The Well

Rachel Surman | Blog,Mortgages

The Ultimate Guide To Qualifying For A Mortgage In 2018

March 1, 2018

The new mortgage rules are the talk of Canada at the moment! If you’ve been following the news, you’ll know that qualifying for a mortgage in 2018 is much harder than it was last year. 

If the words “stress test” run a cold shiver down your spine – don’t worry. We’ve got you covered with our ultimate guide to qualifying for a mortgage in 2018 in Canada. But first, let’s talk about what happened to cause this major change.

What’s different in 2018?

The Office of the Superintendent of Financial Institutions (OFSI), Canada’s federal financial regulator, announced in October 2017 that even borrowers with a 20% down payment will still have to face a stress test as of January 1st, 2018. Previously, if you had a 20% down payment, you wouldn’t be subjected to this stress test.

This (combined with multiple other factors) caused Canadian home sales to drop sharply to their lowest level in 3 years in January, reported CBC news. There’s also been a retreat in listings since the new mortgage rules have come into play. The Canadian Real Estate Association (CREA) announced that home sales through the Multiple Listing Service (MLS) have declined by 14.5% from December 2017 to January 2018. In what was a red-hot housing market, it’s a significant drop. 

What is a stress test?

A stress test means that all homebuyers must qualify for the Bank of Canada’s (BoC) 5-year interest benchmark rate (5.14%) or the mortgage rate offered by their providers, plus 2% added.

You can see why it’s called a “stress” test! It’s important, however, because it ensures that new homeowners will be able to afford their mortgage payments, even if the interest rates increase. The BoC has already raised its key interest rate 3 times in the past year! In January of 2018, the interest rate rose to 1.25% – marking the third 0.25 percentage point increase since July. 

What does this mean for you?

If you’re interested in qualifying for a mortgage in 2018, there are definitely some new things to consider!

Here’s a realistic example of how the new mortgage rules may affect your ability to buy a home. Say let’s say you receive a mortgage rate of 3.04% on a 5- year term fixed rate from True North Mortgages. (If you’re new to True North Mortgages, you can check out our review here!)

3.04% is the rate you would need to pay, however, the rate you actually need to qualify for would be 5.14% because it’s the BoC’s current qualifying rate. For many potential homebuyers, this is roughly a 20% loss in buying power. It’s a powerful jump, especially for the first-time homebuyer. 

Qualifying for a mortgage in 2018

Despite it being more challenging to get a mortgage these days, don’t lose hope. Here are the steps to qualifying for a mortgage in Canada.

First of all, having a good credit score can make for more favourable interest rates, which in turn, can save you money. Checking your credit score and improving it before applying for a mortgage is a great start if you’re just starting to shop around for mortgage rates. If you’re curious about what score you need to qualify for a mortgage, check out this blog to help you understand the different factors.

Once you know your credit score, it’s time to take a long hard look at your finances to establish the size of your down payment. When you figure out how much you can realistically put down, you’ll know kind of property you can buy. How much you can save for your down payment will make a big difference in the type of mortgage available to you.

It’s also important to mention the common misconception among many first-time homebuyers that a down payment of 20% is required to purchase a home in Canada. This isn’t true. You can actually qualify for a mortgage with only 5% down – but mortgage default insurance is required for down payments less than 20%.

When you’ve figured out the size of your down payment, you’ll have a good idea of about the type of house you can afford.

Applying for a mortgage

While qualifying for a mortgage may be different with the new mortgage rules, applying for a mortgage basically remains the same. This is the fun part – where you get to shop around for a mortgage broker or online lender and *hopefully* get pre-approval for a mortgage. This is the stage where you can compare rates and offerings, such as cash-back options and different fee coverage.

Once you’ve made your decision, contact your broker or lender. You’ll also need some of the following items to go with your application: your credit report, proof of income, and a copy of your passport. Don’t forget: Borrowell now offers free credit scores and reports – so your application just got that much easier.

A final word

Your credit score carries a lot of importance when lenders and brokers are taking your information and calculating your interest rate. It’s advised to get your financial house in order and work to get that credit score up before applying for a mortgage.  If you’re thinking of applying for a mortgage in the future, you can take our free 7-week email course about the basics of your credit score and how to improve it.

If you’re feeling a little discouraged about the cost of housing, especially in Canada’s big cities (see infographic above) – you’re not alone. But with some saving, planning, and research to weigh your options, getting a low-interest mortgage in Canada IS possible. Check out our blog, 5 creative ways to get into the housing market, for some advice on breaking into the property game.

In the market for a mortgage? Get your credit score for free from Borrowell and instantly see what you qualify for!