Lately, there’s been a lot of discussion in the media and real estate circles that “as of January 1, 2018, it’s going to become more difficult to get a mortgage.” Maybe your real estate agent or mortgage broker has approached you and said, “Buy now! These new mortgage rules are going to make it more difficult to purchase a home in 2018!” This blog entry will discuss what is actually changing and how it may affect persons applying for a mortgage.
What Is Changing?
On October 17, 2017, the Office of the Superintendent of Financial Institutions (“OSFI”) confirmed that all borrowers will need to qualify at interest rates that are two percentage points greater than the rates they are applying at, or the big banks (TD, RBC, BMO, BNS, CIBC) average five-year posted mortgage, whichever is greater (the posted five-year rate is currently 4.89%). These changes come into effect on January 1, 2018.
Previously, only borrowers who required mortgage insurance to purchase a home had to pass this stress test (if a borrower puts down less than 20% of the purchase price, they must purchase a mortgage insurance policy in favour of the lender). Now the stress test applies to all borrowers, regardless of the size of their down payment. This change is aimed at decreasing household debt risk and to cool the hot housing markets, specifically in Toronto and Vancouver.
Interestingly, these new regulations are only applicable to federally regulated lenders (i.e. domestic banks, such as RBC, TD, BNS, BMO, CIBC). The real impact of the change on the market won’t be known until it is known to what extent borrowers ‘migrate’ to non-federally regulated mortgage lenders (i.e. private lenders, credit unions and caisses populaires).
Practically, if receiving a loan from a federally regulated lender, the expanded stress test will decrease the purchasing power of a potential buyer of a $1 million dollar home with a 20% down payment by about 15%.
Conclusion
In conclusion, nothing is changing for borrowers buying with a down payment of less than 20%. The stress test already in effect for those borrowers is being extended to all borrowers, regardless of the size of their down payment. The “stress test” is a federal regulation that does not apply to credit unions or private lenders.
Information herein is NOT legal, financial or investment advice. Should you have questions with respect to the information herein, please contact Lemke Law Professional Corporation.
Scott Lemke is the founding lawyer of Lemke Law Professional Corporation. Scott’s practice is focused on private company corporate law, commercial litigation, and election law.