Understanding Canada’s New Mortgage Rules: What You Need to Know

1. The Stress Test and Its Impact

One of the most significant changes in Canada's mortgage landscape is the introduction of a stricter stress test for all homebuyers. The stress test was initially introduced in 2017 but has since been tightened in recent years. Essentially, the stress test ensures that homebuyers can still afford their mortgage payments if interest rates rise.

What's new?

As of recent changes, buyers must now qualify for a mortgage at a rate 2% higher than the contract rate, or the Bank of Canada's five-year benchmark rate, whichever is higher. This means that even if you secure a low-interest mortgage, lenders will test your ability to make payments based on a higher interest rate.

Why does it matter?

The aim of the stress test is to ensure that borrowers are not taking on more debt than they can afford, preventing potential financial strain if interest rates increase. This rule can affect first-time homebuyers or anyone seeking a high-ratio mortgage, as it limits the amount they can borrow.

2. Down Payment Requirements

The new rules have also affected down payment requirements for homes in Canada, particularly for properties above a certain price threshold. Homebuyers putting down less than 20% for properties valued at over $1 million will now face more stringent down payment rules. For homes priced above $1 million, a down payment of at least 20% is now required, as opposed to the 5% minimum that applied to homes under $1 million.

What does this mean for homebuyers?

If you're planning to purchase a home in Canada, especially in major cities like Toronto or Vancouver, you'll need to ensure you have a larger down payment if your property price exceeds the $1 million threshold. This change is designed to temper high-risk borrowing and curb speculative home buying.

3. Qualification for High-Ratio Mortgages

High-ratio mortgages are those where the borrower puts down less than 20% of the home's purchase price. The new rules make it more difficult for buyers with smaller down payments to qualify for these types of mortgages, especially if the borrower's debt-to-income ratio is high.

What has changed?

Lenders are now more focused on a borrower's ability to repay their mortgage by considering income and debt levels more rigorously. If you're applying for a high-ratio mortgage, you may need to have a lower debt-to-income ratio to qualify.

4. Mortgage Insurance and Its Role

Another notable change concerns mortgage insurance, which is required when the down payment is less than 20%. This insurance protects the lender in case the borrower defaults on the loan. The Canada Mortgage and Housing Corporation (CMHC), one of Canada's largest mortgage insurers, has adjusted its eligibility requirements, now focusing more on borrowers with higher credit scores and lower debt loads.

What you need to know:

The higher the borrower's credit score and lower the debt-to-income ratio, the better their chances of securing mortgage insurance at an affordable rate. This will be particularly important for first-time homebuyers who may need mortgage insurance to secure a home loan.

5. Homebuyers' Plan (HBP) Enhancements

For first-time homebuyers, the Home Buyers' Plan (HBP) allows individuals to withdraw funds from their Registered Retirement Savings Plan (RRSP) to use towards the purchase of their first home. The maximum withdrawal amount has increased, making it easier for Canadians to use their RRSP savings for their home purchase.

What has changed?

The maximum withdrawal amount from an RRSP under the HBP has increased to $35,000 (up from $25,000 previously), making it easier for first-time homebuyers to access funds for a down payment. The new rule also allows couples to each withdraw up to $35,000, potentially giving them $70,000 in total to put towards their first home purchase.

6. Rental Properties and Investment Properties

For those considering purchasing rental properties or investment properties, the new mortgage rules also target these types of transactions. The government has introduced stricter rules for investors, including higher down payment requirements and tighter eligibility for multi-unit properties.

What's the impact?

Investors looking to buy rental properties may find that the cost of borrowing has increased due to higher down payment requirements and higher qualification standards. Additionally, the increased stress test and stricter rules around property taxes may affect profitability for investors, especially in hot real estate markets.

7. Changes to the Canada Mortgage and Housing Corporation (CMHC) Insurance

The CMHC has also made adjustments to its eligibility requirements for mortgage insurance, which affects borrowers who put down less than 20%. As a result, CMHC is now less likely to approve mortgage insurance for borrowers who have higher debt-to-income ratios or low credit scores. The Canada Guaranty and Genworth mortgage insurance companies have also followed suit with similar eligibility changes.

What should you do?

Potential borrowers should focus on improving their credit scores and minimizing outstanding debt to ensure they qualify for the best mortgage options available. This is particularly important for those seeking insurance to purchase a home with less than a 20% down payment.

8. Impact on Homebuyers in Hot Markets

The new mortgage rules will have a more significant impact on homebuyers in Canada's hottest real estate markets like Toronto, Vancouver, and Montreal. These cities have seen rapid price growth, making it more difficult for first-time homebuyers to enter the market. The tighter rules are designed to help cool these overheated markets by limiting the number of buyers who can afford to purchase homes in these areas.

Final Thoughts: Navigating the New Rules

Canada's new mortgage rules are aimed at making the housing market more sustainable and preventing borrowers from taking on excessive debt. While these changes may make it harder for some buyers to qualify for mortgages, they are also designed to protect homeowners and lenders from financial instability. Whether you're buying your first home, upgrading to a larger property, or investing in real estate, understanding these new rules will be key to navigating the Canadian housing market in 2025 and beyond.

If you're considering buying a home in Canada, it's essential to consult with an experienced real estate lawyer mississauga and mortgage broker to understand your options and how these new rules may impact your mortgage application.