The mortgage qualifying rules will be changing as of January 1st, 2018. If you’re planning on buying or refinancing a home, now would be good time to do so. Below is a summary of what is to come and an example of how it can affect your borrowing power.
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OSFI EXTENDS ‘STRESS TEST’ TO ALL NEW MORTGAGES
• The Offce of the Superintendent of Financial Institutions (OSFI) released revised “B-20” guidelines for residential mortgage underwriting at federally regulated financial institutions. As was widely expected, the updated ‘stress test’ will be applied to all new mortgages beginning in January 1, 2018. Currently the test applies only to mortgages requiring insurance (i.e. those with low down payments) and those whose term is less than five years.
• This change requires that borrowers qualify for mortgages at the greater of the Bank of Canada’s five-year benchmark rate or the contracted rate plus 200 basis points. For reference, the Bank of Canada posted rate was 4.89%. It should be noted that OSFI will not apply the more stringent requirements in the case of mortgage renewal.
• While the extension of qualification guidelines will likely draw the most attention, OSFI introduced two other changes:
• Loan-to-value limits must be established and lenders will be required to ensure that they “are reflective of risk and are updated as housing markets and the economic environment evolve”
• Lending arrangements designed to get around loan-to-value limits are restricted with the updated guideline explicitly forbidding ‘co-lending’ or ‘bundling’ arrangements.
• As expected, OSFI has expanded the scope of the ‘stress test’ to include anyone taking out a mortgage at a federally regulated institution regardless of term and whether they are insured. Perhaps underscoring the logic behind the change, OSFI bank data for August of this year showed insured mortgages (which were already subject to the stress test) were down 4.5% year-on-year, while uninsured mortgage credit grew 17.3%. While this is partly related to the rising prices of Canadian real estate, with more and more of it priced above the insurance caps, it also likely reflects the skew stemming from the past stress test requirements. As such, the change, alongside the explicit guidance around co-lending arrangements, will together help address the shift as far as those borrowing from federally regulated institutions.
• Let’s consider a scenario in which an average household making $150,000, with minimal debt and a deposit of 20 per cent or more, gets approved for a mortgage rate that 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 this same mortgage after Jan. 1, they would see their approved mortgage limit drop from approximately $850,000 to $650,000 based on the new guidelines.
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