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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/.

IS IT DIFFICULT TO GET A HOME EQUITY LOAN in 2020?
A home equity loan is a great way to borrow against the equity you’ve built up in your home. Against the backdrop of a robust Canadian housing market and near record-low interest rates, it continues to be an excellent time for property owners to consider taking out a home equity loan.

Common Myths about Home Equity Loans
There are many misconceptions about what a home equity loan is and how it can be used.

Myth #1: A Home Equity Loan and Home Equity Line of Credit Are the Same
A home equity loan and home equity line of credit (HELOC) might sound alike, but they are very different financial products, even though they both use the equity you’ve built up in the property.

For starters, “home equity” is the difference between the value of your home and the remaining balance on the current mortgage—every time you make a mortgage payment, your home equity increases. Your home equity also increases as the value of your home increases.

A HELOC is a revolving line of credit that lets you borrow against the equity in your home. You can withdraw money when needed, and you only pay interest on the amount you borrow.

A home equity loan works like your primary mortgage and is sometimes referred to as a second mortgage. You receive a fixed amount that is payable over a predetermined period time with a fixed interest rate and set monthly payments. You start to pay interest on the entire amount as soon as you receive the home equity loan.

Myth #2: You Can Only Use a Home Equity Loan for Home Improvements
The money you secure for a home equity loan can be used for whatever you like. Many people take out a home equity loan for home improvements, but you could use the money to buy a second property, pay for a college education, consolidate debt, or anything else.

Myth #4: Approval Is Guaranteed
Just because you have a house does not mean you’re guaranteed to get a home equity loan. A lender might approve you for a certain amount, but they could back out of the home equity loan or renegotiate the terms after they take a closer look at your financial situation.

How Do You Get a Home Equity Loan?
The requirements for getting a home equity loan can vary depending on who the lender is. The bigger the lender (i.e. Canada’s big banks), the stricter the lending rules.

Canadalend Can Help You Get A Home Equity Loan Even If:

• - You are self-employed and cannot verify your income
• - Your credit history has weakened
• - You have taken on too much additional debt
• - The value of your house has dropped

Where there is a will, there is a way with Canadalend. We don’t let the small things get in the way of making sure you get the best mortgage product at the best price.

FAQ about Home Equity Loans

Q. Is It a Good Idea to Take Out a Home Equity Loan?
A. YES! There are many advantages to taking out a home equity loan. One of the most significant benefits is the lower interest rate. If you’re consolidating debt, credit cards can charge interest as high as 30%. A home equity loan will also have a lower interest rate compared to loans that are not backed up by the equity you’ve built up in your home.

Q. Can I Get a Home Equity Loan if I’m Unemployed or Have Unreliable Income?
A. YES! If you go to one of Canada’s big banks and ask for a home equity loan while unemployed or have unreliable income, chances are you’ll get turned down. Even if you are self-employed, the big banks can discriminate against you. But not at Canadalend. We specialize in working with the employed, self-employed, even client’s that are in-between jobs.

Q. Can I Get a Home Equity Loan with Bad Credit?
A. YES! Canadalend can help you.

We work with all incomes and credit scores to help secure home equity loans for our clients. There are many reasons why your credit can take a hit, and it’s not always your fault, but banks don’t care. Even if a traditional lender does offer you a home equity loan, they won’t be giving you their best rates.

The same thing applies if you have declared bankruptcy and want to take out a home equity loan. Traditional lenders see you as being a risk and could charge you a premium for a home equity loan, but not at Canadalend.

Q. Is it true that Canadalend has access to more lenders and more products than any bank or financial institution?
YES! Canadalend has access to private and alternative lenders, banks that specialize in providing home equity loans, and even caters to those who are self-employed, have unreliable income, or bad credit.

Private lenders do not have to follow the same strict lending guideless that Canada’s big banks and trust companies do. Unlike big banks, private lenders provide you with more freedom, flexibility, and options. At Canadalend.com, we have access to hundreds of different lenders. That means we can find you a lender that will provide a home equity loan.

It’s your equity, and you should be able to take out a home equity loan on your terms. If you’re a homeowner and are looking to take out a home equity loan, contact Canadalend.com today or apply online. A Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.

Apply online in 60 seconds & get approved now!
Call us for more information 905-881-0242
Canadalend.com, Helping Homeowners Get a Home Equity Loan

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In the fall of 2017, news broke that the Bank of Canada was raising its interest rate. Even though borrowers shouldn’t expect another hike this year, the rate seems to have reached a level that could affect a lot of Canadians and their financial situation. The new interest rate is a departure for Canadians who have been enjoying a lower rate for several years now.

How have Canadians responded to the new interest rate and what can they expect in the first two quarters of 2018? What does this rate hike mean for borrowers with a home equity loan or line of credit?

Have Canadians Adjusted? 

Many Canadians saw their mortgage and loans become more expensive overnight, which shrank their cash flow and increased their monthly expenses. Even a half a percentage hike can apply quite a bit of pressure on borrowers.

Based on the changes to the housing market and early reports from the Bank of Canada, Canadians have adjusted well and might have even been prepared for a market adjustment.

The 2018 Interest Rate Outlook

After two rate increase, the remainder of 2017 should stabilize for borrowers, but early 2018 could see another rate increase. The Bank of Canada has been non-committal about what Canadians should be prepared for in 2018, but the door is open for more hikes based on Canada’s strong economic showing and soaring commercial showing.

Do Borrowers Need to Panic or Plan?

Borrowers should stay the course and continue to borrow or pay off debt based on their current financial structure. Saving more money or reviewing monthly expenses is always advisable, but there is no need to panic.

If you weathered the rate hike in September, then you have most likely dealt with the worst of it. 2018 will come with some challenges but there shouldn’t be too many major surprises.

Contact one of Canadalend’s home equity or mortgage experts to learn more about home equity loans or lines of credit or to better understand how the current interest rate would work with your mortgage approval.

Canada’s housing market is vital to the national economy. To secure its health, all levels of Government must monitor the market and proactively step in when the warning signs become clear. In major cities, strong housing usually means strong employment rates and other signs of prosperity.

Only a few months ago, banks were urging the Federal Government to intervene in Toronto and Vancouver’s housing markets to offset the price increases from earlier in the year.

Government involvement

To stabilize or stimulate the housing market, Governments can implement several action plans or items:

• Offer subsidies to homeowners.
• Work with the Bank of Canada to lower interest rates.
• Raise the amount that someone can deduct from a RRSP to put towards down payment.
• Make renting more attractive through legislation like rent control.
• Create more areas of affordable housing for people of different economic tiers.

These are proven ideas but success is never guaranteed.

Recent Government intervention

To curb defaults and protect borrowers, the Government implemented a stress test, which made it more prohibitive for most people to get a mortgage. Essentially, a borrower had to be able to afford a mortgage at a much higher rate, proving they could withstand an interest rate hike if it were to ever happen.

This was a measure to stabilize the market by creating a barrier to entry.

Pros and Cons

The pros for Government intervention is evident. In some cases, markets can correct themselves over time, but many times, help is needed. They require legislation that puts homeowners first or has the goal of getting citizens into their first home.  The Government has the means, resources and motivation to want a strong housing market.

The consequences of Government intervention are that it could benefit lenders more than borrowers or have the interest of builders in mind. Any strategy that doesn’t put homeowners first could negatively impact the market and citizens in the long run.

Above all, the national housing market specifically in Toronto and Vancouver needs to be strong and the Government needs to do what it can to ensure its growth.