On Oct 17th, Canada’s banking regulator (OSFI) announced a new mortgage stress test that will come into effect January 1st, 2018. This regulation will affect new mortgages that are currently not subject to mandatory mortgage insurance, meaning buyers who have 20% or more as a down payment.
By law, borrowers with a down payment of less than 20% for a home must purchase mortgage default insurance. Borrowers pay an insurance premium, but the beneficiary is actually the lender, because the insurance protects the loan giver in the event the borrower defaults on the loan. (And the insurance premiums can easily be into the tens of thousands of dollars, on top of the cost of a home depending on the size of the down payment and the price of the property.)
The vast majority of first-time borrowers have to purchase mortgage insurance, and they have been obligated to undergo a stress test of their finances since last year.
Anyone who puts down more than 20% of the value of a home isn’t required to pay for the default insurance, and is known as an "uninsured" borrower — these are the people that will be affected by the new rules come January 1st, 2018.
The stress test itself consists of ensuring the borrower would be able to pay the loan if interest rates become higher than they are today. How much higher? 2% or the posted 5 year mortgage rate (which is currently 4.89%) whichever is higher. So basically, if you qualified at a rate of 3.5%, as of January 1st, you will have to qualify at a rate of 5.5%, even though you would still only be paying the 3.5%. For the overall economy, it’s not such a bad thing. It’s proactively protecting our real estate market from crashing and in essence protecting the home buyer from not being able to afford their home should there be a significant mortgage rate increase. However, for the average home buyer, you won’t qualify for as high a mortgage as you would today and in some cases, may not qualify at all.
It should be noted that the new stress test rules won't apply to mortgage renewals as long as they are with the borrower's existing lender.
Home affordability will undoubtedly change as a result of the changes, according to calculations from RateHub.ca. The rate-comparison website looked at the maximum price a buyer could afford, under two scenarios, and compared current rules with incoming ones. The buyer is a family with an annual income of $100,000, enough cash saved for a 20% down payment, and a five-year fixed mortgage amortized over 25 years.
For Scenario No. 1, the family's mortgage rate is 2.83%. Under incoming rules, the mortgage application faces a stress test using the Bank of Canada's current five-year benchmark rate of 4.89%. That's because the central bank's posted rate is higher than the family's negotiated rate plus 200 basis points (4.83 %).
For Scenario No. 2, the family's mortgage rate is 3.09%. Under incoming rules, the family would be stress tested at 5.09%. That's because the negotiated rate plus 200 basis points (5.09%) is higher than the Bank of Canada's posted rate (4.89%). Either way you cut it, the family's purchasing power will decrease when the new rules come into effect on Jan. 1, 2018 so, if you're considering a move, considering buying a new home or want information about re-financing your current home, ACT NOW!! Call TODAY to discuss your options (905-706-2932).