Think you are safe because you want to place more than 20 percent as down payment for your mortgage? You really are not; since you will have to take a ‘stress test’ before you are approved for a mortgage loan, as from Jan, 1, you may not qualify for the mortgage you wanted. According to the Bank of Canada, these new rules will disqualify about 10 percent of the homebuyers looking forward to placing more than 20 percent as down payment.
When this happens, such homeowners will be forced to delay buying, settle for homes that are smaller than they had initially anticipated or put more money down to get the mortgage they want. Again, this will make a considerable number of buyers to opt for alternative loans from other lenders, which is a riskier undertaking.
With the regulations, you need to prove that you can still repay the requested mortgage amount without problems, if interest rates increased in future. This test is already being administered for borrowers with less than 20 percent as down payment for their mortgages. According to the Superintendent of Financial Institutions’ office, the ‘stress test’ will be administered to all borrowers from Jan, 1, regardless of their down payment.
Cumulatively, this change will affect about $15-billion in new mortgage borrowing every year. The effect will be greater in the ‘hot’ markets, such as Vancouver and Toronto. As a matter of fact, the tight rules could disqualify up to 12 percent of mortgage borrowers in such cities. At a personal level, the new changes will lowers home buyer’s buying power by about 15 percent.
The CEO of the Ontario Real Estate Association, Tim Hudak thinks that the changes will be hard on the buyers. According to him, many people will not be able to purchase their first homes or upsize as their families grow. While most of the experts project serious effects when these rules come to effect, the Bank of Canada is for the opinion that the move will improve the overheated house prices and rising household debt, which have been problems in the country since 2013.
Governor Stephen Poloz, in a statement that accompanied the bank’s Financial System Review, mentioned that the financial system in the country was still resilient due to job creation and strong growth. This optimism may be attributed to the fact that the tighter lending standards and higher rates are combating riskier borrowing and cooling the real estate market in the country.
An economist at the Toronto-Dominion Bank, Brian DePratto thinks that things are now moving in the right direction; the comparatively high rate of increase in house prices witnessed in the country in precious years has slowed to 10 percent per year since October. This reduction in the rate of increase of house prices may also be attributed to the introduction of taxes, in the case of foreign buyers, earlier this year. However, Mr. Poloz thinks that things will take time to harmonise because of the property prices run-up and the relatively high household-debt level in the country today.
Some experts in the industry believe that the buyers are to be blamed for this crisis. This is because they always find other ways to negate tighter mortgage rules. A good example is when Ottawa introduced high-ratio mortgages, back in 2016. Rather than coping with the new borrowing conditions, a considerable number of home buyers opted for low-ratio mortgages. As of now, more than three quarters of the new mortgages in Ottawa are the low-ratio mortgages. However, the Bank promised to start monitoring the private lending market more carefully.
Regardless of such, a considerable number of economists as well as industry officials today hope that the new borrowing rules by the OSFI will curb home prices in the near future. As a matter of fact, the Canadian Home Builders’ Association has projected that the ‘stress test’, along with other recent policy reforms in the housing sector, will reduce the total number of house transactions by about 10 percent. According to the association, this would translate to a 50, 000 units decline in the number of resale-home transactions to about 75,000 units each year.