In October 2017, the Office of the Superintendent of Financial Institutions (“OFSI”) announced new mortgage rules for Canadians. The rules introduced a mortgage stress test for uninsured mortgages, and they also imposed tighter regulations for lenders.
These new mortgage rules will undoubtedly affect house hunters, but they will also have a impact on current homeowners, particularly when it comes time for mortgage refinancing.
According to ratespy.com, OSFI’s changes will tack on six to seven percentage (6-7%) points to the average borrower’s gross debt service ratio (“GDS”). Those considering refinancing to consolidate debt into a mortgage could face greater challenges.
In the past, many consumers have been concerned about their loan-to-value ratio (“LTV”): the size of the loan compared to the value of the property. However, with the new mortgage rules in place, lenders will be paying closer attention to other evaluations, such as the GDS and total debt service ratio (“TDS”).
The new mortgage rules mandate that lenders need to pay closer attention to LTVs, which means more lenders will be looking at the GDS and TDS ratio for potential borrowers. Where LTV is calculated solely on the size of the loan to value of the property ratio, GDS is calculated based on the percentage of your income needed to cover monthly housing-related expenses and TDS is calculated based on the percentage of your income needed to cover all debts.
Costs included in your GDS include mortgage payments, property taxes, heating expenses, and, where applicable, condo fees. Your TDS includes credit card payments, credit line payments, and car loans.
Under the new mortgage rules, the GDS and TDS will also be more important for qualifying for home equity lines of credit (“HELOC”) as lenders are mandated to look at HELOCs with a higher level of diligence.
If your TDS is high, you will need a plan to deal with your debt if you want to be able to qualify for a mortgage. Even if you have “good payment” habits and manage minimum payments, most lenders will not extend financing if the numbers don’t add up.
What can you do if you need to lower your GDS or TDS?
Reducing your GDS can be challenging as it is tied to your household payments. Therefore, the only ways to reduce your GDS are to either earn more money, or reduce housing payments, either by downsizing or renegotiating your mortgage terms.
With TDS, reducing your debt load is a good first step if that is what is driving up your TDS. Decreasing the amount you owe on your credit cards, lines of credit, or car payments will lower your TDS. Increasing your credit score could also help as many lenders will look at that number and your credit history.
You could also consider increasing your down payment if you are shopping for a home, or adding rental income. If you co-own a home, GDS and TDS looks at the debt loads of both you and your partner, so make sure you are both on the same page.
Spergel can help you find the best plan to minimize debt and increase your credit rating so that you’re ready to withstand the new mortgage rules.
Call us today for a free consultation: 310-4321.