New mortgage rules recently announced by Canada’s top regulator of federal banks, The Office of the Superintendent of Financial Institutions (OSFI), and will take effect on January 1, 2018. The intent of these new rules were designed to austensibly protect today’s housing market, and help avoid any potential economic risks associated with any increase in interest rates.

You may recall in 2008 the financial crises when, due to large-scale mortgage defaults, the U.S. banks had to be ‘bailed out’ by the Feds. Regulators such as the OSFI and The Bank of Canada havehad ongoing concerns over Canadians’ high level of household debt, and they anticipate these new rules help avoid a financial crisis like the U.S. experienced. It is important to know that Canada has not exceeded a 0.45% default rate in Canada for all the people who own homes in this country. Real Estate is still one of the best investments. It may be a little harder to spend as much or borrow as much when looking to purchase, refinance or change mortgage lenders but we still have options. Time will tell, of course.

Included in the new regulations are:

  • Expanded “stress tests” [assessing potential ability to pay by borrowers at increased interest levels] to determine if they would be able to make their payments with increased interest rates.
  • Eliminating “alternative lending arrangements” such as co-lending and bundled mortgages. These practices were often implimented when people were high-risk applicants.

Why are people getting stressed about the stress test?
The greatest concern and impact of these new regulations is the expantion of stress-tests to the over 20% downpayment market; the people who want to borrow back funds from their homes and individuals that want to have consumer choice of product and rate when shopping at renewal.

In Canada, anyone with a down payment less than 20% of the purchase price must get mortgage insurance – this gives protection to the lender should the borrower default on the loan. Obviouisly, the lower the down payment, the greater the mortgage loaned and the greater the risk; thus the requirement for a “Stress Test”. Under the new regulations however, everyone applying for a mortgage will have to pass a stress test to prove they would be able to continue to make their payments if (or when) interest rates go up.

This new stress test, designed to simulate a borrower’s financial situation using either the five-year average posted rate, or, a rate that’s two percent higher than the actual mortgage rate being offered — whichever one is higher. They then would only qualify for the mortgage at that higher simulated rate, not the actual current rate.

For example. Our Facebook Page at The Wilson Team gives a mortgage rate comparison what the new household income needs to be come January 1st and how this affects your buying power. You are now looking to have a household income of aprox $70,000 to $80,000 to have a mortgage of aprox $300,000. This is only affecting those who have built the equity in their homes or are putting more than 20% down. If you are putting less than 20% down then the Stress Test already happened in October 2016.

Utilizing the currently existing rules, that family could qualify for a house valued at $706,692. However, once the new rules take effect, they would only qualify for a house worth $559,896 (based on a 4.89% stress test).

Finance experts are saying that the average home-buyer will see their purchasing power diminished by approximately 20%. Obviously, this could have a significantly impact on the housing market across Canada, especially impacting on larger cities where housing prices are highest.

In addition, OSFI’s new guidelines state that borrowers who renew their mortgage don’t have to meet the new stress-test standard if they stay on with their same lender. If someone renews with a new lender, they will have to qualify under the new rules because all new financing and paperwork is required. This has generated concern that the banks won’t offer their lowest rate at renewal time; they know that many customers won’t shop around for lower rates because of their fear of not passing the stress test. That’s why it’s always a good idea to talk to the Wilson Team at renewal time or anytime, because it’s our job to shop around for the best interest rates, and we give you solid advice about your mortgage options.

What if I fail the stress test?

If a mortgage seeker doesn’t pass the new stress test, there are still some very good options and stratagies you can impliment. Such as:

  • Improve your application by getting a co-signer who has a solid financial standing
  • Improve your debt situation and up your credit rating
  • Make a larger down payment to reduce the amount of the mortgag to pass the stress test
  • Delay buying a home and rent a little longer in concert with increasing your down payment savings
  • Purchase less home – such as a condo or townhome
  • Contact a mortgage broker for a guidance consultation on the availability of alternative options such as, private lenders or credit unions to apply to. The new stress-test regulations don’t apply (at the moment) to private lenders or provincially regulated credit unions
  • Stay calm and mortgage on in the new ‘stress test’ world

You absolutely don’t need to give up your dream of home ownership nor get stuck with your original lender on renewal or re-finance just because of this new legislation. In a worst-case scenario you may have to wait a bit longer to get approved for a mortgage, but the good news is you’ll be saving your hard-earned money and improving your credit and debt situation in the mean-time.

If you are worried about the new stress-test or any of the new regulations and wish to develop a stratgey for 2018 contact an experienced mortgage broker, such as ourselves, who understands the various rules and regulations and the options that you have going forward.

You may contact us, The Wilson Team, at 613-695-9250 or at kelly@wilsonteam.ca. We look forward to meeting with you.