OAFI Finalizes New Mortgage Rules - Includes Stress Test For Uninsured Borrowers

On October 17, 2017  the Office of the Superintendent of Financial Institutions (OSFI) released revised guidelines for the mortgage industry, similar to the draft version released earlier this summer. These new parameters will take effect January 1, 2018. 

Effective January 1st, 2018, all Buyers (irrespective of downpayment amount) will now have to qualify at the greater of the Bank of Canada’s five-year posted rate or 2% higher than the negotiated contract rate.

Why the change?

The Canadian government is worried about the housing market correcting, and they’re worried about interest rates rising. For the past few years, they’ve been taking steps to slow the market down (particularly in Toronto and in Vancouver), in the hopes of preventing a housing disaster. Making it harder to get a mortgage and ensuring people can afford their home if/when interest rates rise is intended to cool the market down.

OSFI said they will be holding information sessions through the fall to discuss implementation expectations. These new guidelines include a stress test for uninsured mortgages or mortgages with more than a 20% down payment or 20% in existing equity.  This new stress test means that borrowers will be qualified at the greater of their contract rate + 2% or the five year benchmark rate published by the Bank of Canada, which is currently 4.89%.

For example:  per $100,000 in mortgages. Based on an interest rate of 3.29% with a 25yr amortization.

Mortgage Payment - $488.25 (3.29% with 25yr am)
Benchmark Rate Payment - $575.36 (4.89% with 25yr am)
Stress Test Payment - $598.22 (5.29% with a 25yr am)

These are not the only changes made today, below is a summary of all the changes:

• A new minimum qualifying rate (stress test) for uninsured mortgages

• Lenders will be required to enhance their Loan to Value (LTV) measurement and limits to ensure risk responsiveness

•  Restrictions will be placed on certain lending arrangements that are designed or appear designed to circumvent LTV limits.

What else might the OFSI changes mean?

• It’s possible that we’ll see Buyers move towards shorter-term mortgages with lower interest rates, in order to make qualifying easier.

• We may see Buyers move to alternative and unregulated markets to borrow money.

• We’ll probably see some market volatility in Atlantic Canada and the prairies (where markets are not over-heated and not in need of cooling).

• We’ll also see people extending the length of their mortgage amortization so that their payments are lower, thus allowing them to qualify for more house.

Will prices go down?

The goal of the stress test is to ensure the long-term viability of our real estate market – not to make it implode. But here’s the thing: the real estate market doesn’t run on logic – it runs on emotions too. It’s impossible to predict what Buyers and Sellers will do in response to the changes. Will a bunch of Sellers decide to sell and increase the supply? Will Buyers decide to wait and see (like they did with the changes announced in April) and reduce demand? Will Buyers rush to buy before January 1st and we’ll see prices increase in the short-term?

Our best advice: Don’t try to time the market. Do the right thing at the right time, for you. Think long-term.

Should I buy now?

For some people, the new qualifying changes may mean that they can no longer afford to buy, so they’ll need to either re-evaluate their needs and plans, or buy before the changes take place. Talk to your lender. If the changes mean the amount of money you can borrow will take you out the housing market (or out of the market for what you’re looking to buy), then you might want to consider buying before the new rules come into effect.

Shameless self-promotion: Assist 2 Sell can help! Our team of agents is ready to help make your home ownership dreams happen before the changes come into effect…we’ve cleared our schedules and we’re ready to go.

I already bought a house and am closing on it and taking possession January 5, 2018. Am I affected?

Firm agreements of purchase and sale (in other words, all conditions have been waived) dated before January 1, 2018, will not be subject to the new qualification rules (unless individual banks decide to implement the rules earlier, which is very possible).

I have a mortgage pre-approval that is valid until the end of February 2018. Will I be affected if I buy in January 2018?

Yes. A pre-approval is not a guarantee of a mortgage, so if you don’t have a firm Agreement of Purchase & Sale in place before January 1, 2018, you will need to qualify at the new levels. Talk to your lender ASAP.

What happens when it’s time to renew my mortgage?

Like in previous changes to mortgage qualification rules, if you renew your mortgage with the same lender who is holding your mortgage now, nothing changes. If you switch to a different lender, you’ll need to qualify under the new rules. This is a huge bonus for the banks – it’s hard to imagine them being competitive on renewal rates when they’re basically holding people hostage.

I want to refinance my existing mortgage. Will the new qualification rules change anything?

Yes, as of January 1st, 2018, lenders will have to qualify borrowers with the new rules for refinancing.

The guidelines go into effect January 1, 2018. Assist 2 Sell will update you accordingly. In the meantime if you would like more information or would like to contact a mortgage broker, do not hesitate to contact us at 902 446-3113. We can help!