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Mortgage lending rules tighten effective June 1, 2021 (June 2021)


Over the past decade, the rules governing mortgage lending in Canada have been repeatedly amended, each time to impose more stringent requirements on would-be mortgage borrowers. The latest such change is to the “mortgage stress test”, which imposes income and creditworthiness requirements on would-be borrowers, with the goal of ensuring that they will be able to manage (and repay) their mortgage debt, now and in the future. The change is effective as of June 1, 2021.


As everyone knows, interest rates (and therefore mortgage lending rates) are near historic lows. Consequently, borrowing costs are minimal and those minimal borrowing costs are reflected in lower mortgage monthly payment requirements. However, interest rates will inevitably increase, in either the short or long term, and the amount of monthly mortgage payments will increase at the same time.


When an applicant seeks mortgage financing, lenders use two tests to determine the applicant’s ability to manage the borrowing sought. The first — the Gross Service Debt (GDS) — is a measure of housing costs, and includes mortgage payments, property taxes, heating, and (where applicable) condominium fees. Lenders want to see that no more than 39% of a household’s gross income is needed to meet the GDS. The second measurement, the Total Debt Service (TDS), includes housing costs plus all other debt obligations (student loans, car payments, etc.). When it comes to TDS, lenders want to see that payment of total debt obligations utilizes no more than 44% of the borrower’s gross household income.


The mortgage stress test requires would-be borrowers to meet the GDS and TDS ratios based on both the actual mortgage interest rate which the lender is providing and a notional higher rate. Where the prospective borrower has a down payment of at least 20%, he or she must meet the GDS and TDS ratios using the actual rate negotiated with the lender, plus 2%; or the national rate set by the federal government, whichever is higher. Where the down payment is less than 20%, the prospective borrower must meet the GDS and TDS ratios using the higher of the actual lending rate or the national rate set by the federal government.


On June 1, that notional higher rate will increase and prospective borrowers must show that they can meet the GDS and TDS ratios with an assumed notional mortgage interest rate of 5.25%. Prior to June 1, that notional higher rate was 4.79%.

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