Mortgages demystified

Valuable information for prospective homebuyers

Canada's new mortgage qualification rules and how they could affect you

On Jan. 1, 2018, new mortgage rules came into effect. Under the new rules, Canadian mortgages are subject to stricter qualifying criteria. Ultimately, this means some buyers will have to settle for less expensive homes than they could have qualified for prior to the rule change – up to 20 per cent cheaper in some cases.

All homebuyers must now go through the mortgage stress test:

• Homebuyers with uninsured residential mortgages (where the down payment accounts for 20 per cent of the property value or more), must qualify at the greater of either the Bank of Canada five-year benchmark interest rate or the buyer's contracted interest rate plus two percentage points.

• Homebuyers with insured residential mortgages (where the down payment accounts for less than 20 per cent of the property value), must qualify at the greater of either the Bank of Canada five-year benchmark interest rate or the buyer's contracted interest rate.

The Bank of Canada's five-year benchmark interest rate for mortgage stress testing is currently 5.34 per cent. The rate is determined based on a survey of conventional five-year rates available at Canada's big banks.

Fixed vs. variable rate mortgages

As the name suggests, fixed rate mortgages give homebuyers a locked-in interest rate that will remain constant for the term of the mortgage. As a result, the interest rate, payment amounts, how each payment is divided between the principal and interest, and the amortization of the loan will be static.

On the other hand, with a variable rate mortgage, your payment amount will remain the same for the term of your mortgage, but the interest rate will fluctuate based on the lender's prime rate. If the prime rate increases, more of your payment will go towards interest, and if the rate decreases, more of your payment will go towards your principal. Variable rate mortgages also tend to offer the lowest mortgage rates available.

According to RBC, a fixed rate mortgage is best for you if:

• You enjoy the security of a rate that is guaranteed not to change for the term of the mortgage and are willing to pay a slightly higher interest rate for that security

• You prefer the peace of mind of predictable mortgage payments and amortization that are guaranteed not to change during the term of your mortgage

A variable rate mortgage is best for you if:

• You are comfortable with rate fluctuations to gain possible long-term interest savings

• You have the flexibility to accept possible increases in your amortization should the interest rate increase