The start of 2018 isn’t only bringing in a new year — for Canadians, it’s also bringing in new mortgage rules.
In October of 2017, the Office of the Superintendent of Financial Institutions (OSFI) put new mortgage rules in place. The big one is a new mortgage stress test for uninsured mortgages. Those with a down payment of 20 per cent or less will have to test their mortgages against either the Bank of Canada’s five-year benchmark qualifying rate, or 200 basis points above their contractual mortgage rate. A basis point is used to calculate changes in mortgage rates and bond yields. It’s 1/100 of a per cent; 50 basis points equal ½ per cent.
Experts predict that first-time home buyers will be hit the hardest by the new mortgage rules, but there’s another group of Canadians who will feel the consequences: those seeking mortgage refinancing.
If you’re planning on refinancing your mortgage, you’ll have to qualify according to the higher stress-test rates rather than your existing mortgage rate.
Global News shared an example of the potential impact. Imagine you bought, for example, a $400,000 home and have a $100,000 mortgage balance left. You want to borrow $50,000 more for a renovation. You have a five-year fixed mortgage rate at 3.3 per cent.
Before the new stress test rules, your lender would make sure that you can take on a $150,000 loan at 3.3 per cent. However, with the new mortgage rules, your financial institution would have to make sure you can take on a $150,000 loan at 5.3 per cent. If you can’t, you may not qualify to refinance at all, which can create a predicament if you are loaded with debt.
In addition to the stress test, the new mortgage rules also encourage lenders to establish loan-to-value ratio (LTV) limits for lending. A LTV ratio is the amount of your mortgage loan divided by the appraised value of the property. For example, a buyer taking on a $50,000 mortgage to purchase a home appraised at $100,000 would have a LTV of ratio of 50%.
The changes will also tack on six to seven percentage points to the average borrower’s gross debt service ratio (GDS), according to RateSpy. The GDS ratio is the percentage of your income needed to pay all of your monthly housing costs. Lenders are looking to more than just the LTV ratio — they’re putting more weight on the GDS and the total debt service ratio (TDS), which can be affected by how much debt you already carry. The TDS ratio is the percentage of your income needed to cover all of your debts, including car payments, credit cards, alimony, loans, etc.
Qualifying for a home equity line of credit (HELOC) will likely also be more difficult under the new mortgage rules if you already carry a lot of debt.
So, what can you do if you need to consolidate debt into your mortgage, but you already owe too much and don’t have enough equity in your home to take out a loan?
If you find yourself in this situation, you may want to consider other debt consolidation options, such as a Consumer Proposal. A Consumer Proposal is a formal offer to your creditors to settle your debts, usually for an amount less than what is owing. You can likely keep your home and continue with your mortgage depending on the equity position, plus a Consumer Proposal is interest-free and leaves you with a single reduced monthly payment.
If mortgage refinancing isn’t possible due to the new mortgage rules, Fuller Landau Debt Solutions has experienced Licensed Insolvency Trustees who can talk you through your debt consolidation options. Call us today to schedule a free consultation: (416) 927-7200.