The Office of the Superintendent of Financial Institutions (Canada’s banking regulator) introduced three new rules on mortgage lending that takes effect in 2018—and the new rules will hit first-time home buyers and those thinking of refinancing their homes hardest. This is the second intervention by the government in less than a year trying to slow down Canada’s Hot Real Estate market.
Effective January 1st, 2018 the Office of the Superintendent of Financial Institutions (OSFI) has set a new minimum qualifying rate, or “stress test” for all prospective home buyers, even those with a down payment of over 20%. As of Jan 1st, all borrowers will need to pass a stress test before they are allowed to take out mortgages from federally regulated institutions such as banks, regardless of how large their down payment. People who fail the stress test won’t be able to obtain a mortgage, and estimates have put the ratio of those who will fail to qualify as high as one-in-five.
OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages (mortgage consumers with down payments 20% or greater than their home price).
The rules now require the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada (presently 4.89%) or 200 basis points above the mortgage holder’s contractual mortgage rate.
Option 1: Bank of Canada five-year benchmark rate
In this case, the family’s mortgage rate, plus 200 basis points, is less than the Bank of Canada five-year benchmark of 4.89%.
According to Ratehub.ca’s mortgage affordability calculator, a family with an annual income of $100,000 with a 20% down payment at a five-year fixed mortgage rate of 2.83% amortized over 25 years can currently afford a home worth $726,939.
Under new rules, they need to qualify at 4.89%
They can now afford $570,970
A difference of $155,969 (less 21.45%)
Option 2: 200 basis points above contractual rate
In this case, the family’s mortgage rate, plus 200 basis points, is greater than the Bank of Canada five-year benchmark of 4.89%.
According to Ratehub.ca’s mortgage affordability calculator, a family with an annual income of $100,000 with a 20% down payment at a five-year fixed mortgage rate of 3.09% amortized over 25 years can currently afford a home worth $706,692.
Under new rules, they need to qualify at 5.09%
They can now afford $559,896
A difference of $146,796 (less 20.77%)
If a first-time home buyer doesn’t pass the new stress test, they will have three options. “They can either put down more money on their down payment to pass the stress test, they can decide not to purchase the home, or they can add a co-signer onto the loan that has income as well. The stress test will be done at the time of refinancing as well, with one exception. “If on renewal you stay with your existing lender, then you don’t have to pass the stress test again.
This could allow Banks to stop giving borrowers a good rate at renewal as they would have to qualify under the new rules if they move their mortgage. Once again the Government will be helping to fill the coffers of the Big Banks, which have had record profits every year for as long as I can remember. As usual the taxpayer will have to pay the price while big business continues to increase profits. Some things never change.
Here is how the Federal Government spends some of the money collected from Taxpayers.