On Tuesday October 17th, Canada’s banking regulator introduced new rules regarding the requirement for all homeowners to undergo a mortgage stress test. This applies to all even those with larger down payments. As of now, only those with mortgages with lower down payments and less than five-year terms are required to pass the stress test.
A minimal qualifying rate (or “stress test”) was introduced by the OSFI (Office of the Superintendent of Financial Institutions) for both insured ( less than 20% down payment) and uninsured mortgages (with a down payment of 20% or greater) to quality for a mortgage, .
These new guidelines will be effective on the first of January 2018 and apply to renewal applications, switch loans as well as new mortgages. However, financial institutions are not required to apply for a mortgage renewal for existing borrowers, unless they so choose to, according to a statement by the OSFI to Global news.
Under the new guidelines, federally regulated financial institutions are now required to scrutinize applicants for uninsured mortgages. This will be accomplished using a minimum qualifying rate that is greater than the five-year benchmark of the Bank of Canada, which at this time is 4.99%. In turn, they may also be vetted by their contractor’s rate plus two additional percentage points. These new guidelines will significantly reduce the size of mortgage that Canadians will be able to qualify for given a set income and down payment.
According to Ratehub.ca, this is how these guidelines will affect a family with an annual income of one hundred thousand dollars. Ratehub.ca is a website that runs comparison on potential mortgage rates and credit cards.
In our first scenario, the family in question has been extended a mortgage rate of 2.83%. This rate is more than 2% below the five-year Bank of Canada benchmark, which is currently 4.99%
If said family were to apply for a mortgage in the current market, with a down payment of 20% on a fixed five-year mortgage with a 25-year amortization, they would qualify for a home in the $726,900 range. However, if they were to apply on or after January 1, 2018, when the new guidelines go into effect, they will only be approved for a mortgage of $570,970 with a down payment of 20%.
In our second scenario, the same family now qualifies for a mortgage rate of 3.09%.This means that the family would then be vetted with a rate of 5.09%. Under the current guidelines, with a 20% down payment, they would be able to purchase a home in the $706,000 range whereas with the new guidelines, they would only qualify for a home in the $599,000 range.
These new rules will most like steer potential homeowners in the direction of cheaper home and provincially regulated lenders.
As well, the new regulations will most likely steer prospective buyers towards credit unions and other provincially-regulated mortgage lenders that are not affected by the new changes to institute by the OSFI, DePratto said in a statement over the phone to Global News. He added that some potential homebuyers may be directed to shop for cheaper dwelling such as condos or townhouses.
The final guidelines in the new policy are pretty much the same as what the OSFI had originally proposed earlier this year in July in which a draft of the proposal was composed for public consideration.
However, the proposed changes are being criticized for the potential of increase costs as well as preventing prospecting homeowners from qualifying for mortgages.
In spite of these outcries, the OSFI stand bending their stance that these changes are in fact warranted. Jeremy Rudin, OSFI superintendent, was quoted as saying “These revisions to Guideline B-20 reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada.”
Other possible changes to the current guideline could place restrictions on bundled mortgages and co-lending, these changes are geared toward ensuring that financial institutions do not circumvent rules limiting how much they could potentially lend a prospective buyer.