“These rules reinforce a strong and prudent regulatory regime for residential mortgage underwriting, and protect the Canadian banking system in a rising interest rate environment.” Jeremy Rudin, OSFI’s superintendent.”

How new Mortgage rules beginning January 1stm 2918 will affect homebuyers and investors

On January 1, 2018, Canada’s federal banking watchdog, the Office of the Superintendent of Financial Institutions (OSFI) will introduce new rules on mortgage lending to take effect on that day. So what exactly do the new regulations set out?

  • The OSFI will set a new minimum qualifying rate, or “stress test,” for uninsured mortgages (mortgage consumers with down payments 20% or higher than their home price). The will primarily require the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada (presently 4.89%) or 200 basis points above the mortgage holder’s contractual mortgage rate.
  • The new rules will apply regardless of how much money a homebuyer puts down as a down payment on a property.
  • All buyers no matter how well qualified will have to pass the stress test. This would apply to both variable and fixed-rate mortgages, regardless of term.
  • Other changes include in addition to the stress test, include lenders having to scrutinize more closely the loan-to-value ratio of the loans they give out, to ensure they are not giving out mortgages that are too large compared to the underlying value of the home.
  • There are also new limitations on so-called co-lending or bundled mortgages that aim to ensure lenders don’t flout rules designed to limit how much they can lend.

OSFI’s new guidelines also clarify that borrowers who are renewing mortgages will not have to meet the new stress-test standard as long as they are staying with the same bank. However, renewals done with another lender will have to qualify under the revised criteria because they require new underwriting.

The OSFI said the new mortgage rules come on the heels of other changes made this year, which makes it tougher to obtain a mortgage, as it is concerned about the risks posed by high household indebtedness, rising interest rates and growing property values in some large cities.  A year ago, a stress test was introduced for all insured mortgages to ensure a borrower’s ability to make their mortgage payments at a higher interest rate

OSFI hopes the new rules will curb an out of control housing market and inject some stability into the sector. “These revisions reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada,” said Jeremy Rudin, OSFI’s superintendent

However, critics of the new rules say the changes are draconian. Surrey real estate agent, Nav Kang says, “The rules will mainly affect first time buyers who will have to either downsize what they buy regarding price and space or come up with a bigger down payment.” He adds, “For a place like Surrey, with big immigrant populations, who will do anything to buy a property, the rules don’t mean much, families will help buyers with down payments, or people will be more creative in accessing funds, through co-signing for example.”

Surrey mortgage broker Sunil Singh says, “With the stress test, a first-time homebuyer will be able to buy 20% less house. I think the rules are too strict now; you will get people priced out of buying property. OSFI is looking for stability at the expense of first –time buyers and that is not very fair.” He adds, however, “its good business for independent mortgage brokers like myself who can help people qualify for a mortgage if the banks turn them away.”

The changes, which will take effect Jan. 1, are widely expected to reduce house sales across Canada, but forecasts of the impact vary. The Fraser Institute recently released a study that said these new rules would do more harm than good, as loan rates increase while fewer people will be able to access mortgages. Meanwhile, Mortgage Professionals Canada warn the changes could reduce the volume of home sales by 10 per cent to 15 percent annually, resulting in 50,000 to 75,000 fewer home sales a year in Canada.  Sunil Singh, however, has a different take. “It depends on where you are buying a house and for what price, in a hot market, like Vancouver or Surrey there are always investors and people with money who will buy property regardless of federal or provincial rule changes. The real losers with new rule changes will be the first time buyer with no family support struggling to come up with a down payment and trying to get qualified for a mortgage.”

He adds, “When demand for property – of all sorts, outstrips supply, you will always have rising property prices. It’s down to simple economics really” His advice,  to tackle the new mortgage rules, “Save more for a larger down payment or adjust the kind of property you have in mind and be open to all options including co-signing and shared ownership.”