If your client is looking to buy a new home, she might want to get pre-approved by New Year’s Eve.

New mortgage rules are effective January 1, 2018, for homebuyers with down payments of 20% or more (uninsured mortgages).

If your client receives mortgage pre-approval before Jan. 1, 2018, and she purchases a home before her pre-approval expires, she won’t be affected by the new rules, says TD Bank in an infographic.

TD adds that if a current homeowner renews their mortgage and stays with the same lender to do so, then they won’t be subject to the new rules. If they move to a new lender, TD says, they’ll “be treated as a new borrower and will have to qualify at the higher, stress-test rate.”

Certainly, many buyers are sealing the deal on real estate ahead of the new year, suggests an RBC housing report. Home resales in Canada rose at their fasted rate in nine months, at 3.9% between October and November. The report adds that many sellers are also getting ahead of new rules, with new listings rising by 3.5% in Canada over the same fall period.

“We expect some market volatility over the next few months as the new mortgage rules are implemented,” says the report. “Our outlook for 2018 calls for further moderation in home resale activity and prices increases in Canada.”

The details

The new rules apply to federally regulated financial institutions, not credit unions or private lenders. Here’s what your client should know:

  • Uninsured mortgages are subject to a new qualifying rate, or stress test. This rate is the Bank of Canada’s five-year rate (4.99%), or the lender’s contract rate plus 2%–whichever is greater. Your client’s mortgage payment will still be based on the contractual mortgage rate but the higher rate will be used for qualifying purposes.

The table below shows the difference in monthly payments using the lender’s rate versus the qualifying rate, for a mortgage of $500,000 amortized over 25 years (using CMHC’s mortgage payment calculator).

RateMonthly payment
Lender rate of 3.39%$2,467
Qualifying rate of 5.39% (3.39% + 2%)$3,020

(The lender rate of 3.39% is based on RBC’s 5-year fixed mortgage rate for a mortgage with a 25-year amortization.)

Read: BoC warns of risks for clients with mortgages

Further tightening for banks

Banks are subject to two other measures, effective Jan. 1:

  • Lenders must enhance their loan-to-value (LTV) measurements to reflect risk. Technically, the maximum LTV in Canada is 95%, because the minimum down payment is 5% on a purchase price less then $500,000. When the rules were announced in October, OSFI said in a release: “Federally regulated financial institutions must establish and adhere to appropriate LTV ratio limits that are reflective of risk and are updated as housing markets and the economic environment evolve.”
  • Lenders are prohibited from creating lending arrangements designed to circumvent LTV limits. That means no more bundling by lenders. Mortgage website YourMortgageYourWay.ca describes bundling this way: “[Say] a consumer applies for a mortgage with an 80% LTV, and the lender can only approve 65%. The lender then partners with a second lender for the additional 15%. The original lender then bundles the 15% LTV mortgage with the original 65% mortgage to form the complete 80% LTV loan. This is no longer permitted as per OSFI.”

Also read:

Mortgage stress test to temper home prices: report

Why millennials won’t be main boon for Canadian housing