Note: This policy has been changed since this article was written. Here’s the latest on the mortgage stress test.
Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), is setting a new minimum qualifying rate for uninsured mortgages that will come into effect on Jan. 1, 2018.
The minimum qualifying rate (or stress test) for consumers getting uninsured mortgages—borrowers with a down payment of 20% or more—will be the greater of the Bank of Canada’s five-year benchmark rate (presently 4.89%) or 200 basis points above the mortgage holder’s contractual mortgage rate.
OSFI notes that federally regulated financial institutions “are not expected to re-apply the qualification rate assessment to existing borrowers that are renewing mortgages.”
“Those of us working in the mortgage industry question if now is an appropriate time to introduce more regulation which will cool markets across the country further,” says James Laird, co-founder of Ratehub.ca and president of CanWise Financial.
“We have yet to see the full impact of regulation added over the last 12 months, combined with rising interest rates,” he adds. “A more prudent approach would be to let these new variables work their way through the real estate markets, and decide if further tightening is required.”
The changes will have an impact on mortgage affordability. Assuming monthly heating costs of $150 and monthly property taxes of $400, here are two examples of how the changes will affect affordability:
Scenario #1: Bank of Canada five-year benchmark qualifying rate
According to Ratehub.ca’s mortgage affordability calculator, a family with an annual income of $100,000 with a 20% down payment at a five-year fixed mortgage rate of 2.83% amortized over 25 years can currently afford a home worth $726,939.
Under the new rules, they need to qualify at 4.89%. Now they can only afford a home worth $570,970—a difference of $155,969.
Scenario #2: 200 basis points above contractual rate
According to Ratehub.ca’s mortgage affordability calculator, a family with an annual income of $100,000 with a 20% down payment at a five-year mortgage rate of 3.09% amortized over 25 years can currently afford a home worth $706,692.
Under the new rules, they need to qualify at 5.09%. Now they can only afford a home worth $559,896—a difference of $146,796.
OSFI also announced two other changes:
- Federally regulated financial institutions must establish and adhere to appropriate loan-to-value (LTV) ratio limits that are reflective of risk and are updated as housing markets and the economic environment evolve.
- A federally regulated financial institution is prohibited from arranging with another lender a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law.
“These revisions to Guideline B-20 reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada,” says OSFI’s superintendent Jeremy Rudin.