If there is one thing that is constant in life, it is change. So why would we expect anything else from our government and the rules they oversee with regards to our mortgage financing?
Since the 2007 financial meltdown in the US, the federal government has been consistently tightening lending regulations in an effort to avoid a similar fate here in Canada. As rates have been dropping for the past number of years, we’ve seen the government shorten amortization lengths to keep the ability to qualify for financing relatively equivalent. In fact, until rates started increasing a couple months ago, you could compare examples of the maximum amortization lengths with rates in the 5% range producing the same income qualification requirements as rates in the 2% range with the current amortization lengths. But the times they are a changin’.
OSFI (the Office of the Superintendent of Financial Institutions) has tabled some legislation which include measures aimed at ensuring banks are lending money to home buyers who can manage their loans even if interest rates rise. This new ‘stress test’ will ensure financial institutions have their qualification calculations based on the great of; the contract rate plus 2%, or the Bank of Canada qualifying rate (currently 4.89%). They already introduced a similar ‘stress test’ to high-ratio (less than 20% down payment) products last year. This new one will be for low-ratio purchase (20% down payment and greater) and refinance transactions with terms of 5 years or less. Let’s look at an example:
The Hood family would like to purchase a home for $800,000 and have saved a $200,000 down payment (25%). They find a product that suits them at 3.09%. Currently, they need to show they can afford the mortgage payments as they would be at $2,867 a month (contract rate). As of January 1 2018, they will have to show they can afford payments as if the rate was 5.09% or $3,520 monthly. That’s an increase of 23%! This means if they can barely qualify now, they’ll need to increase their income by 23% or keep on saving.
It is important to note that because this is a federal regulation, it only applies to federally regulated institutions, so BC Credit Unions are exempt. That being said, credit unions have the option of adopting these regulations and may end up doing so, and the high-ratio stress test implemented last year will remain in effect for all lenders, as the 3 mortgage insurers (a mortgage insurance policy is required if you have less than a 20% down payment) are federally regulated.
What does this mean for you? If you’ve been on the fence about making a purchase, now may be the time. At least getting a pre-approval in place as those ‘should’ be grandfathered in once the rules change. Also, if you have your mortgage financing with a bank or non-bank lender (ie: not a BC Credit Union), and you have been thinking of refinancing, it would be worth a discussion with your banker or broker to see if these new changes will affect you. Now is also a good time to qualify for an increase to your global borrowing limit for secured lines of credit, as it is unclear how financial institutions will qualify these products in 2018. As they say, it’s better to ask for credit when you don’t need it than when you do...