A man and woman review their mortgage application on a laptop while sitting with their dog. A man and woman review their mortgage application on a laptop while sitting with their dog.

If you’re thinking about getting a mortgage, renewing an existing mortgage or refinancing a mortgage in 2018, it’s important you understand some critical changes to mortgage regulations that went into effect on Jan. 1. Depending on your current financial situation, these changes could affect your decision to enter the housing market this year.

These changes will affect anyone seeking a mortgage in 2018 and not just those who make less than a 20% down payment, meaning they must take on a “high-ratio,” or insured, mortgage.

The good news is that the amount of money someone needs to pay for their mortgage – should they be approved for one – may not change as a result of the new regulations. On the other hand, the qualifying rate for a mortgage will be substantially higher, meaning some individuals may no longer qualify for a mortgage, while others will qualify for a much less valuable mortgage.

So, what, exactly, are the changes?

In the past, getting a mortgage required going to a lender and meeting their qualifying contract rate – in 2017, with interest rates relatively low, a typical rate might be 2.85%. In most cases, so long as someone was approved by their lender at that qualifying rate, they could acquire a mortgage.

But that’s changed. Now, anyone applying for a mortgage will have to pass a “stress test” that requires applicants meet the Bank of Canada’s 5-year conventional mortgage rate – which is currently 4.99% – or their contractual rate plus an additional 2%, whichever is greater. In other words, if the lender’s qualifying contract rate is 2.85%, you’ll need to be approved at 4.99% (the greater number).1

How might this affect the amount you can borrow? According to Global News Opens a new website in a new window, someone applying for a 5-year fixed mortgage with a 25-year amortization period will go from being able to afford a home worth $726,939 to being able to afford a home valued at $570,970 – a very substantial difference.2

For Canadians renewing their mortgage, it’s possible those who fail the stress test will be forced to accept a higher interest rate with their current lender rather than having the freedom to shop around for a better rate. As for individuals seeking to refinance their mortgage – say, to pay for home renovations – they’ll also face the stress test. In the end, that could mean prospective borrowers have less money available to them than in the past.3

Searching for stability in a wild housing market

The changes, which have been implemented by Canada’s Office of the Superintendent of Financial Institutions Opens a new website in a new window (or OSFI), are designed to help ensure borrowers can truly afford the home they’re seeking to purchase.4

The changes are also expected to help stabilize a national housing market that has been white-hot and rather tumultuous for the past couple years. The most pressing need for change has been, arguably, in major urban centres like Toronto, Vancouver and Montreal, where competition for a limited number of homes has been fierce.5

This intense competition has caused housing prices to soar, sometimes unpredictably, across Canada. As people have searched for their own space in the crowded housing market, they’ve turned to some risky strategies, like skipping a home inspection.6

The frenzy has also resulted in some people taking on excess debt, which not only endangers their financial security, but the general wellness of the Canadian economy.7 The OSFI hopes its changes will bring some order to the housing market and, presumably, help prevent the economic uncertainty of 2008 and the years that followed.

Determining how these changes will affect your own home-buying experience may be tough. A financial security advisor with Freedom 55 Financial can introduce you to a London Life credit planning consultant, who can help you find a mortgage tailored to your specific financial situation.

1 However, you won’t have to pay the extra 2% should you meet the higher qualifying rate.

2 Eric Alini, “Here’s how much house you’ll be able to buy with the new mortgage stress test Opens a new website in a new window,” Globalnews.ca, Oct. 17, 2017.

3 Erica Alini, “New mortgage rules 2018: A practical guide Opens a new website in a new window,” Globalnews.ca, Dec. 10, 2017.

4 One last gasp for the Canadian residential market as rule changes cloud 2018 outlook Opens a new website in a new window,” Financial Post, Oct. 27, 2017.

5 Toronto home bidding wars so fierce that homebuyers are skipping inspections Opens a new website in a new window,” Financial Post, April 3, 2017.

6 Pete Evans, “House prices and debt loads a growing concern, Bank of Canada says Opens a new website in a new window,” CBC.ca, June 8, 2017.

7 Armina Ligaya, “OSFI sets new rules for mortgage lending Opens a new website in a new window,” BNN.ca, Oct. 17, 2017.