Thursday, October 19, 2017 / by Jody Manchisi
New mortgage stress test effective Jan 1. 2018
New mortgage rules in effect Jan.1 will have a 'significant dampening effect' on the market
Expanded stress testing of mortgages will have effect on the housing market and could hit move-up home buyers hardest. The latest lending restrictions announced by the Office of the Superintendent of Financial Institutions (OSFI) on Tuesday, could also slow interest rate increases next year if the Bank of Canada pauses to assess the impact of the new borrowing rules.
The new guidelines now require federally regulated financial institutions to vet applicants for uninsured mortgages by using a minimum qualifying rate equal to the greater of the Bank of Canada’s five-year benchmark rate (currently 4.89 per cent) or their contractual rate plus 2 percentage points.
Let’s consider this scenario in which the family is offered a mortgage rate of 2.83 per cent, which is more than two percentage points below the current Bank of Canada five-year benchmark of 4.89 per cent.
If they were to apply for a mortgage on or after Jan. 1, they would be able to afford only $570,970, with a 20 per cent down payment.
Under the new rules, even home buyers who don’t require mortgage insurance because they have a 20 per cent down payment, will have to prove they can make meet their commitment if interest rates rise above the five-year benchmark rate published by the Bank of Canada or 2 per cent higher than their contracted mortgage rate, whichever is higher.
This is potentially more wide ranging and it will dampen the housing market in 2018, probably more significantly than we saw (with) the earlier federal measures
A survey by industry group Mortgage Professionals Canada showed the requirement would disqualify about one in five potential home buyers.
OSFI has been tightening underwriting standards for home loans in the past five years as the federal and provincial governments have also introduced market cooling measures in Vancouver and Toronto. In the Toronto region, the 905-area communities will feel the biggest impact.
Because the new lending rules will likely mean buyers can afford less house, they could find themselves unable to afford the next rung on the property ladder. Then it becomes a question of whether they want to move at all.
The chief economist of the Canadian Real Estate Association Gregory Klump said he fears the impact of further cooling measures could negatively impact other housing markets.
The Ontario Real Estate Association (OREA) issued a statement calling the OSFI changes “overkill” that “will hurt middle class families and punish careful savers most.”