The new rules about to be implemented by the Office of the Superintendent of Financial Institutions (OSFI) are aimed at subjecting the uninsured mortgage borrowers in the country to stress test as well. A stress test is a type of test that is carried out on the borrower’s finances to determine if he or she would still be able to pay his or her mortgage loan, if the interest rates for the loan increased in future. With the main objective being to rein in personal debt, the test determines whether the borrower can afford the loan at 2 percentage points above the current deal or at the five-year average rate projected by the Bank of Canada—whichever value is the highest.
Currently, only the insured borrowers is subject to the rule, borrowers who have placed less than 20 percent of the home value as down payment, are being subjected to a financial ‘stress test’. The borrowers who place more than 20 percent of the home value as down payment are not required to pay for mortgage insurance, hence are referred to as” uninsured borrowers”. While the uninsured borrowers are being exempted from this test today, they too will need to undergo a ‘stress test’ as part of the mortgage application process, when the new rules take effect on Jan. 1, 2018. So, how is this announcement by the OSFI expected to affect the real estate industry?
Projected Effects of the Proposed ‘Stress Test’ Rules
Just as expected, the new rules will have a certain effect on the real estate industry. Some of these effects are immediate while others are long term, as discussed below:
When these rules are enforced, borrowers are going to lose a significant amount in their home buying power. According to Jonathan Hull, an Ottawa Realtor, home buyers are going to lose between $50,000 and 100, 000 of their buying power, depending on the value of the property they are buying. This could also mean that some of the prospective buyers who could have afforded to buy a home under current rules will not be able to afford a home when these rules come to effect.
A TD Bank economist estimated that home buyers will lose about 15 percent of their buying power after January. If you were planning to spend $ 1 million on your new home and planning to place more than 20 percent of the amount as a down payment, your buying power would be reduced by about $150,000.
Now that prospective home buyers are aware that the new rules will reduce their buying power, many of them are rushing to acquire mortgages before the new rules are enforced. For instance, one of Hull’s clients, a first time home buyer, was planning to buy a home in the summer of 2018, following the announcement by the OSF, this client decided to do it right away, before the new rules are enacted. The leading professionals in the industry feel that this move will affect certain demographics, such as the first time home buyers who would use family gifts to buy homes or those who just got their first jobs and would like to get a mortgage with the hope that their salaries will increase in time.
While this is the case, some players in the industry feel that the new rules are a great idea. According to them, the OSFI is trying to make borrowers realize that loan interest rates could increase in coming years. Additionally, such players also believe that the move will curb the comparatively high unsecured debt that many borrowers seem to be carrying currently.