In January 2018, new government rules for borrowers will kick in. To prevent lenders from encouraging excessive debt, potential homebuyers will need to pass a ‘stress-test’ to show that they could absorb likely interest rate rises. 

Interest RateDoes anyone remember high interest rates?

Interest rates have been low for almost a decade. That’s made mortgages very affordable for many home owners. But that is about to change. The Bank of Canada has started to hike rates, in anticipation of inflation and other economic pressures on the economy. Worried about the long-term trend to higher rates, the federal government has issued instructions to banks that they must be positive that customers could afford higher mortgage payments in years to come. 

Is it in your interest to act before New Year’s Day?

If you are thinking about buying a new home, it could be ‘in your interest’ to make a move before the end of the year. On the first day of 2018, lenders will be looking hard at your loan application, even if you are buying a home with more than a 20% deposit, i.e., if your home is not covered by the Canada Mortgage & Housing Corporation (CMHC) insurance. 

When the regulation comes into force, it will mean that your lender will add 2% to the mortgage rate they are offering, or use the Bank of Canada’s five-year benchmark rate, to see if you could afford the hike. So if the offered rate was 3%, you would be assessed at 5% -- quite a jump. 

The practical outcome for prospective homebuyers is that they would be offered a smaller mortgage to compensate for the potential rise in interest rates. Of course, this doesn’t mean that rates are guaranteed to rise. It is simply a precaution. 

Lock in a low rate now

It does mean that if you have your eye on a home right now that is at the limit of your budget, you should consider moving quickly, to lock in both a low interest rate and maximize your purchasing power. 

With a new home, you don’t need to wait until it is built to arrange your mortgage and make a down payment. You can have everything arranged well before January and then have your home completed afterwards. 

Ask your bank or credit union, or speak to a mortgage broker to get detailed information about the new stress tests.

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