In October 2017, the Office of the Superintendent of Financial Institutions (OSFI) introduced new rules on mortgage lending. With these regulations, OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages.
The new guidelines now require federally regulated financial institutions to vet applicants for uninsured mortgages by using a minimum qualifying rate equal to the greater of the Bank of Canada’s five-year benchmark rate (currently 4.89 percent) or their contractual rate plus 2 percentage points.
The guidelines will take effect January 1, 2018, and apply to new mortgages, as well as mortgage renewal applications if borrowers switch lenders. Financial institutions won’t be obligated to apply the test at mortgage renewal for existing borrowers, although they may choose to do so.
As a result, the rules will reduce the size of mortgages that Canadians will be able to take on given a certain down payment and income. For a family with a household annual income of $100,000, here are two potential scenarios:
Scenario #1:
A family is offered a mortgage rate of 2.83 percent, which is more than two percentage points below the current Bank of Canada five-year benchmark of 4.89 percent.
If they were to apply for a mortgage today, with a 20 percent down payment, a five-year fixed mortgage, and a 25-year amortization period, they would be able to afford a home worth $726,939.
If they were to apply for a mortgage on or after January 1, 2018, they would be able to afford only $570,970, with a 20 percent down payment.
Scenario #2:
A family qualifies for a 3.09 percent mortgage. That rate plus 2 percentage points is higher than the Bank of Canada’s 4.89 percent five-year benchmark. The family would then be vetted using a 5.09 percent rate.
Under the current rules, they would be able to buy a home worth $706,692 with a 20 percent down payment.
With the new guidelines, they would be able to afford a $559,896.
The result?
The effect of the mortgage changes will be felt by homebuyers, resulting in a 20 percent decrease in affordability, which means that homebuyer will be able to buy 20 percent less house.
Buyers do have a few options in 2018:
1. They can put down more money on their down payment to pass the stress test.
2. They can decide not to purchase a home and wait for their income to go up.
3. They can add a co-signer with income onto the loan.
4. They can opt to buy less (perhaps a townhome versus a single detached home, or choose to relocate to a more affordable community).
Or, if you've been waiting to buy or have moving on the brain, let's connect now so that I can help you get into a new home before the end of the year so that you aren’t impacted by these new rules.
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