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Canada’s New, Tough Mortgage Rules Effective January 1, 2018

The Office of the Superintendent of Financial Institutions Canada (OSFI) announced a number of new mortgage rules which came into effect on January 1, 2018. The new rules, which affect all Canadians renewing or refinancing a mortgage, will require people to pass a stress test to prove that they can handle interest rate hikes that are significantly higher than their current rate—even if they never actually reach those lofty levels. The new, wide ranging changes, apply to all federally regulated financial institutions.

If you’re thinking of refinancing or renewing a mortgage, the new mortgage rules will make it very difficult o renew with a new lender. Even if you stick with your current lender, you may not be able to refinance as much as you were hoping to; you might also get stuck renewing a mortgage with uncompetitive rates.

Stress Test

A stress test helps banks determine how much of a mortgage you can afford under certain circumstances. The stress test doesn’t really work in your favour; it’s the big banks way of seeing how you’d do in a worst-case scenario.

For example, could you still afford your mortgage payments if interest rates increased, your income was reduced, you lost your job, or were hit with an unexpected expense?

According to the OFSI, the stricter stress test will make the Canadian real estate market more stable. But critics say the new stress test will hit those looking to refinance the hardest.1

Federal, provincial, and local government regulations can also damage the broader economy as fewer homes are renovated, purchased, and furnished.

Loan-To-Value Ratio

The loan to value ratio is a number that measures the value of a mortgage as a percentage of the total value of the property. Traditional lenders, like Canada’s big banks, need to ensure the loan-to-value (LTV) ratio is adjusted to local market conditions. The higher the LTV ratio, the riskier the loan.

For many financial products, including a mortgage, line of credit, or home equity loan, the LTV ratio had to be lower than 80%. In other words, you could only get a financial product if you had built up at least 20% of equity in the value of the property.

For example, if the total appraised value of a home you were looking at buying was $450,000 and you saved up a down payment of $90,000 (or 20%), the total mortgage loan amount you would want is $360,000 ($360,000/$450,000), or an 80% loan-to-value (LTV) ratio.

If you saved $50,000 (or 11%) for a down payment on the same house, you would be looking at a mortgage of $400,000 ($400,000/$450,000) or an LTV ratio of 88%.

Depending on market conditions, the LTV can either rise or fall. Ideally, it falls because the value of the house increases as you pay off the mortgage. But, if the housing market suffers a correction, the LTV ratio could rise and be higher than the total value of the property.

How Does This Impact Canadians?

Old Rule

Under the old LTV ratio rule, if you were renewing a mortgage, you did not have to pass a stress test. If you were refinancing, the maximum amount of equity you could tap was 80%.

New Rule

Under the new guidelines, if you’re renewing a mortgage, you technically do not need to pass the more stringent stress test requirements. But the banks could still vet you. If you fail, you could be stuck renewing with the current financial institution or have to accept uncompetitive rates.

If you’re looking to refinance a mortgage to consolidate debt, you’ll have to qualify according to the higher stress test rates; not the mortgage rate you initially secured. This means the lender will stress test your loan adding two percent to the initial five-year fixed rate. If you have a mortgage with a five-year fixed rate at 3.3%, you’ll be stress tested at 5.3%. This means you might be stuck getting a smaller loan.

If you’re looking to refinance a mortgage, the new mortgage lending rules mean it will be a lot more difficult to qualify for your refinance. As a result, you may not be able to refinance until you build up more equity.

Canada’s stricter lending rules will also make it tougher to qualify for a home equity line of credit (HELOC). Again, that’s because the big banks need to stress test you by adding two points to the current “benchmark rate” when you apply.

Canadalend.com, the Mortgage Refinancing Experts

Starting January 1, 2018, all borrowers in Canada have to pass a strict stress test if they’re borrowing from a federally regulated financial institution. Fortunately, Canadalend.com can help circumvent those rules and get you the mortgage or other financial product you deserve.

The licensed mortgage professionals at Canadalend.com are independent. That means they can help you find a mortgage with the best rates and terms. How can Canadalend.com beat what the big banks are offering? Where banks are stuck providing their own financial products and legally need to follow the new OSFI mandated stress test, Canadalend.com has access to hundreds of different private lenders; lenders that do not follow the same rules.

If you’re looking to secure a first mortgage, renew a mortgage, or refinance, contact Canadalend.com today. We’ll evaluate your current financial situation and help you find a lender that can provide you with a mortgage that suits your financial and lifestyle needs. Or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.

Sources:

1.“New mortgage rules could disqualify 10% of buyers with big down payments: Bank of Canada,” The Globe and Mail, November 28, 2017; https://www.theglobeandmail.com/report-on-business/new-mortgage-stress-tests-could-disqualify-10-of-buyers-bank-of-canada/article37109981/.

Flipping houses is a popular real estate investment, where the investor buys the home with the goal of quickly reselling it for profit. Often, they make improvements to the property to maximize its value.

Flipping houses in the GTA real estate market can be a smart investment and a positive experience if the investor knows what they’re doing. The biggest aspect that many don’t consider are the tax implications that come with flipping a property.

How to Flip a House

There are different ways that one can go about this. Some prefer to hold onto the mortgage for the shortest amount of time possible by flipping them as soon as the market heats up. They might not maximize value but they should yield a profit.

Other investors play the longer game where they invest in the property through renovations and improvements. This can result in a greater return on investment but it means the investor will be responsible for the mortgage for longer, and must finance the renovations. A greater financial commitment can lead to a much greater reward.

What’s the Risk?

There is risk with any investment. Each property comes with some problems, which could affect how quickly the house can be sold. In addition, markets fluctuate fast and if it happens to cool before an investor can resell the property they could have to financially carry it for longer. This could reduce the profit margin.

Any unexpected delays in renovations or construction could also result in less profit.

Restrictions and Tax Implications

When the GTA market heats up, one suggestion to cool the rising prices is to tax house flippers. This would impede speculative purchases and allow more residents to buy a home. Restrictions and tax implications could hinder some investment opportunities, but in conjunction with the new mortgage rules could protect borrowers, lenders and investors.

Another idea being considered is a graduated tax system. This means that an owner who buys and sells a home shortly after purchase would pay a higher tax rate.

These ideas do come with the contrarian viewpoint that it would take value and money out of the market, driving down the price of homes.

Flipping a home isn’t for everyone, but savvy investors who understand a specific market could yield a huge return.

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A lot of Canadians are house rich and cash poor; meaning, they’re good at paying down their mortgage, but at the end of the day, don’t have a lot of disposable income. That can make it difficult for the average Canadian to come up with the much-needed funds for an unexpected expense, purchase, renovation, debt consolidation, etc.

Two of the most popular ways for homeowners with more than 20% equity in their homes to free up some cash is with either a home equity loan or home equity line of credit (HELOC). They sound alike, but they’re very different; understanding these differences will help you decide which one is right for you.

What Is a Home Equity Loan?

A home equity loan, often referred to as a second mortgage, is secured against your property. It acts like your primary mortgage and is second in line to get paid off should there be a default.

After you are approved for a home equity loan, the lender will send you a one-time lump sum payment that is paid off over a set period of time with a fixed interest rate, and predetermined monthly payments. Just like the primary mortgage, you are charged interest on the total amount of the home equity loan as soon as you receive it.

Credit Limit with a Home Equity Loan

With a home equity loan, you can borrow up to 80% of your home’s appraised value, minus the unpaid balance on the primary mortgage.1 The interest rate can either be fixed or variable. While the interest on a home equity loan is generally higher than on the existing mortgage, it is a lot lower than other types of loans.

Uses for a Home Equity Loan

Anything! It’s your money, you can use it for anything you like, including renovations, debt consolidation, paying for tuition, a wedding, investing. The sky’s the limit!

What Is a Home Equity Line of Credit (HELOC)?

Like a home equity loan, a HELOC is secured against your house and allows you to access the equity you’ve built up in your property from paying down the mortgage and as the price of the home has increased.

A HELOC is a revolving line of credit with an adjustable interest rate that goes up and down with the markets. As a line of credit, the money is deposited into an account that you can access as little or as much as you want, whenever you need it. Unlike a second mortgage, there are no fixed repayment amounts; the lender usually only requires you pay the monthly interest on the money you use.

Credit Limit with a HELOC

The credit limit on a HELOC combined with a mortgage is 65% of the home’s purchase price or market value. You can increase the credit limit on a HELOC to 80%, but only if it is combined with a regular mortgage.

Using a HELOC to Pay Down a Mortgage

You can use your HELOC for anything you like. You can even use a HELOC to pay down a mortgage. The interest rate on a HELOC is blended or the same as your usual mortgage. Because it can be blended, a lender can change the HELOC rate at any time.

Does that mean you shouldn’t use a HELOC to pay down your mortgage? Not necessarily. The interest on a HELOC might be a little higher than the interest on your mortgage, but you’re only charged interest on the amount you actually borrow from the HELOC, not the entire amount—like you are with a mortgage.

The same payment using a HELOC compared with a mortgage actually pays down more principal; the mortgage then gets paid down a little faster and with less interest.

A Home Equity Loan or HELOC: Which One Is Right for You?

That’s something only you and your lender can decide on. But there are times when one might make more sense over the other.

For example, a home equity loan might be a good choice for homeowners who need upfront money for a one-time event (renovations, wedding, etc.) and like the idea of a fixed-rate loan.

If, however, you want to have access to the money over a longer period of time, a HELOC might be a good idea. Especially if you can pay the amount you borrowed back right away; this would mitigate any costs associated with a variable interest rate.

Or, if you’re a homeowner with bad credit or only have less than 20% equity built up in your home, you might want to look at getting a home equity loan from a private lender. Private lenders do not have to follow the same strict guidelines that Canada’s big banks do. Instead of hurdles, private lenders provide you with more options, freedom, and flexibility.

Canadalend.com, Helping Ontarians Access Their Home Equity

The vast majority of Canadians have not saved up money for a rainy day. That’s why more and more homeowners are accessing the equity they’ve built up in their homes; either with a home equity loan or HELOC. And no one is better at helping property owners tap the equity they’ve built up in their homes than Canadalend.com.

Unlike the big banks, which only try and sell you their own financial products, the licensed mortgage professionals at Canadalend.com are independent. We have access to hundreds of different lenders. That means Canadalend.com can find you a lender that will provide a home equity loan or HELOC that the big banks can’t.

Apply online in 60 seconds & get approved now!
Call us for more information 905.881.0242

If you’re a homeowner and are looking to take out a home equity loan or HELOC, contact Canadalend.com today. We’ll evaluate your current financial situation and help you find a lender that can provide you with a financial product that suits your needs. Or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.

Sources:

“Borrowing against home equity,” Government of Canada, January 31, 2018; https://www.canada.ca/en/financial-consumer-agency/services/mortgages/borrow-home-equity.html.

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Predicting any housing market is difficult. Predicting Toronto’s housing market requires almost Nostradamus-like abilities.  The Toronto market has held strong for several years now, but the recent dip has led many prognosticators to wage a bet that another spike is looming.

Where will Toronto’s housing market end up a decade from now?

Long-term Growth

There are signs that Toronto will come out of the recent market lull and enter a period of growth that will send housing prices soaring. It might take another year for this to happen, but the market is expected to increase in value. This could create some negative scenarios for those dreaming of homeownership.

Once the demand races beyond the supply and people adjust to new policies and regulations, the market will turn.

Housing Will be Less Affordable

For years, there’s been discussion about Toronto’s housing being unaffordable, especially for young professionals and the middle class.  With the housing market bound to rise in value, there’s a chance that affordable housing will become more challenging.

The condo market should continue to hold strong for the next few years but the housing market should outpace it at some point.

Remember, once the market starts to heat up, there will be a rush to buy including speculators looking to make a buck on an investment. This could speed up the market and inflate it to unsustainable levels.

A Good Time to Enter the Market

Now is a good time to enter the market as prices are relatively low. There are some obstacles—high interest rate, stress test, lack of supply—but if a person can get approved, there’s a window where aggressive bidding could pay off in the future.

A Decade Later

It might seem futile to try to predict the future of a volatile housing market but it’s a worthy exercise. The current state of Toronto’s housing market is temporary and the future will affect tens of thousands of households throughout the GTA.

Researching what will happen in a year or two or ten can help someone make more informed decisions as to when to buy, when to wait and when to invest.