New CMHC Qualifications for High Ratio Mortgages
Monday Oct 17th, 2016
New rules from CMHC came out today with regards to how individuals will be qualified for insured mortgages. So you are probably asking what does that mean and how does it apply to me?
This rule applies to those obtaining a first mortgage where your down-payment is less than 20%. This is called a high ratio mortgage and it requires insurance from organizations such as CMHC or Genworth.
When qualifying for a mortgage, your financial institution would calculate, among other things, your TDS or Total Debt Service ratio. This is where they look at all your debts vs your income to determine your ability to pay them back. One input is what your mortgage payments would be at the current interest rate. With the new rules this calculation would be slightly different in that a higher rate would be used (the Bank of Canada Rate).
So here's an example:
Let's say you are purchasing a home at $350,000 and putting 5% down. Your mortgage payments (if amortized over 25 years with a 5 year term) would be approximately $1,507 if your interest rate was 2.29%.
Under the new rules your financial institution would use the Bank of Canada Rate to qualify you, so let's say that is 4.65% that means the mortgage payment they would use is $1,935. It's important to note that you would not be actually paying the higher amount it would only be used to qualify you for the mortgage,
So why do it?
Interest rates have been exceptionally low. At some point they will rise and there is a fear that home owners, especially in larger markets like Toronto and Vancouver where housing prices have been increasing drastically, will not be able to stay in their homes once interest rates rise as the mortgage payments would be too high given their income. This could lead to detrimental effects like we saw in the US housing market.
Still confused or want to know next steps?
Contact your financial specialist or if you are not currently working with one let me know. I am happy to assist in finding the right financial coach for you.