Mortgage Rules and its Application in Recent Days

At the beginning of the year 2018, it was mentioned that it will turn tough for home buyers to get a mortgage. This is because three new rules are going to be introduced during the year 2018 for which you can notice certain changes in the existing rule relating to Down Payment Mortgage. Let’s take a look at the changes in the mortgage rules for the home buyers.

· Stress testing: The Office of the Superintendent of Financial Institutions has enacted the new rule and this rule is going to be in action in the year 2018. As per this rule, a new qualifying parameter is set by Government. This parameter is set for all prospective home buyers irrespective of the fact that they make a down payment of over 20%. Before the introduction of this rule, the homebuyers who make down payment less than 20 percent are required to pass the stress test. In case the home buyers fail to pass this test, the bank will not allow any mortgage. There are two conditions any one of which every home buyer is required clear to pass the test. Either the buyer is required to cross 200 basis points or need to pass the five-year benchmark which is 4.89% of Bank of Canada.

· The increment in the loan to value: Normally the mortgage lenders are required to ensure that LTV or Loan-To-value should remain dynamic. This indicates that this LTV is required to be adjusted with the local market. LTV ratio/ is calculated by big banks in Canada and if the LTV is higher, then the risk is also bigger and vice versa.

· Restrictions to avoid LTV limits: No mortgage lender is allowed to arrange financial products to remain close to the LTV ratio. With the introduction of the new rule, it is suggested that lenders can get 60 percent loan if the LTV ratio is 80 percent. Previously, buyers could have arranged a loan of 80 percent jointly with a second lender.

Hence, with the introduction of the new Down Payment Mortgage rule, it has become quite clear that this new rule is going to be tough for the new home buyers. The potential home buyers will find it extremely tough to get the mortgage. As per the previous rule, if you do a calculation you will notice that if a family in Canada has an annual income of $100000 and can afford 20% down payment with a repayment term of 25 years that family can get a loan of $726939. But, as per the new rule, the family requires to qualify at 4.89 percent and accordingly they can afford a home at $570970.

Again, as per the new rule, the buyer needs to fulfill the criteria of 200 basis point and here a family with an annual income of $100000 can afford a loan of $559896 whereas as per the previous rule the same family could have arranged a loan of $ 706692. Hence, you can notice the difference and accordingly, you need to be extremely cautious while you are going to arrange a mortgage loan.