Canadians who are looking to qualify for an uninsured home loan are going to find it tougher come the beginning of 2018. That’s because the Office of Superintendent of Financial Institutions (OSFI) is setting a new qualifying rate. Consumers who make a down payment of 20% or more will now have to pass the same stress test as consumers who get insured mortgages.
Starting this January all homebuyers, regardless of the size of their down payment, will be required to qualify for loans which are either at the lender’s rate plus 2% or at the higher of the Bank of Canada’s five-year benchmark (4.89% as of October 2017).
What this will essentially mean for homebuyers, is that the value of the home loan that they will be able to qualify for will be less. Approximately 21% less in fact.[i]
What is the potential impact of this new criteria?
The new mortgage rules can be expected to have a fairly significant impact on the Canadian real estate market – especially in the short term.
One likely outcome is that there will be higher demand for real estate from now until the end of 2017, as those who have been pre-approved for mortgages will be anxious to close before the new rules take effect.
Since the new stress test will decrease the size of loan that buyers will be able to qualify for, it is possible that we will see more activity in the market in the less expensive homes category and a cool down in sales of more expensive properties.
Finally, as the new rules only apply to federally regulated banks, it is possible that more homebuyers are going to seek out loans from sources which are not federally regulated. This last area, is where there seems to be the greatest amount of risk.
According to a report by the Fraser Institute, buyers may be more likely to turn to finance companies which are less heavily regulated or they may be more likely to opt for shorter term and more volatile variable loans.[ii]
The new rules for mortgages will be coming into full effect in less than a months’ time. Whether this is a good thing or a bad thing largely depends on your perspective.
Some homebuyers will no doubt find it frustrating that they will not be able to afford as much house as they would like. Young people and newcomers to Canada are likely to be most affected and may even have to put off homeownership for a few years.
On the other hand, the new rules will also help to ensure that Canadians are able to afford the homes they are living in when (not if, but when) interest rates start to go up. This may help to preserve the stability of Canada’s housing market long term.
And if the housing market does slow down as a result of these regulations, it will likely benefit homebuyers who can qualify for a mortgage under the stricter rules.