrowed.
Since 1is Last June, this interest rate increased for all loans, whether insured or not. We now calculate your repayment capacity according to the highest amount Come in :
- The interest rate listed in your contract + 2%
- An interest rate of 5.25%.
If you do not pass the test, you will need to reduce the amount you need to borrow. Or forget about your project.
How is your borrowing capacity calculated?
Financial institutions use two basic rules to assess your borrowing capacity.
First of all, they calculate the gross amortization of your debt (ABD). The ABD consists of the percentage of your gross income allocated to your occupancy costs, namely: your mortgage repayment, the payment of municipal and school taxes and heating costs. These occupancy costs must not exceed 32% * of your gross income.
Then they check thetotal debt amortization (ATD). To do this, they add your occupancy costs (ABD) to the amount spent on repaying all your debts. The result should not exceed 42% * of your gross income.
The increase in the interest rate used in the calculation of stress test increases your monthly mortgage payments thus affecting your ABD and ATD. Therefore, it is possible that you no longer meet the 32% and 42% standards, thereby disqualifying you from obtaining the requested loan.
Mamadou Doukara, mortgage financing specialist, gives us the following example: a person who qualified before the 1is June for a loan of $ 400,000 financed over 25 years now qualifies for a maximum loan of $ 385,000.
* These rates may vary depending on the lender, your credit report or the size of your assets.
Who is affected by this tightening of the rules?
This tightening of the rules automatically applies to all new qualifications for a mortgage loan:
- When buying a home;
- When refinancing, if it must be notarized;
- When transferring a mortgage to another financial institution.
Warning ! Falling interest rates are causing many homeowners to shop around for their interest rates with different lenders. If you change your lender, you will be subject to the new rules.
Why tighten the qualification rules?
The Bank of Canada and OSFI cite the overheating real estate market to justify the increase in interest rates used for the stress test. Their intervention has three objectives.
1. Stabilize the real estate market
With the tightening of the rules, the two organizations wish to slow down the real estate market by reducing buyers’ borrowing capacity. They hope in this way to curb the overbidding by limiting the number of buyers or the maximum amount that can be borrowed. A stabilization of the markets would avoid a national financial crisis.
2. Reduce household debt
According to the Bank of Canada, household debt has increased by 4% since the start of the pandemic. This increase is mainly caused by the increase in mortgage debt and the increase in the cost of housing. With these new rules, the Bank of Canada therefore hopes limit debt-related problems Household.
We can see that the increase in the price of houses is encouraging many buyers to buy a home that is much more expensive than expected. Their budget is therefore tighter and less flexible to an increase in expenses or a decrease in income.
A possible increase in interest rates would therefore have a negative impact on the finances of these households. They could turn to consumer credit to make ends meet. Or they just won’t be able to afford their house anymore!
The new standards therefore seek to offer leeway allowing the budget to adjust.
3. Protect financial institutions
Finally, we won’t hide it, the tightening of the rules also protects financial institutions against losses related to non-payment.
Unfortunately, these new standards put the spokes in the wheels of some buyers. By reducing their borrowing capacity, they have to postpone their project or acquire a less expensive residence. The crisis related to rental housing, the obligation to move away from large centers or to buy a house that requires more maintenance are causing them a lot of headaches!
How to “pass the test” despite the tightening of standards?
The stress test assesses your borrowing capacity in the event of a financial crisis. This capacity is influenced by your current level of debt, the amount to be financed and therefore your level of savings. Therefore, unless you increase your income, you have two options:
- Reduce your debts.
- Increase your down payment.
Before borrowing to buy a house, So eliminate as much debt as possible ! Pay off your credit cards. Avoid taking out a new loan. Think twice before financing a new purchase! Pay special attention to your car loans. If you need to borrow, choose a less expensive vehicle. A luxury car financed over 8 years will affect your ATD for a long time!
You can also increase your down payment.This will reduce the amount of mortgage required and your debt ratio. Important detail: you will also reduce the cost of your mortgage insurance if it is required.
This tightening of mortgage qualification rules frustrates many buyers. However, if your room for maneuver is so slim, ask yourself questions! Perhaps this is the opportunity to take a time out to re-evaluate your choices or your budget.
In addition, a disqualification can be an opportunity for you to reduce your debt, and motivate you to save! Consult our “Housing” section to read other texts of interest and inspire you!
A graduate in consumer science and qualified as an insolvency advisor, Lyne was a budget consultant to non-profit organizations for several years. She is now a writer specializing in consumer and personal finance.
–
– – –Related posts:
