As of November 1, 2012, the Office of Superintendent of Financial Services (OSFI), has brought new mortgage rules to restrict qualification and curb Canadians' household debt to protect the Canadian economy from a US style housing correction. Here is what you need to know:
1. Cashback Mortgage
Cashback cannot be used for downpayment, only for closing costs. Downpayment must be from own resources or gifted from family (parents or siblings) only.
2. Home Equity Line of Credit (HELOC)
Restricted to 65% of home value. One can have a mortgage of 15% of home value bringing the total to 80% (65% HELOC + 15% mortgage) as long as HELOC does not exceed 65%.
3. Mortgage Qualifying Rate
1-4 year fixed mortgages and variable mortgages to qualify at Bank of Canada benchmark rate (in other words 5 year posted rate). This will make it very difficult for Canadians to qualify for shorter term mortgages and variable mortgages. How will anyone qualify for a variable mortgage when when the 5 year posted rate is at 6-7% range? I hope OSFI would revisit this rule in the future.
4. Self Employed Mortgage
The maximum allowed loan to value (mortgage and HELOC) for stated income applicants is reduced to 65%. Stated income programs are for business owners who maximize their tax write offs to reduce taxable declared income. Commissioned applicants such as real estate agents and mortgage brokers do not fall under the self employed program unless they have an incorporated business.
For applicants with 680+ beacon credit score, the maximum GDS/TDS is 39/44. For applicants with less than 680 beacon credit score, the maximum GDS/TDS is 35/42.
As you can see the new mortgage rules restrict qualification and might not be popular with various groups of Canadians, however they are designed to protect the economy since a significant real estate correction would have a major impact on employment numbers. In my opinion, the new rules unfairly penalize self employed Canadians since they will be forced to access funding through secondary more expensive channels; alternative and private lenders.
To discuss how the new mortgage rules impact your qualification whether you are a first time home buyer or self employed, please email Nawar.