An Overview Of The New Canadian Mortgage Rules

The Canadian Office of the Superintendent of Financial Institutions announced that new mortgage rules will affect mortgages starting 18th January 2018. These rules target uninsured mortgages. These are mortgages where the homebuyer puts down a deposit of less than 20%. These mortgages must pass the same “stress-test” as other high ratio or insured mortgages.

Stress test

The new rules require that the minimum qualifying rate for uninsured mortgages must be higher than the 5-year benchmark rate set by the Bank of Canada, or 200 points (2%) above the rate at which a mortgage holder is offering the mortgage, whichever is greater.

Impact

The new rules will largely affect new homebuyers and persons in the lower income bracket. Take the following example:

A potential homebuyer earning $100,000 could put down a 20% deposit for a mortgage at 2.83% amortized over 25 years, and qualify to purchase a $726,939 home. Under the new rules, the new interest rate will be (2.83%+2%= 4.83%) or 4.89% (current 5-year benchmark rate), whichever is greater. In this case 4.89% applies. This means with the same income, this family will afford a lower priced $570,970 home. This is a difference of about 21% less.

What does it mean?

•    Lower affordability

Mortgage Professionals Canada (MPC) estimates that the new rules will affect about 18% of mortgage borrowers. They will not afford higher priced houses. In fact, they estimate 50,000-60,000 people who were willing to borrow a mortgage will not be able to do so at all.

•    Higher prices for cheaper houses

Potential mortgage borrowers who will be locked out of higher priced housing will shift their attention to lower-priced housing. Following the rules of demand and supply, it is only natural that these houses will rise in prices.

•    Delay for first-time buyers

First-time homebuyers with lower incomes may opt to buy later when they stand a better chance of passing the stress test as their income rises.

•    Better chances in non-federal regulated institutions

Homebuyers who fail the stress-test under federally or provincially regulated financial institutions can try their luck in credit unions, or mortgage investment corporations, which are not federally regulated.

•    Slower take-up in pricier areas

Housing in pricier cities like Toronto and Vancouver will be less attractive, and potential homebuyers will look for cheaper regions like Quebec.

For sellers the potential impacts will be:

•    Longer DOM for pricier homes – Those selling pricier homes will see a drop in potential customers meaning that their homes will see more Days on the Market.

•    Better income from cheaper houses – If you are selling a low-priced home, you have the allowance to ask for more as demand will definitely make it more attractive.