Enjoy this post sponsored by Streetwise Mortgages.
New mortgage rules are coming in on June 1, 2021 with revised stress test to check on affordability.
The change will apply to all mortgages, regardless of how much you are putting down.
To remind you of what the stress test is:
It is a methodology implemented by the Office of the Superintendent of Financial Institutions ( OSFI ) , which is the regulator body that governs the banks and is a tool for market intervention designed to manage a heated real estate market.
The stress essentially says the following :
Every time you are applying for a mortgage, whether you are buying or refinancing:
the banks will factor a higher payment than what your actual mortgage payment will be for the purpose of mortgage approvals.
Let’s look at an example:
You purchase a 550,000 property and you are putting 20% down. Therefore you would be applying for a mortgage in the amount of $440,000 .
If the lender is offering you a 5 years variable rate at 1.5% at a 30 year amortization : your actual mortgage payment would be $1,517.
BUT, in order for the bank to approve your mortgage though , they have to confirm that you are able to afford the higher of 2 payments -->1.5%+ 2% ( that is $1,969 ) or a payment at the new bank of Canada qualification rate of 5.25% ; which is $2414.
Bottom line--> the bank is ensuring that you can afford a much higher payment in case interest rates go up in the future ( in a nutshell : the higher of the rate you are being approved for + 2% or a new benchmark rate of 5.25% ; which is up from the current 4.79%)
OSFI has also indicated that they will review this qualification criteria for adjustments on an annual basis.
How Does this Change Impact Your Purchasing Power or Ability to take Equity out?
If you recall: the first stress test was implemented in Canada back in 2018.
At the time purchase power declined by about 22% in 2018 vs 4-4.5% now in 2021.
There is no doubt, this new stress test also impacts purchase power but the impact is much smaller. More in the range of 4-4.5% drop in purchase power.
5 Debt and Income Management Strategies
While the impact is small, here's 5 strategies to follow now:
STRATEGY 1: Re-amortize debts that stand in the way
You may have a high monthly car payment that is eating into your ability to qualify under the new rules. If we re-amortize that loan for example : we hit 2 birds with 1 stone.
A. We reduce your monthly cash outlay leaving money in your pocket to invest and
B. B open up borrowing power
STRATEGY 2: Pave the way
Paving the way is about paying down or paying off unsecured debts including credit cards.
While you pay an interest only payment on those, the banks factor a 3% of the balance into their calculations. Clearing a portion or all of those debts will definitely open up room for you
STRATEGY 3: Rejuggle
This is an advanced strategy that involves converting a portion or all of a secured line of credit into a mortgage.
Say you have a secured line of credit of 100,000 on a property and that you are paying a small interest only payment every month of $250 at an interest of about 3%.
While that is the case, the bank is using a higher payment of about 600 in their calculation . More than double what you are paying.
By converting that line to a mortgage say at 2% , the bank would go by the new monthly payment you are paying which is $369 !
STRATEGY 4: Top it up
Under this strategy , we consider topping up the income to give it a boost.
This can be done through various methods , including : working with lenders that use an opinion of market rents ( versus the actual rents you charge ); which would allow the lenders to use higher rents if your rents are below market.
Another method includes declaring more income to qualify if you are self-employed or adding a co applicant.
STRATEGY 5: Planning
If you are looking for an assessment of how the new guidelines impact your portfolio and what you need to do differently and proactively to pivot and position your finances for growth, myself and my team of income-property mortgage advisors are happy to guide you.
All the best, Dalia
About the author
Dalia Barsoum, MBA Finance:
Is the President and Principal Broker, of Streetwise Mortgages # 12900
An multi Award-winning Mortgage Brokerage, specializing in serving Real Estate investors across Ontario.
Dalia has been recognized as one of the Global 100 mortgage professionals by the CMP Magazine.
She is a Real Estate Investor and finance advisor with over 20 years of experience in the financial industry. Dalia is a regular speaker and contributor on the topics of investing and financing and is a best-selling author of Canada’s # 1 Financing Book: “Canadian Real Estate Investor Financing: 7 Secrets to Getting All the Money You Want”.
If you are really interested in building your rental property portfolio, be sure to talk to Streetwise Mortgages. Dalia Barsoum and her team can help you develop a financing roadmap and answer key questions pivotal to your growth:
1) Where will the money come from ?
2) The best way to take out equity to grow?
3) How to structure your deals to enable growth?
4) What you can expect in terms of financing for the properties you are looking to purchase and much more!
Book your complimentary planning session and consultation at the link below and get a copy of the Streetwise Best to Invest 2021 research of the top 18 investment markets across Ontario.