On April 8th, the Office of the Superintendent of Financial Institutions (OSFI) announced that it is relaunching its consultation on the minimum qualifying interest rate for uninsured mortgages. Usually, mortgages with a 20% down payment do not need mortgage default insurance and are called uninsured mortgages.
Here’s what the OSFI, an independent agency that is the sole regulator of banks in Canada, is proposing: uninsured mortgages will now be subject to a qualifying rate equal to the mortgage contract rate plus 2%, or 5.25% at minimum. OSFI is also proposing a regular recalibration of the rate at least once a year.
The process of approving an uninsured mortgage against a qualifying interest rate is called the stress test and is meant to ensure you can still afford your mortgage even if rates rise. The current qualifying rate is either the higher of the mortgage contract rate plus 2% or the benchmark rate, which currently sits at 4.79%. With today’s mortgage rates as low as they are, most uninsured mortgages are stress-tested against a qualifying rate of 4.79%. These changes will push that qualifying rate up by about half a percentage point.
The current stress test has come under fire for being too restrictive and unreasonably high. But these additional restrictions are intended to maintain Canada’s mortgage underwriting’s soundness given the current real estate boom.
Changes spurred by Canada’s hot housing market
Canada’s housing prices have historically risen steadily across the country and more quickly in major urban areas like Toronto and Vancouver.
That said, the past year has pushed real estate markets in every region of Canada to new heights, leading some to speculate that the market has become overheated. In February, the Canadian Real Estate Association reported that home sales were up 39.2% compared to a year ago. The average price for a home in Canada is up 25% from the previous year.
These price increases are fueled by several factors, including record-low interest rates, the rise of remote work resulting in the need for additional space at home, and travel restrictions making it easier than ever for Canadians to save large down payments.
With this increase in prices comes an increase in risk, and the adjusted stress test proposed by OFSI is meant to counter-act that risk by ensuring Canadians will still be able to afford their homes when interest rates start to rise again. These changes are also expected to cool the overheated housing market by decreasing mortgage affordability.
James Laird, the co-founder of Ratehub.ca and President of CanWise Financial mortgage brokerage, agrees. “Given the hot housing market we are seeing across the country, it comes as no surprise that OSFI is considering tightening the qualifying criteria for getting a mortgage. OSFI is hoping this change will slow the exponential increase in home values. In the near term, this change will make it more difficult for first-time homebuyers to qualify for a mortgage. However, if this policy has the desired effect of slowing home value appreciation, it may be a good thing for first-time homebuyers in the long run.”
Changes to home affordability
The changes proposed by OFSI will reduce the maximum mortgage affordability of the average Canadian by requiring them to prove they can still afford their mortgage at higher interest rates. Under today’s 4.79% stress test qualifying rate, a family with an annual income of $100,000, a 20% down payment, and a 5-year fixed mortgage rate of 1.78% amortized over 30 years would qualify for a home valued at $651,000.
If the changes proposed by OSFI take effect and the stress test rate rises to 5.25%, this family’s maximum affordability will decrease to $618,000. That’s a difference of about $33,000 or 5% of the overall purchase price.
You can calculate your affordability using Ratehub.ca’s mortgage affordability calculator to determine how these changes might affect you.
Affordability to remain unchanged until June 1st
These changes are still being proposed, which means there is still a window of affordability before they take effect on June 1st. If you buy a home before June 1st, your uninsured mortgage will still be subject to the current, slightly more lenient stress test. Closer to June 1st, you’ll still have a chance at qualifying under the current rules. Laird points out, “anyone who signs an offer to purchase prior to June 1st, but whose home closes after June 1st, should ensure that they have mortgage approval. When mortgage regulation has changed in the past, the government will typically grandfather existing approvals (under the old rules) even if the mortgage has not yet closed.”