If you’ve been following the news lately, you’ve likely heard about a new mortgage rule that’s expected to make it harder to qualify for a mortgage this year. And while that may be the case, there are still things you can do to ensure your jump into the housing market this year, if that’s one of your major financial goals in 2018.
With that in mind, we’ve assembled a handy step-by-step guide to help you qualify for a mortgage in 2018.
So, what’s changed?
Before we get into the nitty-gritty of qualifying for a mortgage, it’s important to look at what is different this year; what’s changed in the qualification process and how it will impact you.
As of Jan. 1, 2018, all federally regulated mortgages in Canada will be subject to a stress test, which was introduced by the Office of the Superintendent of Financial Institutions (OSFI), the country’s federal banking regulator. Prior to this year, only those with a high ratio mortgage (a mortgage with a down payment of less than 20%) were subject to the stress test.
According to the new rules, homebuyers must qualify at a higher interest rate than the one given to them by their mortgage provider. The new qualification rate is the greater of the OSFI's posted rate (currently 5.14%) or plus two percentage points to the mortgage rate offered by your lender (your contracted rate).
For example: Say you’ve been offered a mortgage rate of 2.99% (the current lowest rate offered in Ontario as of Jan. 19, 2018) by your mortgage broker or bank.
While that would be the rate you have to pay, the rate you would actually have to qualify at (and hypothetically be required to afford) would be 5.14%. For many homebuyers, this translates to a loss of 20% in buying power. In other words, the typical homebuyer will qualify for a home that costs 20% less than they would have prior to the stress test.
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Another factor that will impact your ability to qualify for a mortgage this year is rising interest rates due to a recent Bank of Canada interest rate hike. The Bank of Canada announced last week that it was increasing its benchmark rate to 1.25%. That move sparked upticks in bank prime rates and, as a result, variable mortgage rates.
Fixed rates, meanwhile, felt upward pressure just prior to the announcement and even more so after; the lowest fixed rate available in Ontario jumped from 2.79% to 2.99% as bond yields increased following the Bank of Canada interest rate announcement.
So the new stress test coupled with increasing interest rates will make it harder to qualify for a mortgage this year and, indeed, a little pricier.
But fear not; some planning can still help you qualify for a dream home in 2018.
Qualifying for a mortgage
The first step to getting a mortgage – and perhaps the most daunting one – is to save up a sufficient down payment for a home.
How much you save will impact the price of the home you can afford as well as the type of mortgage you qualify for. One common misnomer is that a down payment of 20% is required to purchase a home in Canada; however, you can qualify for a mortgage with a mere 5% down (though mortgage default insurance is required for any down payment of less than 20%).
Once you’ve got a sufficient down payment saved, you’ll have an idea of what you can afford. Of course, the size of your down payment is only one factor in determining affordability; so too are your credit score, your income, and job situation. But more on that later.
To help you get an idea about how much mortgage you can afford, check out our handy Mortgage Affordability Calculator.
It’s important to not get too attached to a budget just yet. As mentioned, there are several factors that impact affordability and it’s a good idea to speak to a mortgage professional before you commit to a particular home or price range.
So you’ve got a preliminary idea about what you can afford and are ready to figure out the financing side of the equation.
Your next step should be getting a pre-approval from your mortgage broker or lender. Pre-approvals let you know how much mortgage you can qualify for, can help you estimate your monthly payments, and can help you lock an interest rate in for up to 120 days. A pre-approval will ensure that, in the case of a rate increase within the pre-approval window, you’re still guaranteed the pre-approved, lower mortgage rate. And that means lower monthly payments.
At this point, you’re likely itching to secure financing and ramp up your home search. While you can now commit to a broker or lender and finalize the mortgage process, you should make sure to have all your documents in order first – this expedites the mortgage approval process and cuts down on the timely back-and-forth with your mortgage provider.
Order a credit report to ensure there are no inaccuracies. Knowing your credit score prior to speaking with a mortgage professional will better prepare you for the type of mortgage rate you can expect. After all, a high credit score will help you get a low mortgage rate.
You’ll also need to provide documents that prove your identification, employment, your ability to pay the down payment and closing costs, as well as information about your assets and debts.
Your mortgage professional may ask for additional documents, including proof of salary and employment history, and a Canada Revenue Agency Notice of Assessment (NOA).
If it sounds like a lot, it is; after all, a mortgage is one of the largest financial commitments you will ever make.
Once these ducks are all aligned, you’ll be ready to qualify for a mortgage and start searching for your next (or first!) home. Just keep in mind that you might qualify for a smaller mortgage this year than you might have in the past.