By now, the upcoming new mortgage regulations set out by OSFI (Office of the Superintendent of Financial Institutions) are top of mind having received plenty of press coverage.
What are the New Rules?
The primary change is a new “stress test” for uninsured mortgages, where a borrower has at least 20% down payment or equity (if refinancing). The stress test requires a borrower to qualify at the higher of the Bank of Canada rate (currently 4.99%) or the contract rate plus 2%.
If the contract rate is 3.14%, a borrower will have to qualify at 5.14%. The actual rate will be 3.14% the mortgage, but the mortgage amount approved will be based on a rate of 5.14%. This will have the impact of reducing the mortgage amount a borrower qualifies for by approx. 20%.
Other changes announced relate to Loan-to-Value ratio measurements and limits lenders will now need to operate by. http://www.osfi-bsif.gc.ca/Eng/osfi-bsif/med/Pages/B20_dft_nr.aspx
What Does the New Stress Test Mean for Consumers?
On average, once the stress test becomes active, clients will be able to afford roughly 20% less than what they can afford today.
Quick Example: A client earning $100,000 would qualify for a mortgage of approximately $506,000 based on a 5-year term, 30-year amortization, 3.14% interest rate. Under the new stress test, they will only qualify for a mortgage of $400,000 (if qualified at 5.14%).
Impact on Housing Market
With borrowers not being able to qualify for as much, demand for lower priced properties is expected to rise. On the flip side, some experts have said that the housing market, primarily in Vancouver and Toronto, will either see a decrease in sales volume (# of properties being sold) as less people will be able to afford properties, or we may see a decrease in prices as the market initially reacts to the reduction in mortgage purchasing power, and then sellers who are trying to sell to buy into larger or more expensive properties reduce their prices to attract buyers.
Additionally, there have been recent mortgage rate increases with expectations that rates will continue to rise, slowly and incrementally.
What are the implications to waiting to see if prices reduce?
If interest rates rise while property prices decrease, any potential savings due to less expensive property prices could be offset by the higher interest rate. The chart below illustrates this.
A 5% and 10% decrease in home prices are, essentially, cancelled out by a 0.50% and 1.00% increase in interest rates respectively.
| | Scenario 1: Home Prices Decrease 5% 0.5% Rate Increase | Scenario 2: Home Prices Decrease 10% 1% Rate Increase |
| Home Price $500,000 | Home Price $475,000 | Home Price $450,000 |
| Interest Rate 3.34% | Interest Rate 3.84% | Interest Rate 4.34% |
| Monthly Payment $1963.45 | Monthly Payment $1966.05 | Monthly Payment $1960.61 |
*Calculations based on a 20% down payment and a 25-year amortization
What to do?
Whether purchasing a property for your own home or for an investment property, the numbers must make sense. We recommend not rushing into a purchase that does not have sound fundamentals. However, if you are in the market and would be affected by the mortgage rule changes, i.e. would qualify for a smaller mortgage and in turn a lower purchase price, then waiting for a price reduction, that may not happen, may not be in your best interest.
As always if you would like more information or to review your options reach out to us and we’ll explore them together.