It’s about to become a lot tougher to qualify for a mortgage in Canada. Canada’s banking regulator OFFSI has released its final changes to Canada’s mortgage rules which will make it harder for buyers to take out uninsured mortgages — uninsured mortgages being mortgages in which borrowers put down more than 20 percent. This news comes not long after OFFSI implemented a stress test for insured mortgages — insured mortgages being mortgages in which borrowers put down less than 20 percent.
The Stress Test
The stress test enacted a year ago was intended to ensure that borrowers would still have the ability to make their payments if rates were to increase, or if there were to be a significant economic downturn. These new measures will expand the stress test to all buyers borrowing money to purchase a property. Even individuals who are putting down 20 percent or more on their mortgage (and are considered to be of the least risk) will have to undergo this stress test. While there are a number of additional changes being put into place, this stress test will have the largest impact on borrowers.
The Impact For Buyers
These new measures will force lenders to test a borrower’s ability to pay higher interest rates than the ones they have been given at the bank. This is going to substantially cut into the amount of money buyers will be able to borrow.
Starting January 1, all uninsured mortgage borrowers will need to qualify at either the Bank of Canada’s five-year benchmark rate (currently 4.89%), or at their contract mortgage rate, plus an additional 2 per cent.
A family with $100,000 annual income putting 20 percent down at a five-year mortgage rate of 3 percent can currently afford a home of $726,939. Come January 1st, this same family would be afforded only $570,970. This is a significant decline: over $100,000 difference. Buyers who purchase a home now will be able to borrow about 20 percent more than they will be able to come January 1st.
Finally, the stress-tests will apply to new mortgage loans and mortgages that are refinanced or renewed with a different financial institution. If you’re chasing a lower rate in a few years, you might need to pass the stress test to get it. The stress test will not apply if you’re renewing with the same financial institution.
The Impact For Sellers
Sellers may be concerned about what this may mean for the value of their home. Economists have crunched the numbers, and they expect that this will impact home values somewhere in the 1-2 percent range. So if homes were to raise 8 percent or 9 percent next year, this could reduce that by a couple of percentage points overall. This doesn’t mean that values are going to decrease; it will just soften price growth by a percentage or two.
Other Changes By OSFI
There are some additional changes being made. If you’re bringing in money from overseas — if you have income from overseas — you’ll need more documentation, and you’ll be considered higher risk. OFFSI is favoring income that can be verified by employers: income that is stable, reliable, and predictable. Thus, those with unique financial situations may find it more difficult to borrow come January 1st. The biggest issue overall is going to be the stress test — and that is going to impact anyone borrowing money for a mortgage.
Now Is The Time To Buy
We have a very balanced market at the moment, which isn’t expected to last much longer. Come this spring, things should heat up. As we’ve seen out in Vancouver, fear is temporary. The fundamentals of the market here have never been stronger. This is the time to buy.
Current interest rates remain historically low. Buyers need to capitalize on this and get into the market. As long as rates remain this low, OFFSI feels that these measures will be necessary to make sure that people don’t get in over their heads. This will likely be for at least a few years, as the Bank of Canada is not likely to increase rates significantly any time soon. It’s important to remember that these regulations will remain in place until rates do go up. So either way, if buyers do not buy now, they are going to find themselves with less purchasing power.
Right now the real challenge will be for buyers to get into the market before January 1st. A 20% cut to your budget is significant. Waiting to save a larger downpayment, waiting for a crash that isn’t coming, or waiting because your too picky is going to severely impact your ability to buy a home.
Since 1955 (the year we started tracking real esate sales in Hamilton-Burlington) we have NEVER experianced more than a 15% drop in real estate values. Infact the only time that has happened was over the course of about 6-7 years between the late 1980’s and early 1990’s. A 20% hit to your budget outweighs any real estate value drop we have witnessed in history. At the same time, most buyers are not going to be able to save a substanial amount of money in a short period of time, which would make waiting a viable option. In other words, now is the time to get into the market.
