Think back to the beginning of July. Vacations were just getting started. Summer weather was in full swing, at least here in BC. Seems pleasant, but mortgage brokers across Canada were quietly dealing a new round of frustration. On July 8th, the Office of the Superintendent of Financial Institutions (OSFI), the big banks’ supervisor & regulator, published draft revisions to the guidelines for residential mortgage qualification, specially for uninsured mortgages. You may recall that in the fall of 2016, sweeping changes were made that included a new stress test for insured borrowers. After that change, a borrower with less than 20% down-payment would now have to qualify at the Bank of Canada benchmark rate (currently 4.89%). Prior to the stress test, the same borrower could qualify at contract rate if they chose a 5yr fixed rate (currently about 3.09%). This “stress test” effectively decreased one’s purchasing power by about 20%.
Fast forward to now. As of today, OSFI has made their summer draft revisions a reality. There are a couple changes being made, but directly from their website, here is the change that will be most felt by the general publicare the changes:
OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages. Guideline B-20 now requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%.
OK, so what does this mean exactly? If you had 20% available for a down-payment, you could avoid the “stress test” and still qualify at the contract rate. As of January 1, 2018, this will no longer be the case. As of that date, the minimum qualifying rate for uninsured mortgages will be “the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%”.
Perhaps this is best explained with an example. Let’s assume the purchaser (or purchasers) has a total qualifiable annual income of $75,000, no other debts and a decent credit history, and has access to the required 20% down payment (own resources or gifted). Under the current rules as they are, if you chose a 5-yr fixed rate term (currently about 3.39%), this income would likely qualify for a purchase of about $565,000.
After January 1, 2018, the qualifying rate for this mortgage will now be 5.39% (the greater of the benchmark rate 4.89%; or the contract rate +2% = 5.39%). At this higher rate, and all other variables being equal, the maximum purchase price drops to about $450,000. Purchasing power has dropped by about 20%.
So why is this happening? OSFI’s official explanation is that “these revisions reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada”. These changes are part of an “engineered slowdown” of the Canadian housing market. The general consensus from mortgage brokers and real estate agents across the country is that this approach is a bit too heavy-handed. Perhaps it would be more prudent to leave sufficient time to gauge the previous changes before making new ones. As with the fall 2016 changes, there are a lot of unanswered questions, and as brokers, we fully expect further clarifications and explanations in the coming days and we will do our best to keep you, our clients as informed as possible.
However, regardless of the motives behind these changes and any consequences, anticipated or not, they are happening. If you’ve been toying with the idea of purchasing or refinancing, now is a very good time to thoroughly examine all options as your goal will be pushed a little further out of reach in the new year. I’m more than happy to discuss these new changes with you and to help figure out your best course of action moving forward. Contact me today!