What you need to know about the Mortgage Qualification Changes
Well it finally happened, something OFSI (Office of the Superintendent of Financial Institutions) had announced they were considering. It’s a Mortgage/Interest Rate “Stress Test” for any Buyer who has more than 20% down on their property (which encompasses anything over $1-million). This change was instituted for Buyers with less than 20% down last year, so it has now been expanded to include everyone.
What this means, is that during their mortgage approval, Buyers will have to qualify for their purchase using a mortgage rate 2% above their given mortgage rate (i.e. if you can get a 3% interest rate, you have to qualify for your mortgage using 5% in the calculations). This qualification (“Stress Test”) ensures that Buyers will still be able to afford the property when an inevitable interest rate increase happens. if Buyers qualify, their mortgage rate will be their original rate (in my example, 3%).
Tom Prasol, our resident mortgage broker from 4Front Mortgages and someone you should contact if you need to be pre-approved, re-approved (the mortgage market is constantly changing) or approved, breaks this down in more detail:
Effective Jan 1, 2018 the Office of the Superintendent of Financial Institutions (OSFI), the federal crown corporation that regulates all chartered banks, will require lenders to “stress test” all mortgages, regardless of the down payment.
- This new regulation will affect all borrowers.
- The new rules will require buyers to demonstrate they could still afford their mortgage payments if interest rates were 2% higher than the actual rate they negotiate.
- This effectively reduces the amount borrowers will qualify for by 20%, a significant amount by any stretch of the imagination.
- Potential home-buyers will either need to lower their purchase price expectations, come up with more down payment, utilize the “bank of mom and dad”, or obtain a co-signer.
As an example, a client could negotiate a 5 year fixed rate of 3.09% however the lender will need to base their approval on the client’s ability to qualify at a rate of 5.09%. On a $500,000 mortgage the client would need to “have the ability” to pay an extra $568 per month. In reality, prospective purchasers who want to borrow at the maximum threshold will need to reduce the amount they borrow so their new mortgage payments are $568 less, in this example, which is roughly equal to $100,000. For those clients who are not approaching their upper borrowing limits, the new rules will have little impact.
Many banking and real estate industry leaders speculate that this latest move by the government will slow down housing activity modestly in 2018 as consumers adjust to the new lending environment. One thing is for certain; this will not help improve affordability. Unfortunately, any rules that could help affordability would likely need to come at the expense of managing mortgage risks.