When you’re starting your home buying journey, it can be hard to know where to begin. For one thing, mortgages aren’t always easy to understand, especially with regulatory changes over the past two years. If you’re looking to buy a home, it’s important to get up to speed on these rules so you can select the right mortgage for you. To help you understand these changes, let’s look at some of the basic requirements for buying a home.
The mortgage basics
Down payment requirements
Home down payments are usually expressed in percentages. They’re calculated by dividing the dollar value of the down payment by the home price. In Canada, the minimum down payment depends on the purchase price of the home:
- Purchase price of less than $500,000 needs a 5% minimum down payment
- Purchase price of $500,000 - $999,999 needs a 5% minimum down payment on the first $500,000, and 10% on any amount over $500,000
If you make a down payment of at least 20% of the purchase price, you’ll hold a conventional or low-ratio mortgage. If you put down less than 20%, your mortgage is considered a high-ratio mortgage. By law, high-ratio mortgages require you to buy mortgage default insurance.
Mortgage default insurance
This type of insurance protects mortgage lenders if homeowners can’t pay their mortgage. Your mortgage lender can arrange a default insurance policy through Canada Mortgage and Housing Corporation (CMHC), Genworth Canada or Canada Guaranty. In most cases, the additional cost is factored into your mortgage payment.
Financial stability requirements
Your lender will use two ratios – gross debt service (GDS) and total debt service (TDS) – to assess your ability to make monthly payments. These are used to determine how much you can spend on housing without risking your financial stability.
- Gross debt service is an estimate of the maximum home-related expenses you can afford each month, including mortgage payments, electricity and gas costs, property taxes and condo fees. While an acceptable number varies between lenders and the type of mortgage you hold, your monthly housing costs should be less than 30% of your gross monthly income for a non-insured, conventional mortgage.
- Total debt service is an estimate of the maximum debt load you can afford each month. In addition to your home-related expenses, this number includes things like car loan payments, credit cards and other loan expenses. This number also varies between lenders, but in general, your monthly debt obligations shouldn’t be more than 40% of your total monthly income for a non-insured, conventional mortgage.
Regardless of where you are in your home buying journey, brushing up on mortgage basics and the current rules is a good place to start when thinking about your next move.
Recent changes to borrowing
Changes to mortgage stress test requirements
What is it? Effective Jan. 1, 2018, the Department of Finance revised its stress-testing requirements for all homebuyers requiring a mortgage. With these changes, all homebuyers needing a mortgage must qualify for the greater of their lender’s contractual rate plus an additional 2%, or the Bank of Canada’s 5-year conventional mortgage rate to get a mortgage. For example, if your lenders qualifying contract rate is 2.89%, and the Bank of Canada’s rate is 4.99%, you’d need to be approved at 4.99%.
Who’s it for? All homebuyers that require a mortgage, regardless of their down payment amount.
How does it affect me? These changes intend to help Canadians avoid taking on bigger mortgages than they can afford. While the amount of money needed to pay for a mortgage hasn’t changed, it’s now harder to qualify for a mortgage to begin with. This could mean some individuals no longer qualify for a mortgage at all, while others will qualify for a smaller mortgage amount.
How much mortgage default insurance costs
What is it? From time to time, Canada Mortgage and Housing Corporation (CMHC) changes the cost of insurance. Under new guidelines, CMHC increased the cost on March 17, 2017.
Who’s it for? Homebuyers applying for a high-ratio mortgage that requires mortgage default insurance, or where low-ratio mortgage insurance is required.
How does it affect me? The cost of mortgage default insurance is based on the loan-to-value (LTV) ratio of the mortgage you’re applying for – it’s calculated by dividing the size of the loan you’ll need by the purchase price of the home. The higher the LTV ratio, the more insurance will cost. The cost depends on the LTV ratio. For current rates, refer to the CMHC website.
For B.C. residents only: British Columbia Home Owner Mortgage and Equity (HOME) Partnership program
What is it? Starting February 15, 2017, the Government of British Columbia introduced a new program to assist eligible first-time home buyers in British Columbia to enter the housing market.
Who’s it for? First-time homebuyers who are Canadian citizens or permanent residents and have lived in British Columbia for at least one year.1
How does it affect me? The British Columbia HOME Partnership program matches a qualified first-time homebuyer’s down payment with a repayable loan of up to 5% of the purchase price (maximum purchase price of $750,000). The program will run for three years, ending March 31, 2020. For full program information, visit the B.C. Housing website.
With housing price fluctuations and changing mortgage rules, it can be overwhelming to navigate the housing market. If you need a little help to get started, your financial security advisor can assess your financial security plan to make sure you’re on track towards your home ownership goals.
Your advisor can also put you in touch with a mortgage planning specialist who can guide you through each step of the mortgage process. Regardless of where you are in your home buying journey, brushing up on mortgage basics and current rules is a good place to start when thinking about your next move.
1For full eligibility requirements, visit https://www.bchousing.org/housing-assistance/bc-home-partnership. .