On October 17, 2017, the Office of the Superintendent of Financial Institutions (OSFI) announced the final changes to mortgage underwriting standards in Canada. Among the new rules is a requirement to stress test uninsured mortgage borrowers. What does this mean for borrowers and how will this news impact mortgage lending?
By law, borrowers with a down payment of less than 20 per cent for a home must purchase mortgage insurance and the mortgage is referred to as an insured mortgage. The insurance is paid for by the borrower and protects the lender in the event that the borrower defaults on the loan. Borrowers who put down more than 20 per cent on a home do not have to pay this insurance and are referred to as a conventional mortgage or uninsured mortgage.
Historically low interest rates, coupled with high household debt and real estate prices have raised concerns that homeowner’s will be unable to meet their mortgage payments should interest rates rise. The stress test is designed to simulate a borrower’s financial situation by assuming they would have to pay the loan at a higher interest rate, which is not the same rate as their contract rate. Currently, only insured mortgages, variable rates and fixed mortgages less than five years are qualified at the higher rate.
As of Jan. 1, 2018, borrowers with uninsured mortgages will need to show that they can afford payments based on the greater of the Bank of Canada’s five-year benchmark rate (currently 4.89 per cent) or their contract mortgage rate plus two percentage point. For example, the interest rate for a fixed five year fixed mortgage that is uninsured is currently at 3.24 per cent.
You will now have to qualify to make a payment based on a rate of of 5.34 per cent in this scenario. Under the current rules, a family with an annual income of $75,000 could afford a home worth $600,000 by putting 20 per cent down with a five year fixed mortgage rate of 3.34 per cent and a 30-year amortization. After the new rules take effect that family will only qualify to purchase a home for $475,000. These rules will also apply to those who want to refinance their existing mortgage or move their mortgage at renewal to another lender for a better rate. For those with a mortgage funded under the old rules, the stress test will not apply when a mortgage renews if you renew with your existing lender.
In addition to the stress test, the new rule will require lenders to exercise a higher level of scrutiny around the loan-to-value ration of the loans they fund and to ensure that they are not funding mortgages that at too large compared to the underlying value of the home.
Although the new guidelines are aimed at taking some of the risk out of the market there are strong concerns that the new qualifying rate will slow down the housing market and have negative implications on the mortgage financing market.
If you are planning to purchase a home or refinance your mortgage and are wanting to qualify under the old rules time is of the essence. If we can be of any assistance with arranging your mortgage financing, please give us a call.
Of Prime Interest is a collaboration of mortgage professionals Trish Balaberde (250-470-8324) & Darwyn Sloat (250-718-4117) Christine Hawkins (250 -826-2001)