New Mortgage Rules and stress test introduced for uninsured mortgages

New Mortgage Rules and stress test introduced for uninsured mortgages

New OSFI rules for mortgages were introduced in late 2017, which will affect borrowers with down payments of 20% and over.

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In late 2017 Canada’s main banking regulator released the much anticipated final version of Guideline B-20. The revised guideline contains descriptions of the new rules which target uninsured borrowers. Regulations came into effect on January 1st of 2018.

Features of the new OSFI mortgage rules

According to the new regulations home buyers who do not require mortgage insurance because they put down twenty per cent or more of down payment will still have to prove their ability to pay the mortgage payments if rates rise. Previously only insured borrowers had to go through a qualifying test. Now the stress test will apply to essentially all borrowers. Uninsured borrowers will have to qualify at a rate greater than their contractual rate plus 2% or the five -year benchmark rate published by the Bank of Canada, which is 4.94% today.

The Office of Superintendent of Financial Institutions (OSFI) made comments about the new guidelines. The superintendent stated that new rules are meant to decrease risks of indebtedness for Canadian home owners.

New changes already triggered an uproar. The reasons for criticism included potential cost increase and limiting access to mortgages for some buyers. Some experts believe that tighter regulations would simply force borrowers to seek help from riskier lenders. Many believe that stress test for uninsured mortgages is absolutely unnecessary and will inevitably cool down the market.

OSFI superintendent claims that they will be watching the economy and borrowers’ adaptation to the new rules closely. In the event of any considerable change to the interest rates, regulations would be revisited. However, OSFI believes that new rules will enhance the resilience of the Canadian banking system in a rising interest rate environment.

Example #1: A family of two buying a detached home.

Annual Income: $100 000

Monthly obligations (car payments, credit cards, etc): $750

Property tax: $4500 a year

Down payment $130 000

Amortization 30 years

Outcome: Purchasing power decreased by 15% and maximum purchase price dropped by $100 000.

Example #2: First time home buyer purchasing a condo.

Annual Income: $100 000

Monthly obligations (car payments, credit cards, etc): $750

Property tax: $4500 a year

Down payment $130 000

Amortization 30 years

Outcome: Purchasing power decreased by 18% and maximum purchase price dropped by $88 000.

Examples above demonstrate that we should expect certain price correction since purchasing power is decreasing anywhere from 12% to 18% depending on home type and income levels of mortgage borrowers.

What does this mean for your mortgage?

Experts believe that the new OSFI mortgage rules would likely slow down the housing market, with prices dropping by 2 to 4 per cent in 2018. Some borrowers may also resort to provincially regulated mortgage lenders, since they remain unaffected by the new rules for now. Yet some other buyers will turn to cheaper homes or condos, as a result of new rule implementation.

First time home buyers may actually benefit from the new arrangement and decreasing prices, since they already had to go through the stress test. However, if you are looking to refinance or purchase a larger home and not interested in insurance, this could be the time to make a move.

If you are currently shopping for a home, renewing your mortgage, or looking to refinance, we have access to mortgage products that are not available through a retail bank branch and can potentially save you thousands of dollars in mortgage payments per year.

If you have any questions about new mortgage regulations, Contact us today for a FREE, no-obligation consultation and find out how you can get the best deal on your mortgage stress-free! We have been in the industry for over 10 years and maintain an extensive record of successful deals and happy clients.

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