Canadian mortgage rules: What you should know 

If you're a new homebuyer seeking a mortgage, or an existing homeowner looking to switch or refinance, it's important that you're up to date on the mortgage rules in Canada.

In September 2024, the federal government announced two key changes including a price cap increase for insured mortgages and expanded eligibility for 30-year mortgages. Here’s how these adjustments affect homeowners and what you should know if you’re looking for a new home.

In Canada, homebuyers with a down payment of less than 20% of the purchase price need to buy mortgage default insurance. Default insurance is provided through Canada Mortgage and Housing Corporation (CMHC), Sagen or Canada Guaranty, and your lender applies on your behalf.

All three mortgage default insurance providers limit the types of properties that can be purchased under their insurance. For example, options like short-term rentals, units used for a hotel or mixed-use properties are all ineligible for mortgage default insurance. 

Until recently, properties costing $1 million or more weren’t eligible for mortgage default insurance. That’s now changed. In September 2024, the federal government increased the $1 million price cap for default-insured mortgages to $1.5 million – its first boost since 2012. This change comes into effect on December 15, 2024, and means that more homebuyers could potentially qualify for a mortgage with a down payment of less than 20%.

Learn more about how mortgage default insurance works here.  

Mortgage amortization periods (meaning the number of years that it’ll take to fully repay a mortgage loan) are typically 25 years in Canada, but given the current interest environment, many homebuyers are interested in mortgages with 30-year amortization periods. That’s because the 30-year option could potentially be a better fit for some people’s budgets, since stretching out the repayment period decreases their monthly payment. But until recently, anyone who put down less than 20% on a home purchase was limited to a 25-year amortization.

In August 2024, Canada changed that rule, meaning that first-time borrowers purchasing a newly constructed property with a default-insured mortgage could qualify for a 30-year amortization period. In September, the government further expanded these rules to include all first-time homebuyers buying a home of any kind, as well as anyone purchasing a newly built home.

So, if you’re buying a new build or are a first-time homebuyer with less than 20% as a downpayment, you could now be offered a 30-year amortization period, instead of 25 years. These new rules come into effect December 15, 2024.

The mortgage stress test was introduced on January 1, 2018 as a way to protect Canadian homeowners. It requires banks to check that a borrower can still make their payments at an interest rate that's higher than they will actually initially get. The purpose of the stress test is to evaluate if a borrower (a.k.a. the potential homeowner) can handle a possible increase in their mortgage interest rate.

For Canadians to qualify for a federally regulated bank loan, they need to pass the mortgage stress test. To do this, homebuyers need to prove that they can afford a mortgage at a qualifying rate that’s higher than the rate they are approved for by their lender. The stress test was revised in June 2021. As of June 2021, that rate is either the interest rate they were approved for by their lender plus 2%, or 5.25%, whichever is higher.

For example, if your mortgage rate is 2%, then the stress test would require that you be able to afford the mortgage at a rate of 5.25%, since that's higher than 4 % (the approved rate plus 2%). If the rate approved by their lender is 5%, however, the mortgage stress test would require that the buyer be able to qualify for the home at a rate of 7% (the approved rate of 5% plus 2).  

This stress test is also performed with homeowners looking to refinance or take out a home equity line of credit. Those who renew with the same lender don't have to undergo the stress test again.

In September 2024, the bank regulator, the Office of the Superintendent of Financial Institutions (OSFI), announced a change to the stress test rules.  If a homeowner with an uninsured mortgage is switching to a new lender and is keeping the same amortization and loan amount (known as a straight switch), the new lender won’t have to apply a new stress test in order to qualify them.¹

Learn more about the stress test here.

In June 2022, Canada introduced regulations that would ban non-Canadians from directly or indirectly purchasing residential property in Canada for a period of two years (this ban started on January 1, 2023). The legislation, called the Prohibition on the Purchase of Residential Property by Non-Canadians Act, is meant to cool housing prices for the benefit of Canadians.

For that reason, foreign buyers weren’t able to qualify for a mortgage in Canada once the regulations went into effect in January 2023. It requires those violating it to pay a fine of $10,000. The government could also order the sale of the property. In March 2023, the government amended the legislation to make it easier for newcomers to Canada on work permits to purchase property. Work permit holders are eligible to buy a home if they have at least 183 days left on their work permit, and they have not purchased more than one residential property. The regulations also no longer apply to vacant land or property purchased for development purposes.

In February 2024, the federal government announced their plan to extend the ban by another two years to Jan 1, 2027. 

If you are concerned about how this legislation might affect you, reach out to your legal advisor.

The 2021 CMHC rules affect the amount of debt that borrowers with a default insured mortgage can carry. Mortgage applicants will be limited to spending a maximum of 39% of their gross income on housing and can only borrow up to 44% of their gross income once other loans payments are included. This is up from the previous 35% and 42% set in 2020. These amounts can change frequently so be sure to double check what they currently are on the CMHC website. 

Are you looking into which mortgage is right for you? A mortgage calculator can help give you an idea of how much you can qualify to borrow towards a mortgage.

However, mortgage calculators can't tell you how much you could actually borrow, because you don't know what mortgage interest rate you're likely to qualify for. To fully understand your home buying budget, you'll need to apply to be pre-approved for a mortgage.

A Scotiabank Home Financing Advisor can help you apply for a pre-approval. They can also advise on strategies for things like saving for a larger down payment or how to use your existing funds more effectively – for example, taking advantage of options like your RRSP's Home Buyer's Plan or the Tax-Free First Home Savings Account.