While the details are still trickling in, the Office of the Superintendent of Financial Institutions (OSFI – the bank regulator) has once again used its powers to tighten mortgage qualification rules. These changes are effective as early as today for some lenders, but no later than January 1, 2018 and will impact anyone looking to purchase a home with 20% or more down payment (or looking to refinance) – i.e., a lot of people.

As this is a federally initiated change, our credit union lenders, which are provincially regulated, may not be impacted initially which could provide potential solutions on a case by case basis.

We will continue to monitor this closely as the various banks and lenders issue their responses/implementation dates and guidelines. We hope you find the below helpful, and we are available at any time to discuss specific client questions or scenarios you may have, or the changes in general.

What’s Changing?

While a number of changes were announced today, the most significant is with respect to setting a new minimum qualifying rate, or “stress test” for uninsured mortgages (i.e., mortgages with 20% or more down payment).

As a recap, currently if you have 20% or more for a down payment and you select a 5-year fixed mortgage term, you can qualify for a maximum mortgage using your actual monthly payment in the calculations. A typical 5-yr fixed bank rate is around 3.24% right now, which is called the “contract rate” or “actual rate”. Going forward, while your actual mortgage payment would still be based on your contract rate, you would need to qualify using a much higher monthly mortgage payment based on the new “stress test” rate requirement which is the HIGHER of:
The 5-yr benchmark rate published by the Bank of Canada (currently 4.89%), or
The contract rate plus 2.0% (i.e., if the contract rate is 3.24% the qualifying rate would be 5.24%)
In the above example, this change would significantly reduce the maximum purchase price or refinance amount that a person could qualify for as it would require them to qualify based on a stress test rate of 5.24% vs. the contract/actual rate of 3.24% – please refer to the impact section below for examples.

When is This Changing?

The banks/lenders have yet to comment, but it is anticipated some may start implementing the new rules as early as today, but no later than January 1, 2018. As noted, this is federally regulated change which will impact the banks, but it is expected most mono-line lenders will follow suit. Credit unions are provincially regulated, so there may be gaps of opportunity that come available over the coming months and into the new year.

What is the Potential Impact?

While every case is different, we have included a sample max purchase price impact calculation for a 20% down buyer. Please contact us if you would like us to run the numbers for any specific scenario:

Impact Example #1 (Max Affordability):
Total household salaried income = $200,000
Down payment available = 20%*
Mortgage Product Chosen = 5-year Fixed
Purchase Style / Location = Freehold / Toronto
Debts = limited debts (i.e., credit card, car, etc.)

Current Max Purchase Price = Approx. $1,550,000*
Max Purchase Price After New Stress Test Rules = Approx. $1,320,000*
(Note: the above is for illustration only. Please contact a member of The Lang Team to discuss, or for specific scenarios.)

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Impact Example #2 (Max Affordability):
Total household salaried income = $100,000
Down payment available = 20%*
Mortgage Product Chosen = 5-year Fixed
Purchase Style / Location = Condo / Toronto
Debts = limited debts (i.e., credit card, car, etc.)

Current Max Purchase Price = Approx. $720,000*
Max Purchase Price After New Stress Test Rules = Approx. $620,000*
(Note: the above is for illustration only. Please contact a member of The Lang Team to discuss, or for specific scenarios.)