New requirements for uninsured mortgages. What will it cost home buyers?Posted on December 1st, 2017
As of January 1, 2018, home buyers who don’t require mortgage insurance — those with a down payment of 20 per cent or more — must qualify for their mortgage at a higher rate.
Canada’s Office of the Superintendent of Financial Institutions (OSFI) announced these rule changes on October 17, 2017.
Draft changes were released last summer for stakeholder feedback. The Canadian Real Estate Association provided a submission.
Under the new rules, the minimum qualifying rate for uninsured mortgages will be:
- the greater of the Bank of Canada’s five-year benchmark rate; or
- the contractual mortgage rate plus two per cent.
OSFI will also require lenders to enhance their loan-to-value (LTV) limits and restrict certain lending arrangements designed to circumvent LTV limits.
These changes apply to all federally regulated financial institutions and are the final revisions to Guideline B20: Residential Mortgage Underwriting Practices and Procedures.
The new stress test will not apply to home owners renewing their uninsured mortgage who stay with their existing lender.
Home owners who move to a different lender, for example, a lender with better rates or terms, will be treated as a new borrower and will have to qualify at the higher, stress-tested rate.
Cost of new mortgage rules to home buyers
|Location||Benchmark price, September 2017||Monthly mortgage payment before January 1, 2018*||Monthly income required||Monthly mortgage payment after January 1, 2018**||Monthly income required||Difference in monthly mortgage payment|
*Note: calculation is based on a 25% downpayment, a 5-year term at 3.7%, amortized for 25 years from Canadamortgage.com.
**Note: calculation is based on a 25% downpayment, a 5-year term at 5.7%, amortized for 25 years from Canadamortgage.com. Calculations do not include strata fees or property taxes.
Economic analysis from the BC Real Estate Association (BCREA)
The impact of the new stress test requirement will be to lower the purchasing power of households by up to 20 per cent, according to Cameron Muir, BCREA chief economist.
“Like past tightening of mortgage regulations, we anticipate that the market impact will be sharp but temporary. In the past, we’ve seen home sales decline in the three to nine months following the implementation of tighter mortgage lending standards, with the severity of the impact fading within one year. However, these new regulations impact a larger pool of mortgages and so the impact could be more significant than in the past,” Muir said.
A series of mortgage policy changes
This is the seventh time since 2008 that the federal government has made mortgage policy changes.
Since the 2008 recession, Ottawa has made mortgage policy changes six times. In addition to the recent changes outlined above, here’s a timeline of changes.
OSFI requires smaller banks to perform a stress test requiring low equity borrowers (less than 20 per cent down payment) to qualify for the Bank of Canada’s posted five-year rate; and borrowers with a down payment at or above 20 per cent (low ratio) to meet these same eligibility requirements.
The federal government increased the minimum down payment for insured high-ratio mortgages for anyone buying a home valued between $500,000 – $1 million to 10 per cent down from 5 per cent down.
The maximum amortization period was reduced to 25 years from 35 years for high-ratio insured mortgages. A new stress test was implemented. To qualify for a high-ratio mortgage, a home buyer’s debt costs could be no more than 44 per cent of their income. Home owners refinancing could borrow a maximum of 80 per cent of a property’s value, down from 85 per cent. Government-backed insured high-ratio mortgages were available only on homes valued at less than $1 million.
The government reduced the maximum length of an insured high-ratio mortgage to 30 years from 35 years. The maximum amount home owners refinancing could borrow was reduced to 85 per cent from 90 per cent.
The government lowered the maximum amount home owners could borrow when refinancing a mortgage to 90 per cent of a home’s value, from 95 per cent. A new rule required owners not living on a property to have a minimum 20 per cent down payment if they needed government-backed mortgage insurance.
Then Finance Minister Jim Flaherty reduced the maximum length of an insured high-ratio mortgage to 35 years from 40 years.
Sources: Central 1 Credit Union, Federal Department of Finance, REBGV