On Tuesday October 17th the Office of Superintendent of Financial Institution (OSFI) changed the lending guidelines for federally controlled financial institutions (big banks) now requiring banks to qualify for mortgage rates at the Bank of Canada’s five-year benchmark rate. This means borrowers will need to qualify at a rate two percent higher than their contracted rate. This new change is affecting uninsured mortgages and will come into affect on January 1st 2017.
What is an uninsured mortgage?
An uninsured mortgage is a mortgage with greater than a 20 percent down payment. These loans are not insured by a mortgage insurer, such as CMHC, in the case of loan default and are therefor considered ‘uninsured’. Because of the significant down payment, banks typically consider uninsured mortgages safe, however the new rules implemented by OSFI are set to minimize the risk of these loans even further. According to the Royal Bank of Canada, 45 percent of mortgages at domestic banks are currently uninsured.
What are the changes?
The new guidelines will now make uninsured borrowers undergo a stress-test (similar to what insured borrowers need to meet) which will make them qualify at a minimum rate equal to the Bank of Canada’s five-year benchmark rate (which is currently 4.89 percent), or their contractual rate plus two percent. Currently borrowers of uninsured mortgages can qualify for rates as low as 2.97 percent however after January 1st with the changes they will need to qualify for a rate two percent higher than their applied for rate which is closer to 5 percent.
How will this affect buyers?
It is thought that one in six mortgages will be affected by this new rule. Borrowers renewing their mortgage and remaining with the same lender won’t be affected. In essence, borrowers applying for a new loan will now require 20 percent more income to qualify for the same size mortgage.
According to Ratehub, the changes will look like this:
A couple with a household income of $100,000 is offered a mortgage rate of 2.83 percent. Based on this income, they would be eligible to purchase a home up to $726,939 based on a 20 percent down payment and a 25-year amortization.
After of January 1st this same couple will now need to qualify at the Bank of Canada 5-year benchmark rate of 4.89 percent- despite the fact the rate they have been offered is 2.83 percent. This means they are now only able to afford $570,970 based on the same income, down-payment and amortization schedule.
This new mortgage rule is one of the most-shocking changes to Canadian mortgages in recent times:
“Given where our housing market and debt levels are at, this is the most ground-shaking mortgage rule change of all time. That’s not hyperbole,” Founder of Ratespy.com, Rob Mclister told the Financial Post.
Will there be loopholes?
The big question now is if credit unions, which are provincially not federally regulated, will follow suit. The new federal stress test may shift more borrowers to credit unions and provincially funded lenders who have the choice of passing on the new rules or not.
What will this do to the real estate market?
The newly announced lending changes will likely cool the housing market and slow growth of the mortgage market. RBC expects a surge in buyer activity at the end of 2017 before the new guidelines come into affect in January. The new rules are expected to slow the housing market, dragging down prices between two and four percent in 2018 according to a TD economist. Although many banking professionals believe these new rules could have unintended consequences, proponents of the changes believe they will strengthen Canada’s banking sector and help prevent hardship from unforeseen economic events.
Will these new rules affect you? For more information on the new lending changes and how this could affect buying property in Whistler, contact Lance Lundy.