Pre Approvals and upcoming changes April 19th

As you may have heard there are some changes coming down on April 19th from the government that will effect mortgages.

The change that will effect most buyers is the qualification rate used by lenders to determine how much money they will lend based on debt servicing ratios. In the past if a purchaser was trying to stretch their topside, you could qualify for a higher dollar amount by taking a shorter term or variable rate mortgage product. This would allow a lender to use a 3 year rate of 3.25% instead of the higher 4.09% 5 year rate. Doesn't seem like much, but that difference could mean tens of thousands of dollars on your mortgage. As of April 19th, the government will be dictating a contract rate (like the bank rate) that will be based on 5 year rates and that all lenders will be required to use in qualifying mortgage debt ratios, regardless of product.

Right now, with the threat of higher rates coming, many of my clients are looking for pre-approvals or rate holds to lock in a great rate while shopping for their new home. How does the change effect your rate hold or pre-approval?

Suppose you get pre-approved before April 19 and you’re putting down less than 20%. What happens if you don’t sign a purchase agreement until, on or after, April 19? Which qualifying rate will the lender use to determine if you can afford the mortgage?

CMHC has provided this clarification:
Pre-approval does not count as a financing agreement as it doesn’t represent a binding agreement to advance funds. So even if the borrower gets pre-approved before April 19, given that he/she would sign the purchase agreement after the cut-off date, the new rules would apply.

In practice, if you’re well-qualified, you won’t be impacted by any of this.
If, however, you are getting pre-approved and your debt ratios are near the limits, it could mean that:
a) The higher qualifying rate after April 19 might reduce the mortgage amount you’ll qualify for (assuming you haven’t signed a purchase agreement before then); and,
b) You might potentially qualify for only a 5-year fixed term.
Keep in mind that the government’s new posted qualifying rate does not apply if you are putting down 20% or more.

Hope this helps clarify this topic. Stay tuned for further updates regarding the other changes coming soon!

Peter McKinnon
www.peterlmckinnon.com