Article written by Michael Lemelin, Mortgage Broker
C. 514.819.2243
E. michael.lemelin@archyp.ca
Buying a home is one of the biggest financial decisions most people will make in their lives.
In Canada, mortgage rules are designed to ensure borrowers are well prepared for this responsibility. These rules aim to protect both borrowers and lenders by ensuring that loans are manageable, even during economic changes. Here is an overview of the main mortgage criteria and regulations, including the famous mortgage stress test.
Minimum Down Payment: To purchase a home, a down payment is required. If the price is less than $500,000, the down payment must be at least 5%. Between $500,000 and $999,999, the down payment is 5% on the first $500,000 and 10% on the rest. For homes worth a million or more, the minimum down payment is 20%.
Mortgage Insurance: When the down payment is less than 20%, mortgage insurance is required. This insurance, often provided by CMHC / SAGEN / Canada Guaranty, protects the lender if the borrower cannot repay the loan.
Loan-to-Value Ratio (LTV): LTV is the ratio of the loan amount to the value of the property. A higher down payment means a lower LTV, which is better for lenders.
Debt Ratios: Lenders evaluate debt ratios to determine the borrower’s repayment capacity. The gross debt service ratio (GBD) should generally not exceed 39% of gross income, and the total debt service ratio (ATD) should not exceed 44%.
Mortgage Stress Test: This test ensures that the borrower can withstand an increase in interest rates. He must prove that he can make mortgage payments at a qualifying rate, which is either the contract rate plus 2% or the Bank of Canada benchmark rate, whichever is higher.
Amortization period: For insured mortgages, the amortization period cannot exceed 25 years for exciting constructions and 30 years for new constructions. Uninsured mortgages may have a longer term.
Credit History: A good credit history is crucial to getting a mortgage. Lenders will look at the borrower’s credit score and history.
Documentation and Verification: Documents are required to verify income, assets, debts and down payment, including pay stubs, tax returns and bank statements.
Canadian mortgage rules are there to ensure the stability of the housing market and the financial security of borrowers. By understanding these rules, potential buyers can better prepare for purchasing a home and ensure they are making an informed, lasting decision.
