Mortgage mumbo jumbo still confusing Canadians
When it comes to understanding the ins and outs of their mortgages, Canadians could use a refresher course. That’s the consensus of a recent TD Bank survey, which showed that almost five in 10 Canadian homeowners don’t understand how Canada’s new mortgage rules could affect them.
“This survey tells us that Canadians lack confidence in their mortgage knowledge, specifically when it comes to the mortgage stress-test rules,” said Pat Giles, TD vice-president, Real Estate Secured Lending.
The new mortgage rules came into effect Jan. 1, 2018, yet the TD survey showed that nearly half of Canadians (43 per cent) aren’t confident in their knowledge of them. To help clarify what’s new, Giles suggests thinking of potential homebuyers as fitting into one of two categories: those who have more than 20 per cent as a down payment and those who have less than 20 per cent as a down payment.
For those with less, nothing has changed. Lenders will still qualify them and their mortgage will be considered high-ratio, meaning loan insurance will be required.
What’s new is that homebuyers with a down payment of 20 per cent or more are now subject to a stress test, a new mortgage qualification rule designed to “help them feel confident they’re buying the house they can afford, both now and in the future,” said Giles. The new stress test is for uninsured mortgages and uses either the five-year Bank of Canada benchmark rate or their mortgage rate plus two per cent, whichever is higher.
If you are renewing a mortgage and staying with your current lender, the stress test doesn’t apply. However, if you choose to move to a different lender you will be subjected to it, he explained. The stress test is a good reminder that the costs of owning a home are much more than a regular mortgage payment, Giles said.
“It really is a matter of the assessment up front about the lifestyle that people want to lead,” he said, noting that online mortgage calculators and tools are a good way to measure affordability.
The TD survey also found that Canadians are unsure about the difference between mortgage pre-qualification and pre-approval, and don’t necessarily understand what’s available to them if they need to take an emergency break from a mortgage payment.
“Getting pre-qualified only gives you a general idea of how much mortgage you might be approved for, but there’s no certainty that this is the actual amount you’ll receive, plus you can’t lock in a mortgage rate,” explained Giles. Getting pre-approved, on the other hand, gives you a 120-day rate hold so you’ll know your exact monthly payment amount.
A payment pause is a feature that allows a borrower to request to skip the equivalent of one monthly payment, either in part or in full. A payment vacation is offered to homeowners who’ve got ahead of their mortgage amortization schedule by making extra payments along the way. It enables them to skip the equivalent of one monthly payment four times over the life of the amortization period.
“No matter where you are in the home-buying journey, it is important to build a strong foundation of mortgage knowledge to ensure you feel prepared and confident at every step,” said Giles.
“A lot has changed in the Canadian housing market in recent years. Starting off the process with an informed, confident decision is what we want to see.”