New Mortgage Rules 

Canada’s top banking regulator has published the final version of its new mortgage rules. The new guidelines for the mortgage industry will come into affect on January 1, 2018.

Among the major new rules is a requirement to stress test uninsured borrowers. Previously, only insured borrowers had to undergo such a test. By law, borrowers with a down payment of under 20 % for a home must purchase mortgage insurance. Borrowers pay an insurance premium. The beneficiary is actually the lender. The insurance protects the loan giver in the event the borrower defaults on the loan.

The stress test is designed to simulate a borrower’s financial situation.  Assumming the borrower  would have to pay back the loan at the posted average. (Not whatever deal they were able to negotiate). Under the new rules, borrowers would be stress tested at either the 5 year average posted rate, or 2% higher than their actual mortgage rate. Whichever one is higher.

As an example, on a $500,000 home with a $50,000 down payment.  The CMHC says a borrower would be charged an extra $13,950 to insure the $450,000 mortgage.

In addition to the stress test, the new rules would require lenders to have more scrutiny around the loan-to-value ratio of the loans they give out.  This will  ensure they are not giving out mortgages that are too large compared to the underlying value of the home.

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