I’m sure you heard a lot of buzz around the new OSFI mortgage regulations, and were likely especially interested if you’re considering your first home purchase. You might be wondering how the new rules will impact your homeownership dreams and you might even be feeling confused and a little frustrated. Let us assure you, you’re not alone in these feelings. We’re going to outline the details in laymen’s terms so they’re easy to understand and you know exactly what changes and impacts to expect.
So now, onto the new regulations – some say it was the hammer we didn’t need – as it’s aimed primarily at those with heavier debt and at least 20 percent equity – while supporters of the new requirements argue it will tighten up lending and avoid a potentially depressed economy.
Either way, it’s said to be a tide turner.
The most notable change?
Every uninsured borrower must undergo a “stress test” to ensure they can withstand higher interest rates (what this actually means: the test simulates the borrower’s financial situation and assess the risk in lending to that borrower).
The potential result: experts suggest that the rules will have a “big impact on certain segments of the market, especially first-time buyers with small down payments” (2).
It’s essentially like a 2 point increase – “uninsured borrowers can qualify for a mortgage today at five-year fixed rates as low as 2.97 per cent. After the changes, this will soar to almost 5 per cent, meaning you could need upwards of 20 per cent more income to get the same old bank mortgage you could get today” (3).
Quick summary: “if you have a higher debt load, weak credit and/or less provable income, get ready to pay the piper” (3).
So, if you already have more than 20 percent of the cost of a downpayment saved up (kudos to you!), it might be worth considering pulling the trigger and making a purchase, as after the 1st of January it will become much more difficult to qualify for a mortgage.
A Real Life Example:
“To illustrate the impact of the new stress test, the website RateSupermarket.ca used the example of a family with [an] annual income of $100,000. The family can now [prior to the new rules] afford a house that costs $726,939 based on a five-year fixed-rate mortgage of 2.83 per cent, a 20 per cent down payment and a 25-year amortization. The new rules would [allow] them [to] afford a house costing $570,970” (4).
So, as you can see from the above example, it impacts the overall cost of a home you can consider. Suddenly, your reality might look very different from what you expected.
The Possible Silver Lining?
There are a few:
- Prudent borrowers will still be able to buy a house under these regulations, but it’s still the general consensus in the industry that the new rules will be squeezing people out of the market.
- There are also lenders that aren’t covered by OSFI – private individuals or independent lenders aren’t part of the mandate of OSFI – this means a buyer could arrange a mortgage loan through those who aren’t covered by OSFI without having to pass OSFI’s stress test. That said, they will no doubt have their own ways to ensure they get paid and likely have other stipulations in place. For a list of Federally Regulated Institutions, you van visit OSFI’s website here.
- Lastly, if you already have an existing mortgage and you renew with the same lender, you’re not subject to the stress test. It’s said, that this may lessen the competition, as lenders will not want to shop around when they renew in an effort to avoid the stress test.
So, the big question is, Why did OSFI do it?
OSFI argues that this will “insulate our banking system from economic shocks, and to the extent it’s correct – that’s good news” (3).
What’s more, OSFI says they introduced these new measures to reduce the possibility of mortgage defaults when rates go up. They suggest it may also cool the market slightly.
It’s difficult to predict what will happen.
Will the new changes result in a stabilized economy or will the results be bleak for homebuyers?
Will they eliminate a lot of home buyers?
Will renovations become more popular (improving existing home, rather than purchasing a more expensive one)?
Will there be a buying rush prior to January 2018?
Will interest rates continue to rise?
While there are a number of unanswered questions about what impact this will actually have, we hope the above has helped outlined the coming changes and helped prepare you to face these new and potential challenges head on.
The bottom line: the changes are coming whether we’re ready or not or whether you agree with them or not. The key, as it always is, know the rules, understand them and plan ahead.
(2) New mortgage stress test rules kick in today:
(3) Globe and Mail: Ten ways the new mortgage rules will shake up the lending market, Robert McLister, Special to The Globe and Mail, October 17, 2017
(4) Globe and Mail Article: Why squeezing first-time home buyers is a smart housing policy, Rob Carrick, October 17, 2017