New Improved Mortgage Rules Take Effect: Here’s What They Mean for Homebuyers and Existing Mortgage Holders

The new mortgage rules announced by the federal government in September, which make it easier for many buyers and existing homeowners to qualify, finally took effect on December 15. Here are some key highlights.

Higher Purchase Price and Longer Amortization on insured mortgages to Increase Affordability

Effective December 15, the federal government raised the price cap for insured mortgages from $1 million to $1.5 million.

Until recently, properties worth $1 million or more were not eligible for coverage, meaning buyers had to put down a lot more money and often received slightly higher mortgage rates. This well-known paradox in the financial industry, whereby a homebuyer puts down more of his or her own money and gets a higher interest rate, has a fairly simple explanation. With a down payment of less than 20 percent, the mortgage is insured and the insurance company, with the support of the state, essentially guarantees the bank the security of the issued loan. Less risk – lower rates.

The latest changes mean that more home buyers will be able to potentially qualify for a mortgage with a down payment of less than 20 percent at the best interest rates available on the market.

For example, the minimum down payment on a home worth $1.5 million will now be $175,000 lower, and the interest rate for this option is on average 0.40% lower.

The minimum down payment for an insured mortgage is calculated as follows: 5% of the first $500,000 plus 10% of everything above that up to $1.5 million.

$500,000 * 5% + $1,000,000 * 10% = $25,000 + $100,000 = $125,000. Thus, the minimum down payment today is 8.34% ($125,000) of $1,500,000 instead of 20% ($300,000) through December 15.

Additionally, the federal government is expanding eligibility for a 30-year amortization on insured mortgages to first-time homebuyers and all buyers of new construction, including condos. First-time homebuyers can also access a 30-year amortization when buying from a builder or resale.

Previously, the maximum amortization period (the number of years it takes to fully pay off the mortgage) on insured mortgages was capped at 25 years.

A 30-year amortization allows homebuyers to stretch out their repayment period and reduce their monthly payments, thereby qualifying for a slightly larger mortgage amount.

Changes to the Mortgage Stress Test

Since 2018, Canadian homebuyers have had to qualify under what is known as the mortgage stress test, which determines whether a borrower can handle a potential increase in mortgage interest rates. To pass the stress test, buyers must prove that their income allows them to continue making payments at a higher rate. For example, today, a borrower taking out a new mortgage at 4.19% must have income sufficient to make payments at 6.19% (4.19% + 2%).

Also, under the new rules, if a homeowner with an uninsured mortgage (where 20 percent or more was put down when purchasing and the mortgage was not insured) switches to a new bank and does not change the amortization length or the loan amount (an operation called a direct switch/transfer), the new bank will not need to apply the stress test, so the borrower can qualify at the contract rate. This is a big win for the nearly 1 million homeowners who are approaching their 2025 mortgage renewal date. Many of them will now be able to switch banks and get a better interest rate. If your mortgage is due for renewal soon (up to 6 months), you don’t have to stay with your current bank and accept whatever rate they offer you. Please contact a professional mortgage broker to get the best rate or learn more about other great options available to you at the time of your mortgage renewal.