Our blog

New Mortgage Rules

On January 1, 2018, Canada’s already strict mortgage lending rules got even tougher, making it more difficult for those looking to renew or refinance their mortgages. Unlike before, Canadians of every stripe now have to prove that they can handle an interest rate hike that is substantially higher than their current rate.

On top of that, new mortgage rules mean borrowers, even those with a down payment of 20% or more now need to pass a stress test. Before 2018, only those borrowers with a small down payment who needed mortgage insurance had to face a stress test.

This represents the seventh time that the federal government has tightened the country’s mortgage rules since July 2008, severely limiting the amount of debt that Canadians refinance, renew, and borrow.

The new lending rules implemented in 2018 though could have the biggest impact on Canadian homeowners looking to refinance or renew. There is one silver lining for those homeowners who are looking at renewing or refinancing their mortgages: The new, stricter lending rules only apply to federally regulated financial institutions—the rules do not apply to private lenders.

Image Source: iStock.com/tumsasedgars

How Will the New Rules Affect Mortgage Renewals?

Without question, the new mortgage rules will make it more difficult for homeowners to renew or refinance their mortgages.

• Stress Test

The new stress test ensures first time homebuyers can qualify for a mortgage at the Bank of Canada’s current five-year benchmark rate plus two percentage points.

But homeowners looking to renew already have a mortgage so why would the stress test matter? Unfortunately, your lender will still want to make sure you can pay your mortgage.

Just because you were approved for a mortgage in the beginning doesn’t mean your renewal will be approved. In fact, critics of the new mortgage rules say the stress test will hurt those looking to renew and refinance the hardest. Keep in mind, you need to qualify at the higher stress test rates—not your existing contractual mortgage rate.

• Loan-to-Value Ratio

The loan-to-value ratio (LTV) measures the value of a mortgage as a percentage of the total value of the property. For those thinking of refinancing, Canada’s big banks need to make sure the LTV ratio is adjusted to local market conditions. The higher the LTV ratio, the riskier the loan.

If you want to get a line of credit or home equity loan, the LTV ratio has to be lower than 80%. Or put another way, you can only refinance a mortgage if you’ve got 20% equity built up in the value of your property. If you haven’t built up enough equity in your home, you won’t be able to refinance until you do.

Even if you have built up enough equity, the new stricter lending rules will make it harder to qualify for a home equity loan or home equity line of credit. The banks will add two points to the current benchmark rate when you apply.

Can You Be Denied a Mortgage Renewal?

When your current mortgage term reaches its maturity date, you will need to renew the outstanding balance for another term. Before your term expires you’ll receive a renewal offer from your current lender. It will most likely include the new mortgage rate and length of the term. All you need to do is accept their terms and send it back. Except signing the renewal doesn’t mean you’ll get approved.

Even if you’ve made your mortgage payments on time, the lender will want to review your current financial situation, this includes your credit score. They want to see how much debt you’ve accumulated and to see if your employment situation has changed. If your current lender doesn’t like what it sees, it could choose not to renew your mortgage.
Remember, you have to qualify according to the higher stress-test rates—not your existing contractual mortgage rate.

If you fail the stress test, chances are you’ll be stuck renewing your mortgage with your current lender at less than desirable rates.

You can look around and try to find a better rate, but you may get denied by a new lender. That’s because you need to submit a new mortgage application with your renewal.

The new lender doesn’t know anything about your financial situation and will need to verify your income to make sure you meet their credit requirements before they will approve your application.

Tips for Better Mortgage Refinancing

• Homeowners thinking about refinancing are being hit on two different fronts: interest rates are rising, and lending terms are tougher. This means it’s more important now than ever to make sure you get the best terms and rates when it comes time to renew.
• If your mortgage is coming up for renewal, it’s a good idea to start shopping around now and negotiate with prospective lenders. But where can you turn if your financial situation has changed; if your debt level has increased significantly; if your credit score has fallen; or if you make less money?
• If any or all of these scenarios have happened to you, it won’t matter how much you shop around. Traditional lenders will see you as a risk.

Canadalend.com, Mortgage Renewal and Refinancing Experts

Thanks to stricter mortgage rules, it is now a lot more difficult for Canadian homeowners to renew or refinance their mortgages. But those rules only apply to federally-regulated financial institutions. Since Canadalend.com is independent, they can help you find a private lender to renew or refinance your mortgage with the best terms and rates.

Where the country’s big financial institutions have to legally follow the new Office of the Superintendent of Financial Institutions (OSFI)-mandated stress test for mortgage renewals and refinancing, private lenders don’t have to. And the mortgage renewal and refinancing professionals at Canadalend.com have access to hundreds of different private lenders.

So, if you’re looking to renew or refinance a mortgage, 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.

While every life is different, almost everyone aims to own their own home at some point in their lives. Once on the property ladder, you may move to progressively larger homes (as your family grows) or to another city for work or you might decide to rent your home and go travelling.

Whether you’re aiming to join the property ladder, move up it or change your place on it, it’s important to keep abreast of the most recent changes in the prevailing law. We’ve detailed the two most recent changes to Canadian mortgage rules below and explained what they might mean for you.

Getting Stressed

Perhaps the most notable change to the process has been the introduction of stress testing as part of the mortgage process. This new procedure is designed to settle the property market by limiting the amount that Canadians can borrow. It’s working.

The Canadian Real Estate agent Association says that home sales in 2019 are expected to reach their lowest levels for a decade and the rule change has hit new buyers hardest who, on average, can afford 20% less than their predecessors as a result of the new legislation. Different areas, however, have been affected differently. While sales have fallen in Alberta and British Columbia, they have grown in places like Ontario and Quebec.

If you’re looking to join the property ladder in 2020, one of the key steps to getting yourself up to speed on the prevailing rules is to understand both when stress-testing will apply and how it is conducted. Either using the five-year Bank of Canada Benchmark rate or 200 basis points greater than the mortgage’s contractual rate measure. Whichever measure is larger, is the one used.

Down Payments Going Up

In addition to stress testing being brought in for 2019 there were also changes made to the minimum down payment thresholds for properties of different values. 

The revised rules require a minimum downpayment of 5% for a property valued at up to $500,000, rising to 10% for properties up to a million and settling at a 20% flat fee for any property valued in excess of a million dollars.

Where stress testing has a greater effect on first-time buyers, down payment thresholds impact more on people moving further up the property ladder as they will be required to find larger sums of available cash as they move to properties of greater value.

Its impact on first-time buyers is likely to be more tangental; an increase in the amount of time they rent for in order to save more for that initial payment or an increase in those relying on mortgage loan insurance. Mortgage loan insurance is set up to protect the lender in the event that you are unable to make your monthly repayments. Premiums for this type of insurance vary based on the value of the home you are buying and how much of the down payment you can manage. 

If you can’t make the minimum down payment take time to factor in the need for mortgage loan insurance into your budgeting, and like with any other financial product, shop around to see what rates are available to you.

Keeping to the Rules

These rules changes have had a notable effect on how Canadians manage their property purchases. Even if you are on your second or third mortgage application or property purchase, procedures such as stress testing can still appear complex. 

The experts at Canadlend.com are experienced when it comes to helping new and repeat borrowers with their mortgage products. Staying abreast of the changes in the law and how they affect borrowers means they can help you understand the process. Their access to hundreds of lenders and their products means that once they’ve helped you develop your financial plan they can connect you with the best product to execute that plan.

To find out more, contact Canadalend.com today and find out how you can take your first or next step on the property ladder.