How Your Buying Power May Change Next Year

On October 17, 2017, the Office of Superintendent of Financial Institutions (OSFI) announced three mortgage rule changes effective January 1, 2018.

First, a list of terms you need to know:

  • Insured Mortgage/High Ratio Mortgageless than 20% down payment
  • Non-insured Mortgage/Conventional Mortgage: 20% or greater down payment/equity
  • Bank of Canada Rate: the 5 year fixed posted rate
  • Contract Rate: the actual rate offered by the lender to the consumer
  • Benchmark Rate/Qualifying Rate: Stress Test Bank of Canada Rate OR Contract Rate +2%, whichever is greater
  • LTV (Loan to Value): the size of mortgage compared to the value of the property securing the loan

What will change as of January 1, 2018:

1) Qualifying rate Stress Test to all NON-INSURED mortgages.Currently, a home-buyer with a down-payment of 20% or more, qualifies at the rate offered by the lender. As of January 1, 2018, the home-buyer must qualify at the benchmark rate which is the higher of the Bank of Canada Rate (currently 4.89%) OR the Contract Rate from the lender plus 2%. This applies to all terms, fixed and variable rates. Stress Tests will apply to new mortgage loans and mortgages that are refinanced or renewed with a different financial institution. The Stress Test will not apply if you’re renewing with the same financial institution.

2) Lenders will be required to enhance their Loan to Value (LTV) measurement and limits to ensure risk responsiveness, by updating their internal risk management protocols as housing markets and the economic environment evolve.

3) Lending arrangements designed to get around loan-to-value limits will be restricted with the updated guideline explicitly forbidding ‘co-lending’ or ‘bundling’ arrangements. For example, a consumer applies for 80% LTV mortgage and the lender can only approve 65%. The lender then partners with a second lender for the additional 15%. The original lender then “bundles” the 15% LTV mortgage with the original 65% mortgage to form the complete 80% LTV loan. This will no longer be permitted as of January 1, 2018.

Why is Canada implementing mortgage stress-tests?

The stress test changes are a precaution as the world moves away from near-zero interest rates. While it’s not the responsibility of the OSFI to cool our overheated real estate market, they are simply concerned about the debt loads of Canadians amid soaring home values. The OSFI see the stress test as a brake on overstretched buyers who would be vulnerable as rates rise and who might bring down sensible buyers with them, as was seen in the U.S. in 2008.