The Office of Superintendent of Financial Institutions (OSFI), an independent agency reporting to the Canadian Minister of Finance, recently posted an update to mortgage requirement rules that has the potential to affect home buyers in 2018.
The new rules took effect on January 1, 2018, and are designed to tighten up lending practices.
In order to make sure you understand how these rule changes might affect you, we've prepared this handy guide.
The new rules will require that all federally licensed lenders (which is most banks) must now issue smaller loans to home buyers who do not have mortgage insurance.
The "stress test" is nothing new, as it has been around since 2016. To pass the "stress test", borrowers must demonstrate that they can afford the Bank of Canada benchmark.
What's new is the "stress test" requirements are now being applied to borrowers who do NOT have mortgage insurance.
The new rule requires that borrowers prove they can afford an interest rate higher than the Bank of Canada's benchmark rate or 200 basis points higher than their current mortgage rate.
A "basis point" is an industry term that refers to a hundredth of one percent (0.01%) so 200 basis points would be 2% in simple English.
In other words, as of January 1, 2018, all new uninsured mortgages must now be able to pass the "stress test".
The short answer? Probably not.
First, the new rule changes don't affect mortgages for people who have mortgage insurance. This means that people who have a lower down payment (under 20% of the purchase price) won't be affected at all.
Second, the new rules will only affect new mortgages. Even if your mortgage term expires in 2018, you can still renew or refinance it with the same lender at the old interest rate (as long as both you and your lender want to do this) without having to pass a new "stress test".
But if your mortgage term ends and you want to switch to a new lender, you'll be subject to the new rules. To be more precise, everyone who gets a NEW mortgage in 2018 will have to pass the stress test, whereas before, only insured mortgage borrowers had to pass it.
The new regulations seem primarily targeted at restricting new home buyers from borrowing too much.
Let's simulate what this might look like. Let's say the average mortgage rate in Alberta for a five-year mortgage term was 2.69%, but the Bank of Canada's benchmark was 4.89%. In this scenario, the new rules would mandate proving that the borrow can afford an interest rate of 4.69% (2.69% + 200 basis points).
Remember, the actual interest rate won't change because of the new rule. The new rules are only to include uninsured mortgages in the "stress test" requirement.
According to experts, a new home buyer affected by the rule changes will now be able to borrow approximately 20% less money, and, therefore, buy 20% "less house."
First, there's no need to panic. Good homes are available at great prices, and there's no indication that quality properties are going to disappear or be priced out of the market.
Prospective new homeowners have several options:
Most of the time, buyers who can put down 20% (or more) for a down payment are already financially secure enough to pass the stress test. The new rules are to crack down on so-called "bundled mortgages" that stack up several different loans in order to allow borrowers to escape the stress test requirements.
In other words, if you have enough for a 20% down payment in 2017, your ability to get a mortgage in 2018 shouldn't be affected. It's only people who are obtaining one loan to pay the down payment and a second loan in the form of a mortgage who have anything to really worry about
The new rules will really only affect a tiny percentage of new home buyers in 2018, and the vast majority of first-time home buyers or homeowners with a mortgage won't see any changes at all. Nevertheless, it's beneficial to know this information as you prepare for your mortgage application.