Debt has been a mounting topic in Canadian media. Often, we hear about reports of the Canadian debt problem, and how Canadians have been taking on more and more credit. The reaction to this has been mixed: some reports say that the debt has reached crisis levels. On the other hand, other reports say that it’s not something that we really need to worry about. 

Regardless of your position, the fact of the matter is that Canada’s financial regulator has been putting in more and more rules which make mortgages harder to obtain. In 2018 another change has been put through which may affect your ability to get a mortgage. Let’s take a look at how we are affected. 

The newest mortgage rule adds a “stress test” to your payment.

As you may know, one of the most important factors of a mortgage is the interest rate. In conjunction with the interest rate, banks use something called a total debt servicing ratio in order to determine the maximum amount of mortgage you could have. For example, someone making $100,000 a year could qualify for a mortgage which requires them to pay $40,000 a year. 

Normally, this would mean that the person can qualify for around $700,000 of mortgage at a 3% interest rate, which is great! However, with the new mortgage rules this year, banks must use a qualifying rate of 4.99%, which means this same person can only qualify for a $560,000 loan. As a result, their buying power has just decreased by $140,000. The problem is, however, that the person only needs to pay a 3% interest rate regardless! The new rules simply add an extra stress test, regardless of what your ACTUAL mortgage rate, and mortgage payment will be. 

For prospective home buyers, this is obviously not a good thing. The intent behind the new rule, however, is good. The reasoning behind this change is to keep Canadians from taking on too much debt, and to protect them in case the interest rates rise. As you may know, the interest rates did in fact rise multiple times in the last year. Thus, it does seem to reason that these new rules will in fact protect Canadians in a rising interest rate environment. So, what’s the solution for someone looking to buy a home in the near future? 

Credit unions are not under the same mortgage rules as banks.

Although banks do the vast majority of financial business in Canada, provincial credit unions have always been around. The interesting thing about the new federal rules is that they do not affect credit unions, which are governed under provincial law rather than federal law. As a result, there is no such stress test if you apply for a mortgage from a credit union! Of course, the downside is that a credit union generally charges slightly higher rates.

However, if this enables you to purchase your dream property, then it may well be worth it! The important thing is that you know all your options and are able to come to a decision that benefits you and your family in the best way possible.

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