As of October 17, 2016, all high-ratio insured homebuyers must qualify for mortgage insurance at an interest rate the greater of their contract mortgage rate or the Bank of Canada's conventional five-year fixed posted rate. This requirement was also be extended to low-ratio insured mortgages on November 30, 2016 (see below). This requirement is already in place for high-ratio insured mortgages with variable interest rates or fixed interest rates with terms less than five years.
The Bank of Canada’s conventional five-year fixed posted mortgage rate is the mode (i.e., the most common occurring number) of the conventional five-year fixed mortgage rates advertised by Canada’s six largest banks. The rate is updated weekly and is available on the Bank of Canada’s website (CANSIM table 176-0043). The Bank of Canada’s posted rate is typically higher than the contract mortgage rate most buyers actually pay. As of September 28, 2016, the Bank of Canada posted rate was 4.64 per cent.
To qualify for mortgage insurance, your debt-servicing ratios must be no higher than the maximum allowable levels when calculated using the greater of the contract rate and the Bank of Canada posted rate. Lenders and mortgage insurers assess two key debt-servicing ratios to determine if a homebuyer qualifies for an insured mortgage:
- Gross Debt Service (GDS) ratio—the carrying costs of the home, including the mortgage payment and taxes and heating costs, relative to the homebuyer’s income;
- Total Debt Service (TDS) ratio—the carrying costs of the home and all other debt payments relative to the homebuyer’s income.
To qualify for mortgage insurance, a homebuyer must have a GDS ratio no greater than 39 per cent and a TDS ratio no greater than 44 per cent. Qualifying for a mortgage by applying the typically higher Bank of Canada posted rate when calculating a borrower’s GDS and TDS ratios serves as a “stress test” for homebuyers, providing new homebuyers a buffer to be able to continue servicing their debts even in a higher interest rate environment, or if faced with a reduction in household income.
This measure applies to new high-ratio mortgage insurance applications received on October 17, 2016 or later. This measure does not apply to high-ratio mortgage loans where, before October 17, 2016: a mortgage insurance application was received; or, the lender made a legally binding commitment to make the loan; or, the borrower entered into a legally binding agreement of purchase and sale for the property against which the loan is secured.
Homeowners with an existing high-ratio insured mortgage, including those renewing or transferring an existing high-ratio insured mortgage to another lender, are not affected by this change as high-ratio mortgage insurance spans the life of the mortgage.