If you’re looking to purchase a home and have a sizeable down payment–think well over the five per cent minimum required for an uninsured mortgage–you should note that you, too, will be subject to what’s known as a “mortgage stress test.”
Recently, the Office of the Superintendent of Financial Institutions Canada (OSFI) published the final version of Guideline B-20 − Residential Mortgage Underwriting Practices and Procedures.
The revised Guideline, which comes into effect on January 1, 2018, applies to all federally regulated financial institutions (so if you bank with a major institution rather than a credit union, you will be affected).
As for what prompted the changes, they’re reportedly designed to ensure that homebuyers aren’t too overstretched in terms of mortgage payments. As for how they’ll work, prospective homebuyers will have to qualify for a mortgage at a higher rate than what they’ll actually be paying.
This will, ideally, help ensure that homeowners won’t be in danger of extreme financial hardship should interest rates rise (which they will do very soon).
The Guideline now requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate (currently 4.89 per cent) plus two percentage points.
“Under the final Guideline, federally regulated financial institutions must establish and adhere to appropriate loan-to-value ratio limits that are reflective of risk and are updated as housing markets and the economic environment evolve,” the OSFI statement reads.
“OSFI is placing restrictions on certain lending arrangements that are designed, or appear designed to circumvent LTV limits.”
It doesn’t look like lenders will be able to get around this one.
According to the OSFI, a federally regulated financial institution is prohibited from arranging with another lender a mortgage (or a combination of a mortgage and other lending products) in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law.
“These revisions to Guideline B-20 reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada,” said Superintendent Jeremy Rudin.
So, what does this mean for you?
Basically, you might no longer qualify for as big a home loan as you might have in the past. This could also affect your ability to upgrade in a significant way if you’re already a homeowner and you want to move to a bigger house or a pricier neighbourhood.
If you have to qualify at a higher rate, you simply won’t be qualifying for as high as a loan.
Whether this will essentially drive down home prices remains to be seen, but it does appear it could spur even more people to abandon the notion of ever purchasing a detached or even semi-detached home.
Perhaps the condo boom is just what we all need.