Last week, the Office of the Superintendent of Financial institutions (OSFI) introduced new mortgage rules that will go into effect starting January 1, 2018. The new rules will require that uninsured mortgages i.e. mortgages where the homebuyer has a down payment of 20% or more, now pass the same “stress-test” required for high-ratio or insured mortgages.
The “stress-test” essentially means that all homebuyers must qualify for mortgage loans at the higher of the Bank of Canada’s five-year benchmark rate (currently 4.89%) or the mortgage rate offered by their lender plus 2% points.
Rule Changes in the Canadian Real Estate Market
A few changes have been effected in the real estate market over the past year, including:
- A stress test for all insured mortgages where the home buyer has less than 20% down payment, with new buyers having to qualify for mortgage loans at the Bank of Canada’s (BoC) benchmark rate – effective November 2016.
- Restriction of mortgage insurance to owner-occupied dwellings, shorter maximum amortization period, purchase price of less than $1 million, and a minimum credit score of 600.
- Maximum Gross Debt Service ratio of 39% and Total Debt Service ratio of 44% – calculated using the higher stress-test rates.
- Increase in the mortgage default insurance premium payable on insured mortgages to as high as 4% – effective March 2017.
- Imposition of a 15% foreign buyers tax in British Columbia (August 2016) and Ontario (April 2017), plus other control measures.
- A similar stress-test for uninsured mortgages where the buyers have 20% or more of their down payment – starting January 2018.
- A stress-test will also be conducted when homeowners who are refinancing their mortgage change lenders.
Drivers of these changes have largely been due to the increasing and unsustainable indebtedness of Canadian households, soaring house prices, and the potential risks posed by these issues to the general economy.
What the “stress-test” accomplishes is that it ensures homeowners can afford to pay their mortgage loans even if rates go up. And, speaking of rates going up, the bank of Canada has already raised its key interest rate twice this year (currently at 1%). More increases are likely as the economy continues to improve, and mortgage rates will definitely follow suit.
Potential Impact of New Rules
Increased regulation in the housing market often have a predictable outcome, at least in the short term.
Generally, it’s likely we will see the following:
- Increased demand for homes in November and December 2017 as individuals with pre-approved mortgages rush to close.
- Increased activity in the cheaper homes category and less activity in pricier categories. New homebuyers will qualify for less mortgage loans when the new rules come into effect.
- Some slow-down in the growth rate of house prices (year/year), especially in areas like Toronto and Vancouver.
- Increased patronage of lenders who are not federally regulated, such as credit unions.
Mortgage Affordability under the New Rules
An example using Ratehub’s Mortgage Affordability calculator:
Old Rules: Assuming a 20% down payment, 5-year fixed mortgage rates of 2.84%, and a 25-year amortization; a family with an annual income of $100,000 can afford a home worth $693,405.
New Rules: Applying the new “stress-test”, the family must qualify for the mortgage using the greater of 4.89% and 4.84% (calculated as 2% + 2.84%). Therefore, with 20% down payment, a 5-year fixed rate of 4.89%, and 25 year amortization, the family can now afford a home worth $591,537.
The difference is that under the new rules, the family’s affordability has dropped by $101,868 (-15%). A bank that was willing to lend them $700,000 before is now only able to loan them approximately $600,000.
There are going to be different takes on how people see the recent mortgage rules. Many new homebuyers, sellers, and realtors will definitely hate the increased hassle. In my opinion, it’s a mixed bag – on one hand, it’s better to have a housing market that’s healthy and stable; and on the other hand, many young people and new immigrants may have a tougher time becoming homeowners. Overall, if a slower housing market results, it will benefit new homebuyers who qualify. Like I discussed in my article on home affordability, no matter how much the bank is willing to lend you, ensure you only buy a home you can afford.
I like hearing from my readers. If you have any thoughts or questions, please feel free to drop them in the comments section below.
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- Online Mortgage Rate Comparison: Ratehub.ca Review
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