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Ottawa’s mortgage reforms aim to stabilize the housing market and ensure Canadians can manage their debt loads.

Galit Rodan/The Globe and Mail

After sowing confusion with its housing reforms, Ottawa has provided more guidance about which buyers will be exempt from the stricter mortgage requirements.

The new rules, which went into effect Monday, have created panic among some prospective homeowners. Many received conflicting advice from realtors, lenders and brokers about whether they would have to qualify for a mortgage at higher rates than what is offered by most banks.

But since Ottawa issued new guidance on its rules late last week, mortgage insurers have aligned their policies and some lenders have told their clients they will honour purchase agreements and preapproved mortgages made before Oct. 17. The industry said the rules as originally written were ambiguous, making it difficult to figure out who would be affected.

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"The level of confusion is abating," said Stuart Levings, chief executive officer of Genworth MI Canada, the country's largest private sector mortgage insurer.

As of Monday, any buyer who does not make a minimum 20-per-cent down payment will have to prove they can handle mortgage payments at the Bank of Canada's conventional five-year fixed rate, which is about double the rate offered by other lenders.

Even though the borrower will not have to pay the higher rate, the government's so-called stress test will reduce the size of mortgage a buyer can get. Buyers are required to purchase mortgage default insurance if their loan is for more than 80 per cent of the home price.

But now there is more clarity on how to interpret the rules, including which home purchases and mortgage renewals will be grandfathered. However, interpretation is up to the discretion of lenders and they could decide not to grandfather certain purchases.

"As things have been changing, most of our lenders have said they would honour any purchase and sale agreement accepted prior to Oct. 17," said Sheri Creese, a vice-president with Mortgage Brokers Ottawa. Ms. Creese said home buyers should double-check rules with their lenders or mortgage brokers.

"The first answer may have been correct at the time, but may have changed after. It has been an ever-changing landscape for the last two weeks," she said. "Now at this point, if somebody entered into an agreement without financing, we can go back and get the financing under the old rules, as long as they had the agreement in place."

The federal government initially provided two sets of rules for the stress test, including different criteria for purchases made between Oct . 3, the day the changes were announced, and Oct. 17, when they took effect. Now those rules have been streamlined, with all buyers exempt if they signed a legally binding purchase agreement before Oct. 17.

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Ottawa made it clear that homeowners renewing or switching an insured mortgage to another lender would not have to get stress tested to get the new loan. The government also tweaked new rules for portfolio insurance, bulk insurance for low-risk loans.

A spokesman for the Finance Department said "the mortgage insurers are responsible for determining whether a loan qualifies for an exception in specific circumstances."

Buyers who have been exempt from the new rules could still be tested to see whether they can handle higher interest rates.

"The thing is, some lenders may require them to get approved at higher fixed rate just for internal policy reasons," said Robert McLister, founder of mortgage rate comparison website RateSpy.com.

Ottawa's reforms are designed to stabilize the housing market and ensure Canadians can manage their debt loads. The new rules come amid concerns about a housing bubble in Toronto and Vancouver. Real estate values have soared in both cities, with the average selling price of a detached house hitting $1.29-million in Toronto and topping $2.6-million in the city of Vancouver.

The industry believes the latest reforms will not cool the country's hottest markets because very few properties are listed for sale.

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"I don't see it slowing things down because there is such a lack of inventory," said Shawn Zigelstein, a realtor with Royal LePage, who works in the Toronto area.

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