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New Mortgage Rules – January 2018

November 23, 2017

That’s right the government is adding new regulations to the mortgage industry effective January 1st 2018. You might ask yourself “why?” the answer is simply that the mortgage industry won’t regulate itself. The industry is of course broader than just the banking industry and although the rules might seem to apply to all they probably don’t.

Private lenders may only be regulated to the extent that they are seeking mortgage insurance from CMHC or perhaps Genworth, the two main lender insurance companies. In other words, those high ratio or (apparently) high risk mortgages may still be available with little qualification, as they have been in the past.  The mortgagee will assess its own risk without intervention.

Some mortgage agents and brokers are pushing a rush to get you as deep into debt as they can before the end of the year when the new rules will make it harder for them to sell you more debt than you actually need or can handle.

At the moment you may qualify for a $450,000 mortgage and you will find that after the new year you will only qualify for $350,000. But is that a bad thing or simply sober second thought? Let’s face it if the rules are making such a massive difference, in how much you are allowed to borrow, how likely is it that you and your family would be able to withstand the shock of an interest rate hike?

Salespeople, regardless of their field, are too often self-focused and myopic.  In this case many are looking out for the commissions from this week’s sales rather than worrying about where you will be in five years from now when your mortgage becomes dues for refinancing. Whatever they promise you today may not matter a whole bunch in five years when you can barely remember their name much less the details of the promises they made.

TDS and GDS Ratios are commonly used as guides to how much debt you can carry.  Those ratios are based on pre-tax income and haven’t changed in decades (other than the limits being pushed by lenders) even though taxes have increased substantially.  Some lenders will use ratios allowing up to 48% of your gross income to be used for debt management – and that may be largely mortgage debt.

A better idea is to keep your mortgage payments to less than 20% of your gross annual income – for example if you earn $40,000 per year your mortgage payments should be around $700 per month. That will allow you to have enough room in your debt service ratio to manage car payments and payments on other forms of credit. Of course, the bank and other mortgage lenders might tell you that you can manage 32% or $1,100…

In the end, I guess I should be O.K. with you getting deeper into debt, after all I help people file for bankruptcy or make a proposal when they get in too deep.