Borrowers frustrated

The sky is falling, the sky is falling …. 

For many of us, changes to the way we do business tend to instigate a panicked, knee-jerk reaction. 

In October 2017, the Office of the Superintendent of Financial Institutions (OSFI) announced further changes to mortgage lending rules. OFSI’s mandate is to oversee federally registered banks and insurers, ultimately contributing to the stability of the Canadian financial industry.

There has certainly been a significant amount of buzz about what these changes mean to potential home owners.

By way of background, in October 2016 OFSI rolled out sweeping changes as to how mortgage borrowers (primarily borrowers putting down less than 20 per cent) qualify for financing.

You have likely heard the term stress test. Other changes came in to effect at the same time that affected the purchase of rental properties, and refinances.  

Most of the changes being rolled out are designed to protect Canadian consumers, which is an important part of the conversations I have been having with my clients during the last year.

In some circumstances, the stricter qualification guidelines have proved frustrating for clients who have had to reconsider their price range, and think about whether now is still the right time to buy.

During the last year, the stress test you have heard about has been applied to people buying homes and putting down less than 20 per cent (for any offers signed Oct. 17, 2016 or later).

These buyers have to qualify at the Bank of Canada Benchmark rate, not the actual interest rate they will be paying on their new mortgage.

Currently, the Benchmark rate is 4.99 per cent. Five-year fixed mortgage rates (for high-ratio purchases) are sitting around 2.99 per cent.

Using a family income of $75,000, allowing for property taxes and heating costs and assuming no other consumer debt, under the old rules you would qualify for a mortgage of about $347,000.

With the new rules, making the same assumptions, you would only qualify to borrow about $282,000.

The math behind this means that buying power for clients putting down less than 20 per cent has decreased by about 20 per cent.  

As a result of the changes to rentals and refinances, mortgage lenders that previously offered very competitive rates (because they had access to mortgage default insurance for these files) have increased their rates to account for the (theoretical) increased risk associated with these mortgages.

Effective Jan. 1, 2018, the stress test will be applied to all people seeking mortgage financing from a federally regulated financial institution, regardless of the size of their down payment.

At this time, it does not appear that this same rule will be applied to clients (putting down 20 per cent or more) and working with a provincially regulated institution (i.e.: credit unions).

I was asked the other day about the potential consequences of the latest round of changes. There are a few that came to mind, and many others that we will see as time goes on. Reduced buying power will obviously affect many clients who have been considering moving in to larger more expensive properties.

People trying to get in to the housing market may find they need to wait a little longer, or require a co-signer in order to qualify if the inventory of starter homes decreases as people can’t afford to upgrade.

Clients who qualified at the top end of their buying power during the last few years may find that they have fewer options at renewal time.

Unless they have had salary increases or paid down other consumer debt, they may no longer qualify for the mortgage amount they are carrying and find themselves stuck with whatever rates their current lender offers at renewal.

We may see mortgage lenders opting to offer longer amortizations for clients putting down more than 20 per cent in order to qualify these clients. This workaround, while reducing mortgage payments, will potentially increase the amount of interest clients pay over the life of their mortgage.

More concerning, I suspect we will see a brief flurry of clients writing offers on homes so that they are able to buy before the new qualification rules kick in.

All of this seems doom and gloom, and I do feel we will see some adjustments to the market. However, it is important to remember that there are many options available to mortgage clients.

Although the qualification rules are the same for everyone, each lender has their own policies and procedures for approving mortgages.

It is important to work with a professional who is able to help guide you to the best mortgage for your particular circumstances.

For instance, there are still several lenders that will allow the use of Child Tax Benefits as income for qualification purposes. Some lenders allow higher debt servicing ratios if you have substantial equity in your home.

If you have been pre-qualified for mortgage financing over the last few months, I suggest you connect with your mortgage specialist to ensure you will still qualify for the same price range, and learn how the upcoming changes may affect your personal situation.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.