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2 things to know about the down payment changes in Ontario

July 5th, 2017  |  Home

If you’re currently in the market for a home, you’ve probably noticed that the mortgage rules have recently changed. When qualifying for a mortgage, lenders look at several factors: your income, credit, debt ratios and down payment. The down payment is what keeps a lot of renters from becoming homeowners. Some people can afford the carrying costs of a home (utilities, home insurance, property taxes, repairs and maintenance), but they’re unable to save enough for the down payment. This is especially challenging in pricey real estate markets in the Greater Golden Horseshoe that have seen home prices rise a lot faster than inflation.

The high level of household debt is of great concern to the Bank of Canada and policymakers. A big factor driving the real estate market is perpetually low interest rates. With low interest rates, buyers are able to afford to spend more on a home than they otherwise would if interest rates were at a more typical level. Interest rates may be low now, but there’s no guarantee they’ll stay this low in the future. To protect homebuyers from overextending themselves and buying “too much” home, Ottawa has introduced a number of measures designed to slow the price escalation seen in many markets in Ontario. There’s been talk of upping the minimum down payment from five percent, but so far that hasn’t budged. However, there have been a couple big changes that do affect homebuyers in Ontario.

Mortgage stress test

In late 2016, the federal government extended the requirement of the mortgage stress test. The mortgage stress test is a way to stop homebuyers from overextending themselves. It makes you qualify at a higher mortgage rate (the Bank of Canada’s posted five-year fixed mortgage rate) to make sure you can handle it if and when mortgage rates go higher. To put this into perspective, the stress test rate was 4.64 percent when the rules were introduced, two percentage points higher than most available mortgages at the time.

Prior to October 17, 2016, only those who made less than a 20 percent down payment were subject to the mortgage stress test. Concerned about the rising level of household debt, the Bank of Canada extended the stress test to all mortgage, even those putting down more than 20 percent. This effectively reduces your budget to purchase a home by 20 percent on average. Under the stress test, homebuyers have a debt ceiling of no more than 39 percent of their household income to cover the carrying costs of a home, such as mortgage payments, heat, taxes and condo fees (if applicable).

Higher mortgage insurance premiums

Homebuyers with less than a 20 percent down payment will also be impacted by higher mortgage insurance premiums. Starting March 17, Canada Mortgage and Housing Corporation upped mortgage insurance premiums. The premiums don’t protect you – they protect your lender in case you default (fail to repay) you mortgage. The changes work out to on average an extra $5 per month for homeowners with high-ratio mortgages.

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