If you have more than 20 percent of the cost of a home saved up for a downpayment, it’s probably a good idea to go right ahead and buy that property — come January 1, 2018, it will be much harder to qualify for a mortgage.
The Office of the Superintendent of Financial Institutions (OSFI), Canada’s banking regulator, confirmed earlier today that there will now be a qualifying “stress test” for all uninsured mortgages, affecting consumers with downpayments of 20 percent or more.
Under current housing rules, only borrowers with a downpayment of less than 20 percent require mortgage insurance. This category of borrowers are already subject to a mortgage “stress test” that was introduced back in July 2016, amidst concerns about rising household indebtedness.
Right now, if you’re applying for a mortgage with a downpayment of 20 percent or more, the lender will assess if your financial situation is robust enough to afford a five-year mortgage qualifying rate, which currently sits in the range of 4.64 to 4.89 percent.
Under the new rules, OSFI will require that lenders use that same five-year mortgage rate plus two percent — essentially you’ll need to have income that qualifies you to afford an interest rate on a home loan of roughly seven percent.
“This will hit the housing market hard — it will reduce the maximum mortgage home buyers can afford by 17 percent,” wrote David Madani, Senior Economist at Capital Economics and noted housing bear, in a note this afternoon.
“The housing market is already cooling — I don’t think this is necessary,” said Sheree Cerqua, a Toronto-based real estate agent. Cerqua, in fact, believes that OSFI’s rules are going to backfire.
“What really drove the housing market to those highs we saw in first few months of 2017 was a lack of supply. If you’re making it harder for people to refinance their mortgage, or get a new mortgage, they aren’t going to move. You’ll then have a supply problem again.”
Indeed, the government’s uneasiness over mortgage debt is not illegitimate.
A June 2017 report by the Parliamentary Budget Officer forecasted that if the Bank of Canada raised interest rates from 0.5 percent — where they had been sitting for a decade — to three percent, the average Canadian family would have to use 16.3 percent of its disposable income for debt repayments. That debt to income ratio has never, in Canadian history, exceeded 14.9 percent.
But at the same time, only a very tiny percentage of Canadians (0.34 percent) are actually defaulting on their mortgage payments. Despite an increase in home prices in Toronto and Vancouver, data from the Canadian Housing and Mortgage Corporation shows that the average mortgage delinquency rate has actually been declining since 2012.
“They are simply looking to be more prudent, but I don’t believe this particular set of rules was needed in a market that has already cooled significantly,” said Bruce Joseph, a Barrie-based mortgage broker with Anthem Mortgage Group.
Joseph points out that raising the qualification standards for mortgages has an unintended side effect — some lenders that are regulated provincially, and not by OSFI, like credit unions and private lenders, will stand to gain immensely in the short-run.
Private lenders, according to a 2016 Access to Information Request from the Globe and Mail, occupy about 15 percent of mortgage originations in Canada, and have been growing rapidly in recent years. They tend to service clients who might not qualify for a mortgage from prime-grade lenders like the big six banks — the catch is that they charge ridiculously high mortgage rates, that can range between 10 and 30 percent.
“I’ve seen people flock to the private lending space since the first set of mortgage rules came out last year, and I’m sure that’s what we will see happen in 2018,” Joseph said.