Mortgages To Become More Stressful In 2018
November 29, 2017
In this day and age when stress pervades our lives more than ever we bring prospective homebuyers even more stress courtesy of big brother The Office of the Superintendent of Financial Institutions (OSFI; an independent agency of the Government of Canada and the sole regulator of banks in Canada. OSFI was established in 1987 "to contribute to public confidence in the Canadian financial system".
OSFI has largely flown under the radar when it comes to Canada's turbulent real estate market. All that changed on October 17th when OSFI announced new guidelines, including a "stress test" for uninsured mortgages. Approximately 46% of mortgages in Canada are uninsured therefore impacting thousands of potential homebuyers. What is an uninsured mortgage ? Simply put an uninsured mortgage is when a buyer has a downpayment of more than 20 per cent of a home's value – and therefore does not need mortgage insurance.
Unlike a visit to your doctor for a stress test when taking the new OSFI stress test you will not even break a sweat. But the test might leave a bad odour afterwards when you get the results back. Essentially this is no gimme test for homebuyers who now must be able to show that they can qualify for their mortgage at a rate to be greater than the five year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%. Essentially OSFI wants Buyers to prove they could still afford their mortgage payments if interest rates were to rise two percentage points higher than the rate they negotiated.
It is the +2% that is the kicker here and will make it that much harder for prospective homebuyers to meet loan-to-value (LTV) lending ratios necessary to qualify for a mortgage. The new OSFI "stress test" will come into effect on January 1, 2018, and applies to all federally regulated financial institutions. OSFI Superintendent Jeremy Rudin say these mortgage revisions "will provide a strong and prudent regulatory regime for residential mortgage underwriting in Canada.”
All of this is well and fine but what about the homebuyer who had their heart set on buying their first home or moving up to a larger home and now may fail to qualify under the new stricter guidelines. Well for some of the more fortunate buyers there is always the Bank of Mom and Dad (BOMAD) who may be willing to act as a co-borrower on title. Failing this option Buyers may have to turn to Mortgage Investment Corporations (MICs) and Private lenders who are not subject to the new lending guidelines but will charge much higher interest rates.
How will this new lending criteria impact the Toronto real estate market. It is hard to say. One would think that if a homebuyer has a downpayment in excess of 20% then they have many more options to play. Will more buyers start choosing lower term mortgages to qualify with better rates ? This may be very risky as the new guidelines suggest mortgages are going to rise sooner than later and quite possibly as much as 2 percentage points.
To be sure OSFI's 'better to be safe than sorry' guidelines will make it harder for Canadians to buy homes but in the overall picture the new mortgage stress test should not deter most homebuyers. The 2018 Toronto real estate market may not be as robust as 2017 but in a more steady as she goes approach 2018 should be a healthy market with reasonable price gains and a very balanced market where there are way more winners than losers.
David Dunkelman, Broker, Royal Lepage Signature Realty, (Office) 416-443-0300, (Cell) 416-726-6574, email: firstname.lastname@example.org, www.realestatewithdavid.com