New year, new mortgage rules. As of January 1, 2018, Canadian home buyers will be facing more rigid guidelines when qualifying for a mortgage with a federally regulated lender. Thanks to Canada’s banking watchdog, the Office of the Superintendent of Financial Institutions (OSFI), a first-time home buyer will be able to afford about 20 percent less house in the new year. So, what do these changes mean for the want-to-be home owners out there?
1. All uninsured mortgage customers will be subject to a qualifying rate stress test
Under the new stress test, uninsured mortgage customers must qualify for a mortgage at a rate that is the greater of two indicators: either 200 basis points (2 percent) higher than the mortgage rate they qualified for, or the Bank of Canada’s five-year benchmark rate.
Before this new rule, only buyers with a down payment of less than 20 percent had to pass a stress test and home buyers or owners qualified at the rate offered by the lender. For these homeowners, mortgage payments will still be paid at the negotiated rate, but a higher calculation is used for qualifying purposes.
2. All lenders will be required to enhance their loan-to-value (LTV) measurement and limits
An LTV ratio is a number that describes the size of a loan compared to the value of the property. Mortgages lenders, excluding credit unions and private lenders, will need to establish and adhere to acceptable LTV ratio limits that consider risk and are simultaneously updated as the Canadian housing market and economic environment evolves. This means that OSFI direct lenders will implement internal risk management protocols in higher priced markets such as Toronto and Vancouver.
3. Restrictions will be placed on lending arrangements that are designed to avoid LTV limits
Mortgages lenders, excluding credit unions and private lenders, are prohibited from arranging a mortgage, or other financial products with another lender that bypasses the institution’s maximum LTV ratio or other residential mortgage limits.
In the past, if you applied for a mortgage with a LTV ratio of 80 percent and the lender could only approve you for 60 percent, they could partner with a second lender for the additional 20 percent, bundling it into a complete LTV loan of 80 percent.
Traditional lenders can no longer do this.
These new rules, effective January 1, 2018, will impact the country’s fastest growing mortgage market segment – uninsured mortgages, or one out of every six potential home buyers. If you’re one of these prospective home buyers, don’t let these changes stress you out too much. You should still be able to buy a house - assuming you make some necessary adjustments. This might mean waiting longer for an income increase, buying a townhouse or a condo rather than a detached house, or using a co-signer to help you qualify.
Keep in mind, these mortgage lending rules only apply for home buyers looking to secure their mortgage with a federally regulated mortgage lender. We recommend doing some research on private mortgage lenders in Canada to determine if it’s the right alternative for you.
We’d love to hear from you, send us your questions or comments.
Shawna & Robert