Changing the stress rate
The recent change to mortgage rules indicate that in order to receive a variable interest rate that has been the best choice for the last 15 years, each mortgage request will be judged by fictitious interest rate of 4.84% and not 4.64% (=stress rate) as it was till now. This is another hardening of mortgage rules that makes it harder for customers to access the mortgages cheapest and most flexible product – variable interest rate.
Big penalties ball game
Since 70% of the Canadians pay off their mortgage within the 5 years of their contract, their main cost is not related to how high is their interest rate but to the way their penalty is calculated. While a penalty for variable interest rate could be $3,200, the penalty for the same mortgage with fixed interest rate could come up to $20,000.
The effect on us
What is the effect of the current hardening in the mortgage rules? Clients will be eligible for a variable interest rate only if their income can support a monthly payment of a 4.84% interest rate mortgage. If this is the case, they will be approved for a variable interest rate of 2.35% for instance. If they don’t, then the only interest rate, available for them for the same mortgage, will be the fixed rate which is 1% higher. In our case it would be a fixed rate of 3.45% for 5 years with an inflated payout penalty.
Only employment income counts
And that is not all. It seems that in the future whoever’s income comes from dividends, liquid investments, sale of assets and investment properties will have a hard time getting a mortgage approved. According to upcoming policy only salaried income (line 150 taxable income) will count for the mortgage. Any other income will not be considered or will be partially considered.
In that case even if you have a good credit score, high down payment, high equity and large investment portfolio – you will not receive what you used to in the past from you bank or even other banks.
As a result as for Fall 2017 most applicants will receive 25% less than they would receive today for their mortgage. Financial measures like equitytake-out from an existing asset and purchase of a new one or debt consolidation under a cheaper mortgage will be much harder to perform.
Talk to your mortgage consultant today in order to plan the incoming months