Editor’s Note: This is a guest post written by Sean Cooper from mortgagepal.ca.
The Office of the Superintendent of Financial Institutions (short for OSFI) has been a popular topic around water coolers these days. Ever since they were announced, everyone and their mother has been talking about the new mortgage stress test that took effect January 1, 2018. Although the new mortgage rules have been discussed a lot in the media, there remains a lack of clarity out there about them.
Let’s take a closer look at the new mortgage rules and how it affects home buyers.
Are you making a down payment of at least 20 percent?
If you’re buying a home and putting at 20 percent down on or after January 1, 2018, then you’re impacted by the mortgage stress test. Prior to January 1st, you’d have an easier time qualifying for a mortgage.
For example, let’s say you choose the safety and security of a five-year fixed rate mortgage. Under the old mortgage qualifying rules, you’d only have to qualify at the contract rate at your lender. So, if the going rate for a five-year fixed rate mortgage was 3.49 percent, then that’s the rate you’d need to pass.
But with the mortgage stress test, you now must pass a tougher test. You’ll have to qualify at the greater of your mortgage rate plus two percentage points and the Bank of Canada’s five-year benchmark rate. In the example above, with the Bank of Canada’s five-year benchmark rate is 5.34 percent, you’d have to qualify at 5.49 percent, since it’s higher.
Why did OSFI introduce the stress test?
Why did OSFI introduce the mortgage stress test? That’s the question everyone has been asking themselves. The real estate market has seen its fair share of changes in the last couple years, including Ontario’s Fair Housing Plan and B.C’s foreign buyer’s tax.
OSFI brought in these rules because it was concerned with the level of household debt Canadians were carrying. As such, OSFI wants you to be able to handle higher mortgages rates when they finally arrive. Although it’s tougher to qualify at a rate two percent higher, those are the new qualification rules you’ll need to live by.
That being said, the government and regulars should be cautious about introducing too many rule changes in a short time span. Since housing contributes a lot to our economy, too many rule changes could lead to a slowdown in the Canadian economy.
How do the new mortgage rules affect my home-buying budget?
If you’d like to purchase a property in the fall, then you’re probably wondering how the new mortgage rules will impact you. Compared to the old mortgage rules, some homebuyers will lose about 18 percent of their purchasing power. For example, if you could spend $600K on a home before January 1st, you might only be able to spend about $492K after the stress test.
If you’re thinking of buying a home in a more affordable market like Winnipeg or Regina, you shouldn’t feel as much of a pinch, since incomes in those cities are decent compared to home prices. But if you’re buying in Toronto or Vancouver where every dollar counts, you may be forced to buy a condo or townhouse instead of a house to qualify.
If you’re not satisfied with the type of property you can afford, you might choose to buy a property further out of the city where your home-buying dollar usually goes furthers. Just make sure you don’t mind the extra commute time into work if you work in the city.
How will the stress test affect the housing market?
At the tail end of 2017, it was no secret that the mortgage stress test was coming into effect. In fact, homebuyers rushed into the market before the new rules came in.
The first half of 2018 was slower compared to the first half of 2017, but that’s not really a fair comparison. The first quarter of 2017 can be best described as “gangbusters” in Toronto. The Toronto real estate market seems to have recovered from a modest spring market. With all signs pointing to a decent fall market, with interest rates still low, now remains a good time to get into the market.
Other things to consider about the new mortgage rules
Here are some other things to consider about the new mortgage rules.
Only federally regulated lenders are impacted by the new mortgage rules. Provincially regulated credit unions aren’t required to stress test (although they can choose to). If you’re running into difficulties qualifying, it’s a good idea to call up your mortgage broker to see if there’s a lender out there with less strenuous qualifying guidelines.
Those buying a home aren’t the only ones affected by the new mortgage rules. If your mortgage is coming up for renewal, you need to be aware of the stress test, too. That’s because you must pass the stress test if you’re switching lenders. Your lender knows that and may not offer you its best rate when your mortgage is up for renewal. Again, it’s worth calling your mortgage broker to see if there’s another option out there.
Are you looking to refinance your mortgage to consolidate debt or pay for home renovations? Then you’re likely impacted by the new mortgage rules. If you’re already carrying a lot of debt, it may be tough to refinance. Your broker can help crunch the numbers and see if he can make it work.
For those buying a home, you might consider making a down payment of only 19 percent, even if you have 20 percent. By doing that, you won’t need to be stress tested under this new rule. Mortgage rates also tend to be better on mortgages with default insurance, since the lender has that extra security. Your broker can run some scenarios to see if that makes sense.
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