I need help understanding Canada's new mortgage laws? I have tried looking at the information online, and it keeps saying it will need a bigger downpayment, but to my understanding it just increases your potential interest rate. Super confused!
In October 2016 four changes were made to the mortgage rules
- stress tests [*] for qualification now apply to everyone, not just those with less than 20% downpayment
- to get government backed mortgage insurance, the house must cost less than 1 million (many properties in Toronto and Vancouver cost more), you must have a credit score over 600, and your amortization period must be 25 years or less. Mortgage insurance is required when your downpayment is less than 20%, so basically some people won't be able to afford houses under this rule (eg they can't go to 30 year amortization to lower their payments.)
- you have to report the sale of your principal residence to Revenue Canada. It's still tax free, but they need to know about it.
- the government is looking into getting the banks to do some of the backing for the mortgage insurance rather than it being all government.
(*: the stress test is, if your mortgage rate rose to the current 5 year fixed rate, could you cover mortgage, utilities, and property taxes with less than 39% of your income?)
You don't "need" a bigger downpayment, but if you have a small downpayment you will have to buy a house that is less than a million dollars and that you can afford with a 25 year amortization. You will be tested to see if you can afford a higher interest rate, but that doesn't mean you will be charged a higher interest rate.
Your question really should be more precise, but I think you are referencing to stress testing guidelines. Essentially, mortgage lenders are now required to use a fictitious interest that is predetermined to calculate the amount of money that you would be able to repay even in case of an interest rates hike.
See here for example https://www.cbc.ca/amp/1.4358048
The Globe and Mail says:
New rules coming in January could disqualify up to 10 per cent of prospective home buyers who have down payments of 20 per cent or more, the Bank of Canada says.
The tighter rules could disqualify as many as 12 per cent of borrowers in the two cities, which account for half the value of homes sold in Canada