Canadians will have to go through some tough rules to get a mortgage with a properly regulated lender starting in 2018. In particular, Canadian home buyers will have to show that they can pay off high-interest rates on their mortgages regardless of how large their down payments are.
The Office of the Superintendent of Financial Institutions Canada announced that people who apply for uninsured mortgages where the down payment is worth 20% or more of the mortgage value will have to follow a stress test. Those who want to buy homes worth $1 million or greater will have to go through the same test.
This would entail a person having to make payments at two percentage points greater than the rate that is being offered. That person may also make payments at the five-year rate high. Such a plan is being utilized to see how well a person can handle a loan. The higher rate of the two-percent increase or the five-year high will be the one that the person would have to pay off.
For instance, if a person was to get a mortgage with a 1.99% rate, that person might have to pay off a 3.99% rate on the mortgage. This would entail an increase in a monthly payment by a few hundred dollars depending on the value of the home. This would still work even if a person had a 25 or 30% down payment on a home.
Additionally, a new policy would offer mortgage insurance to those who pay less than 20% on their down payments. This is designed to keep mortgage defaults from occurring as often. A home buyer would have to show that they can still handle their payments even when the interest rate goes up by two percentage points.
These rules are designed to help with keeping housing markets in Canada under control. This comes as the prices for homes around the country have been skyrocketing in value since 2010.
There are still concerns that added government intervention could help to keep mortgage rates in check. The Fraser Institute does argue though that the new move for challenging homeowners could cause the market to become unstable. This is due to the added costs involved with monthly payments, thus making it potentially harder for people to pay off their loans. This could make for concern in the market where home values might drop without much warning involved.