New stress test will affect borrowers with down payments of 20 per cent and over
Today is the big day – Canada’s main banking regulator just released the much anticipated final version of Guideline B-20. The revised guideline contains descriptions of the new rules which target uninsured borrowers. Regulations will come into effect on January 1st of 2018.
Features of the new OSFI mortgage rules
According to the new regulations home buyers who do not require mortgage insurance because they put down twenty per cent or more of down payment will still have to prove their ability to pay the mortgage payments if rates rise. Previously only insured borrowers had to go through a qualifying test. Now the stress test will apply to essentially all borrowers. Uninsured borrowers will have to qualify at a rate greater than their contractual rate plus 2% or the five -year benchmark rate published by the Bank of Canada, which is 4.94% today.
The Office of Superintendent of Financial Institutions (OSFI) made comments about the new guidelines. The superintendent stated that new rules are meant to decrease risks of indebtedness for Canadian home owners.
New changes already triggered an uproar. The reasons for criticism included potential cost increase and limiting access to mortgages for some buyers. Some experts believe that tighter regulations would simply force borrowers to seek help from riskier lenders. Many believe that stress test for uninsured mortgages is absolutely unnecessary and will inevitably cool down the market.
OSFI superintendent claims that they will be watching the economy and borrowers’ adaptation to the new rules closely. In the event of any considerable change to the interest rates, regulations would be revisited. However, OSFI believes that new rules will enhance the resilience of the Canadian banking system in a rising interest rate environment.
What does this mean for your mortgage?
Experts believe that the new OSFI mortgage rules would likely slow down the housing market, with prices dropping by 2 to 4 per cent in 2018. Some borrowers may also resort to provincially regulated mortgage lenders, since they remain unaffected by the new rules for now. Yet some other buyers will turn to cheaper homes or condos, as a result of new rule implementation.
We are giving you a more detailed examples to understand how much these rules will affect home buyers.
Example #1: A family of two buying a detached home.
- Annual Income: $100 000
- Monthly obligations (car payments, credit cards, etc): $750
- Property tax: $4500 a year
- Down payment $130 000
- Amortization 30 years
Outcome: Purchasing power decreased by 15% and maximum purchase price dropped by $100 000.
Example #2: First time home buyer purchasing a condo
- Annual Income: $75 000
- Monthly obligations (car payments, credit cards, etc): $400
- Property tax: $2300 a year
- Condo Fee: $600 a month
- Down payment: $102 000
- Amortization: 30 years
Outcome: Purchasing power decreased by 18% and maximum purchase price dropped by $88 000.
Examples above demonstrate that we should expect certain price correction since purchasing power will decrease anywhere from 12% to 18% depending on home type and income levels of mortgage borrowers.
First time home buyers may actually benefit from the new arrangement and decreasing prices, since they already had to go through the stress test. However, if you are looking to refinance or purchase a larger home and not interested in insurance, this could be the time to make a move.
If you have any questions about new mortgage regulations, do not hesitate to call us. Home and Mortgage advice team is known for its professional attitude and competency. We have been in the industry for over 10 years and maintain an extensive record of successful deals and happy clients. Call us today!