Effective October 17, 2016 home buyers that require mortgage insurance (purchasing with a down payment of 20% or less) will now have to pass a ‘stress test’ to qualify for a mortgage at the Bank of Canada 5-year benchmark rate instead of the current lender’s rate. This difference in the qualifying interest rate from the actual rate, about 2%, will reduce the amount a person may qualify for a mortgage by up to 20%.
Before this change, a family with $100,000 annual income could qualify for a mortgage around $580,000 and now may only qualify for a mortgage of around $490,000 since their mortgage eligibility is based on the 32% gross income to housing costs rule.
Here is a breakdown of how the new rules would affect a monthly payment on a home valued at $700,000.
- House price: $700,000
- Down payment: $140,000
- Loan value: $560,000
- Mortgage: 5-year fixed at 2.17% (according to interest rate-comparing website RateHub.ca)
- Monthly payment: $2,418
- Stress test rate: 4.64% (five-year posted rate by Canada’s big banks)
- Stress-tested monthly payment: $3,143
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