There are new changes coming into effect on January 1, 2018 introduced by The Office of the Superintendent of Financial Institutions (OSFI) requiring all uninsured borrowers to complete a newly designed buyer stress test before they can qualify for a mortgage.
What is an uninsured borrower? It is anyone who has put down twenty percent or more of the value of the property as a down payment to secure their mortgage. These borrowers do not need mortgage insurance and are therefore known as uninsured borrowers.
Insured borrowers have down payments of less than twenty percent and terms less than five years, and these borrowers have been required to pass a stress test since last year. The stress test ensures that borrowers can afford their loan payments even if interest rates suddenly increase.
Under the newly proposed test lenders want to mitigate the risk of default by the proposed stress test and that is why uninsured borrowers will have to now qualify based on the greater of a five year fixed rate from Bank of Canada or the current rate + 2% stress test. Which of these two criteria will be used to determine the test outcome, depends on which of the two measures will have the highest value.
If you already have an approved existing mortgage, this rule does not affect your current mortgage no matter when the closing is. Pre-approved mortgages concluded between 17th October to 31st December 2017 should technically still be honoured by most major financial lenders, but we advise you to double check your pre-approved application. For all applications made in 2018, new rules will apply with no exceptions to both new mortgages and any mortgage renewals. Other changes under these new rules include restrictions on co-lending or bundled mortgages.
These changes are surely going to affect different segments of the populations. Most vulnerable will be young first home buyers that are using funds given by their parents for a larger down payment and who may not yet have high paying jobs, many being just at the start of their careers. Also heavily affected will be buyers looking to expand or move up to a larger home as they will not be able to qualify for a bigger mortgage than previously possible and may not be able to negotiate as good a terms and rates as before. Industry experts are concerned on a cooling effect the new rules may have on the real estate market in the coming year.
However, not all outcomes of these new measures are negative. While buyers’ power and affordability is certainly going to decrease, rising national household debt is a growing concern as it continues to break records. By introducing this stress test, the government is preparing the market for any eventual rate hikes and the test would ensure we are prepared for them on both sides as realtor professionals and consumers. It is also a good time to consider those higher than normal debt ratios and rein in household debt and expectations, which all lead to a more balanced, stable market and more affordable home prices for buyers in the long run. The new stress test may also shift buyer focus to condos and townhomes.
Also this new rule does not mean that borrowers with higher debt ratios will no longer be able to get mortgages at all. While these borrowers should be prepared to pay higher rates, smaller B level lenders will still be able to offer some flexibility. Also, most provincially regulated lenders are not bound by these new regulations and local credit unions are expected to be very busy in the coming year. GTA continues to attract large numbers of newcomers, which is still the most important source of new buyers and any cooling or slow down of the market is likely to be temporary.
If you have any questions about the new regulations or have any other real estate related questions, please contact us at any time.