On October 17, 2017, the Office of the Superintendent of Financial Institutions (OSFI) announced they will be implementing a "stress test" for uninsured mortgages. Previously, the stress test was only used when a borrower had less than 20% down. Now, the stress test will be extended to all mortgages, regardless of the down payment amount. This goes into effect on January 1, 2018, and will also affect mortgage renewals if the borrower switches lenders.
What does this mean for the average Canadian home buyer? The new guidelines now require lenders to vet applicants for uninsured mortgages by using a minimum qualifying rate equal to the greater of the Bank of Canada’s five-year benchmark rate (currently 4.89%) or their contractual rate plus two percentage points.
Therefore, the amount you were previously pre-approved for is about to shrink.
An example from Global News:
Here’s how the rules would play out for a family with $100,000 in annual income.
First consider a scenario in which the family is offered a mortgage rate of 2.83%, which is more than two percentage points below the current Bank of Canada five-year benchmark of 4.89%.
If they were to apply for a mortgage today, with 20 percent down payment, a five-year fixed mortgage, and a 25-year amortization period, they would be able to afford a home worth $726,939.
If they were to apply for a mortgage on or after Jan. 1, they would be able to afford only $570,970, with a 20 percent down payment.
That is more than 20% less purchasing power.
It is important to understand you do not pay the higher rate; you are just approved at the higher rate.
What should you do?
If you are planning to purchase a home in 2018 and you planned on putting 20% or more down, you should discuss with your mortgage professional to see how this will impact your purchase. If you currently have a pre-approval, it's advised that you learn how your purchasing power will be changing in 2018.
Why would OFSI do this?
They are describing this update to Guideline B-20 as a strong, and vigilant approach to protecting Canadian families from potential interest rate increases. Concerns over household debt are not new, and there are more discussion around steady increases to interest rates. Also, many believe this to be a blanket solution to slow potentially overheated markets like Toronto and Vancouver.
Please discuss this further with your mortgage professional and do not hesitate to reach out to your Renzo Real Estate agent to be put in touch with a great Calgary mortgage professional.