Mortgage rules changing

The Superintendent of Financial Institutions (OSFI) announced changes to mortgage qualification rules, on Thursday.

The proposed change is set to come into effect June 1. Clients applying for mortgage financing who have 20% (or more) down or who are looking to refinance their mortgage, will now have to qualify at a stress test rate of 5.25%.

Clients who are purchasing a home with less than 20% down will still be subject to the stress test, but still at the current rate of 4.79%.

What does this mean in dollars and cents?

This means a decrease in borrowing power (or ability to refinance) of approximately 4-4.5%.

Assuming the following:

• Combined family income of $120,000
• Property taxes of $4,000 annually
• No significant debts besides the proposed mortgage
• 20% down
• 25-year amortization

Running the numbers as I would for a pre-qualification discussion, at the current stress test of 4.79%, this family would qualify to buy a new home at a purchase price of $750,000.

Under the proposed new stress test of 5.25%, this same family would only qualify for a purchase price
of $715,000.

It may seem like a $35,000 difference in purchase price is not such a big deal. However, in many communities across the country that $35,000 means a significant difference in either the quality or location
of the home people will be looking at.

Who will this affect?

I think this change will most affect middle-class Canadian families looking to upgrade from their starter home to a larger family home. In turn, this may trickle down and also affect new buyers trying to get into the housing market.

If people don’t qualify to upsize or upgrade their homes and are forced to stay put, this means that the inventory of starter homes will be reduced.

With a reduced inventory of starter homes there will be more competition for people trying to buy the homes that do become available.

This might mean people who otherwise qualify to buy a home are forced to continue to rent.

When the stress test was introduced in October 2016 for insured mortgages and subsequently in January 2018 for uninsured mortgages, there was a great deal of conjecture about the long-term impacts of these qualification changes.

We saw lenders adapt some of their policies that helped to ease the impact of the stress test.

As an example, multiple lenders who did not previously include government benefits like Child Tax Credit are now including this income to help more clients qualify.

We saw more and more clients leaning on the bank of mom and dad to increase their down payment or sign as co-borrowers for their mortgages.

Despite the initial pushback and outcry, we have adjusted to the new qualification guidelines. We will again to the proposed changes coming in June.

Ostensibly, this most recent change is geared to cool our crazy housing market. I don’t think this will have the desired effect.

If you are currently shopping for a home and have been pre-qualified based on a down payment of 20% or more, I urge you to reach out to your mortgage professional to double-check how the proposed changes may affect your application.

As the proposed change is still so new so I’m sure we will learn more over the next few weeks. An article posted on the Canadian Mortgage Trends site provided an avenue for public feedback:

The public is invited to provide feedback to OSFI via [email protected], which will be accepted up to May 7.

OSFI will then communicate some of that feedback and any final amendments to the qualifying rate by May 24, prior to the new stress test taking effect on June 1.

Again, for people currently shopping (with 20% or more down) or considering refinancing their home I think it is important to connect with your mortgage person to double-check if and how the proposed change will affect your mortgage application before you write an offer on a home.

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