By now I’m sure you have heard that OFSI (the Office of the Superintendent of Financial Institutions) made the expected announcement with regard to yet more mortgage changes – namely the implementation of a “stress test”
mortgages – also referred to as conventional mortgages – which are mortgages that do not require high ratio or default insurance (usually a 20% of greater down payment). Of the changes announced, this is the one that we expect to have the biggest impact for borrowers. What are the New Rules?
The new stress test requires a borrower to qualify at the higher rate
of either the Bank of Canada rate (currently 4.89%) or the contract rate plus 2%. They also announced changes to Loan-to-Value ratio measurements and limits lenders will now need to operate by. What Does the Stress Test Mean for Clients?
In a nutshell – a smaller mortgage, which usually also means a lower purchase price.
If a borrower’s “contract rate” is 3.14%, they will have to qualify at 5.14%. While your client will still receive the 3.14% rate for their mortgage they will only be approved for the mortgage amount that they could afford if the rate was at 5.14%.
For example, a client who is earning $100,000 would be able to get a mortgage of approximately $506,000 with a 3.14% 5 year fixed term, 30 year amortization. Based on the new stress test, they would only qualify for a mortgage of $400,000 if qualified at 5.14%.
On average, once the stress test becomes active, clients will be able to afford roughly 20% less than what they can afford today. Impact on the Housing Market?
Some are suggesting the market will be busier initially as people try to purchase homes before the stress test comes into affect in Jan 2018, and reduces the amount of the mortgage they qualify for and in turn the price of the home they can afford. Others argue that consumers will hold off purchasing thinking that prices will drop once people realize they can't afford as much, thus reducing demand.
Either way, we wanted to keep you informed so you can advise your clients. Additional Articles
Official OSFI Release: http://www.osfi-bsif.gc.ca/Eng/osfi-bsif/med/Pages/B20_dft_nr.aspx
CBC Article On Topic: http://www.cbc.ca/news/business/osfi-mortgage-rules-1.4358048
For more information give Whittall Real Estate a call - we can refer you to a mortgage broker who can assist you with a purchase before Janurary 2018