Frequently Asked Questions
What is the stress test & qualifying rate?
Lenders must ensure that you pass a stress test, which means that you can handle payments at a certain qualifying rate. The qualifying rate will be higher than the rate of your actual mortgage: a situation that some may find frustrating. The government put in the stress test to ensure that borrowers can handle their mortgage payments should rates rise. But rest assured that your actual payments will be based on the lower mortgage contract rate that we negotiate for you. Not all types of lenders available through Mortgage Brokers are required to use the stress test, and although these mortgages have a higher interest rate, they are an option to consider for those who can’t otherwise qualify.
- Qualifying Rate for High Ratio Mortgages (less than 20% down)
The Department of Finance introduced the Qualifying Rate in 2010. The high-ratio qualifying rate is a 5-year rate published every week by the Bank of Canada. The Bank surveys the six major banks’ posted 5-year rates every Wednesday and uses a mode average of those rates to set the official benchmark. Your lender is required to use this rate to calculate debt service ratios when reviewing mortgage applications for all insured mortgages.
- Qualifying Rate for Conventional Mortgages (20% or more down)
The Office of the Superintendent of Financial Institutions (OSFI) implemented a new “stress test” or qualifying rate for conventional mortgages that went into effect January 1, 2018. This requires federally regulated lenders to qualify all new conventional mortgages at whichever rate is higher: the benchmark rate (described above), or your actual contracted mortgage rate plus 2%. An interesting outcome is that this qualifying rate is often higher than the rate used when qualifying high-ratio mortgages where there is less equity or downpayment. Why the difference? One reason is simply because these rules were implemented by two different government bodies.
How much downpayment do you need?
To purchase a home in Canada, you need a minimum of 5% downpayment. That’s 5% of the price you pay for the home if your purchase is $500,000 or less. For instance, for a $400,000 home, you need a $20,000 downpayment. For any home over $500,000 but less than $1 million, you need 5% on the first $500,000… which is always going to be $25,000. And then you’re going to need ten per cent for any amount over that. So if your house price is $650,000, you’ll need your $25,000 plus ten percent of the extra $150,000… which is $15,000. That means you’re going to need to save up $40,000 for your downpayment. If your purchase price is $1 million or more, a minimum 20% downpayment is required. These minimum downpayment amounts are Government of Canada rules, and they’re designed to maintain a good, stable housing market.
What is CMHC Insurance or Mortgage Default Insurance?
If your downpayment is between 5% and 20%, it is mandatory in Canada that you have “mortgage default insurance,” which is a government requirement to protect lenders. Mortgage default insurance is also available from Genworth and Canada Guaranty. The premium for your mortgage default insurance is almost always added to your mortgage amount.
Here’s an example, if your purchase price is $400,000 and you have 5% down, your mortgage amount is $380,000. The mortgage insurance premium for 5% down is 4% percent or $15,200, which is then added to your mortgage, bringing your total mortgage amount to $395,200. The insurance premium declines to 3.1% (at 10% down) and 2.8% (at 15% down). If you’ve saved up more than 20% of the purchase price, then there’s no premium, because you’ve got lots of equity in the house as a buffer if anything goes wrong. Having 20% downpayment is a good goal, but today, most first-time homebuyers are purchasing their homes with the minimum required downpayment.
What is the First-Time Buyer Incentive?
The First-Time Home Buyer Incentive is a federal government shared equity program designed to reduce mortgage payments for qualifying first-time buyers who have the minimum 5% downpayment required for an insured mortgage. The program will provide 5% of the cost of an existing home, or 10% of a new home. This incentive isn’t payable until you sell the property and is not charged interest. There are a few caveats.
- If your household income is more than $120,000, you aren’t eligible for the program.
- Your total borrowed amount (including the incentive portion) can’t be more than four times your household income. With a household income of $120,000, the maximum purchase price would be approximately $505,000 with 5% down and about $565,500 for a 14.99% downpayment.
- The maximum downpayment for the 10% incentive is 9.99% and 14.99% for 5% down.
- You are required to pay the incentive back after 25 years or when you sell the home, with the repayment amount based on the property’s fair market value, whether it has increased or decreased in value. (Note: Since repayment is based on market value at the time of repayment, you may want to repay early if your home is increasing in value quickly, or prior to conducting major renovations).
Enhanced program for Toronto, Vancouver, Victoria Census Metropolitan Areas:
- Maximum qualifying household income is $150,000
- Maximum first mortgage (not including incentive) is 4.5 times income
- These new parameters take the maximum purchase price to $722,000 for 5% down and to $794,000 with 14.99% down, both for the 5% incentive.
Cities in the Toronto Census Metropolitan Area – HERE
Cities in the Vancouver CMA – HERE
Cities in the Victoria CMA – HERE
More information on the program – HERE
The program’s calculator – HERE
What is a bridge loan?
A bridge loan is a short-term financing tool that helps you “bridge” the gap between old and new mortgages when you move from one home to another. You may be taking possession of your new home a week or two in advance of closing on your current home, either because of how your closing dates worked out, or because you want to do some renovating on your new home before you move in. Whatever the reason, bridge financing can be your best friend for a few weeks: making it possible to easily transition from the old to the new.