New Canadian mortgage rules could make qualifying for a mortgage more difficult.
On October 17, 2017, the Office of the Superintendent of Financial Institutions (OSFI) announced new Canadian mortgage rules, to be put into effect on January 1, 2018. The new regulation requires a mortgage stress test, assessing whether borrowers can withstand higher interest rates.
The changes being implemented are:
1. There is a new minimum qualifying rate — a mortgage stress test — for uninsured mortgages.
The minimum qualifying rate for uninsured mortgages must be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate of +2%.
2. Lenders must enhance their loan-to-value (LTV) measurement and limits so they are dynamic and responsive to risk.
Federally regulated financial institutions must establish appropriate LTV ratio limits that reflect risk and are updated as housing markets and the economic environment evolve.
3. There are restrictions on certain lending arrangements that are designed, or appeared to be designed, to circumvent LTV limits.
Federally regulated financial institutions are prohibited from arranging with another lender a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law.
While all of the new regulations will have an impact, the one people are paying most attention to is the new minimum qualifying rate — which is a mortgage stress test that specifically looks at borrowers’ ability to repay their mortgage payment should interest rates be higher.
As of October 2017, the posted five-year mortgage rate was 4.89%. Under OSFI’s new rules, borrowers would be stress tested at either the five-year average posted rate, or 2% higher than their actual mortgage rate — whichever one is more.
The new stress test rules don’t apply to mortgage renewals as long as they are with the borrower’s existing lender.
The 2018 Canadian mortgage rules were put out in draft form in July 2017. Critics of the regulations have said it will put a chill on an already cooling Canadian real estate market. The last stress test rules were implemented on insured mortgages in 2016. As of August, the CBC reports insured mortgages were down 4.5% in the 12 months they were subject to a stress test. Uninsured mortgages, however, grew 17.3%, which suggests homeowners were doing anything they could to get their down payments above the 20% mark.
According to Global News, in a scenario where a family is offered a mortgage of 2.83%, if they were to apply for a mortgage today with a 20% 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 — with the same conditions — they could afford a home worth $570,970.
The Globe and Mail reports Toronto-Dominion Bank economist Brian DePratto estimates that the OSFI changes will depress housing demand by 5% to 10%, and will reduce price growth by 2% to 4% over 2018. Mortgage Professionals Canada warned the changes could reduce the volume of home sales by 10% to 15% annually, resulting in 50,000 to 75,000 fewer home sales a year in Canada, when combined with other mortgage rule changes announced in 2016.
Provincially-regulated lenders, such as credit unions, are not affected by the new rules.
Purview for Lenders can help you adapt to the new Canadian mortgage rules.
Call us today at 1.855.787.8439 or visit www.purviewforlenders.com.