There’s been a lot of talk about the new mortgage lending rules that came into effect in 2018. If you’re in the market to buy a new home or renew/refinance your existing mortgage, the new rules, which are about as digestible as a three-year-old burger, probably leave you scratching your head. It doesn’t help that every site explains the rules slightly differently… so here’s my attempt to simplify the complicated for you.

The Mortgage Qualification Process Changes

On January 1, 2018, the Office of the Superintendent of Financial Instutions (OSFI) – in the other words, the guys who regulate the banks – announced that they’d be introducing a new “stress test” to the home-buying process. This test will force new home buyers putting 20% down or more to qualify for their mortgage at the Bank of Canada’s posted rate, or 2 percent above the actual rate their bank offered – whichever is higher.

Basically, the stress test is designed to make sure Canadians don’t borrow more than they can afford. Love it or hate, it, the stress test was introduced to protect you. When the legislation came into effect, interest rates were near historic lows, which means the only direction they could go is… don’t make me say it.

So let’s play this out: you’ve borrowed as much as you can possibly afford at the lowest interest rates in history. Good for you. Let’s say you took out a 25-year mortgage, you have to renew it in five years and your job stays the same over the next five years (all very common scenarios). During that time though, interest rates have doubled, and when you go to renew, you find that you can no longer afford your home because it costs $500 a month more than it used to.

Now what?

Well, you, and the rest of the population that over-extended themselves, are forced to either refinance your home for a longer timeframe, or sell and downsize. Any idea what that would do to the housing market?

…remember the great recession of 2008? Awesome.

So that’s why this new stress test was introduced. Now, what the heck does it mean for you?

Buying a new house with less than 20% down

If you’re looking to buy a new place listed at under $1 million with less than a 20% down payment, the 2018 changes won’t affect you. You’ll still need to qualify for the mortgage at the Bank of Canada posted rate for a 5-year fixed mortgage – you can find that figure here (scroll down to the “Interest Rates” section).

Buying a new house with 20% or more down

BAM, stress test. No matter whether you’re a first-time buyer or not, you’ll have to qualify for your mortgage using the new stress test. If you were offered a rate of 3.7% by your bank, and the Bank of Canada’s benchmark rate is 5.34%, you’ll have to qualify for your mortgage assuming an interest rate of 5.7%. Because hey, it could easily happen. If you were offered 2.9% (and don’t hold your breath), you’d still have to qualify at the BOC rate of 5.34%.

Refinancing your current mortgage

Say you have a big chunk of your mortgage paid off, and you want to renovate your home using the equity in the house. What do you do? You refinance. The way it used to work was that, if you had a mortgage rate of say 3%, your lender would make sure you could afford your current mortgage, plus the new renovation amount, all at that 3% rate.

The way it’ll work now, on the other hand, is that when you go to the bank, you’ll have to qualify for the current amount of your mortgage plus the renovation amount, all at the stress test rates I mentioned above. That could be a huge jump, and you might not qualify to borrow the money you thought you could.

Renewing your current mortgage

If you’re looking to renew your existing mortgage for a new term with a different lender, you’ll again be subject to the stress test. If all you’re doing is renewing your existing mortgage for a new term with your current lender though, you’re safe. No stress test for you! Come back; five years. Or you know, whatever your term is 🙂

Wrapping it Up

While many people I know are pissed that this new stress test rule is keeping them from buying the homes they want, I have to say I think it’s a good thing for Canadians and the stability of the economy as a whole. If you can’t buy the home you want, it’s because you won’t be able to afford the home you want, even if you think you might be able to.

It’s way better to spend a little less on a place now, or save a little more for a bigger down payment to get to the place you want. Trust me… future you will thank you for it.

By the way, if you want to read more about the changes from the excellent Rob Carrick, check out an article he wrote here.