Canada’s New Mortgage Rules Explained
Effective January 1st, 2018, the Office of the Superintendent of Financial Institutions (OSFI) has introduced new mortgage lending rules that could mean first time uninsured homebuyers may only be able to afford 20% less house than before the new rules.
Much has been said about a new mortgage stress test which will come into effect on January 1. The test will require all insured mortgage borrowers to qualify against the Bank of Canada’s five-year benchmark rate, or at their contract rate plus an additional 2 per cent.
Many experts predict that the test will slow the market, as first time buyers struggle to qualify against stricter borrowing standards.
OSFI has set a new minimum qualifying rate or “stress test” for uninsured mortgages. These uninsured mortgages are for consumers with down payments of 20% or greater than their home price.
The rules now require the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada (presently 4.89%) or 200 basis points above the mortgage holder’s contractual mortgage rate. It will not matter how much money they put down as down payment, the buyer will need to pass this stress test. According to James Laird, co-founder of ratehub.ca, the effect of these changes will be huge, resulting in a 20% decrease in affordability, meaning a first-time homebuyer will be able to buy 20% less house, explains Laird.
Two likely scenarios and the effect they will have on a family’s bottom line have been run by ratehub.ca and this is what they have found:
SCENARIO 1: Bank of Canada five-year benchmark qualifying rate
In this case, the family’s mortgage rate, plus 200 basis points, is less than the Bank of Canada five-year benchmark of 4.89%.
According to Ratehub.ca’s mortgage affordability calculator, a family with an annual income of $100,000 with a 20% down payment at a five-year fixed mortgage rate of 2.83% amortized over 25 years can currently afford a home worth $726,939.
Under new rules, they need to qualify at 4.89%
They can now afford $570,970
A difference of $155,969 (less 21.45%)
SCENARIO 2: 200 basis points above contractual rate
In this case, the family’s mortgage rate, plus 200 basis points, is greater than the Bank of Canada five-year benchmark of 4.89%.
According to Ratehub.ca’s mortgage affordability calculator, a family with an annual income of $100,000 with a 20% down payment at a five-year fixed mortgage rate of 3.09% amortized over 25 years can currently afford a home worth $706,692.
Under new rules, they need to qualify at 5.09%
They can now afford $559,896
A difference of $146,796 (less 20.77%)
Three options are available for those that do not pass the new stress test.
At the time of mortgage renewal, if you remain with your existing lender, then you will not be required to pass the new stress test. However, it has not been made clear if you change lenders if you will need to undergo the new stress test.
For first time home buyers, it is crucial you understand what you qualify for using the new regulatory rules. Before you start looking for a new home get pre-approved for your mortgage so you understand the process and to calculate the effects of the mortgage stress test on your home affordability you can use Ratehub.ca’s free online mortgage affordability calculator at
https://www.ratehub.ca/mortgage-affordability-calculator.
It is always recommended you complete your research to avoid disappointment.
