On October 17th the Office of the Superintendent of Financial Institutions unveiled their final changes to the B20 mortgage underwriting guidelines. What could be the consequences of these new rule changes? A slow down in the housing market? A reduction in housing prices? A negative impact on the whole economy? We will have to wait and see however, they are guaranteed to make it difficult for Canadians to access funds to purchase a home, refinance their existing property or renew a maturing mortgage with another lender.
There were three changes revealed but the first one has the most impact to Canadians, the “Stress Test”. Here are the changes that are coming into effect as of January 1st, 2018:
#1 Rule – The Stress Test
Why a “stress test”? Buyers, refinancers and clients that want to transfer their mortgage at maturity will have to show they can afford their mortgage if rates were to rise substantially.
At the present moment if you have an insured mortgage (less than 20% down), you are qualified on the Bank of Canada’s benchmark rate which is currently 4.89% and with a maximum amortization of 25 years. This doesn’t mean you are paying a rate of 4.89% but your contract rate (currently 2.99% on a 5 year), and this is what your payments are based on.
For uninsured (20% or more as a downpayment for a purchase or 20% or more in equity for a refinance), you are qualified for a 5 year fixed mortgage not at a rate of 4.89% but the contract rate which is currently 3.04%. This allows you to qualify for much more especially since there are still 30 and 35 year amortizations available. Currently, if you have a variable mortgage or a fixed term of less than 5 years you are qualified on the Bank of Canada’s benchmark of 4.89%. Now, let’s go over what will occur as of January 1st, 2018.
For all uninsured 5 year term mortgages, the qualifying rate is no longer the contract rate (3.04% right now) as of January 1st, 2018 but will be much higher. As for variable rate mortgages or fixed terms less than 5 years, it could remain at 4.89% or be higher. It will be the greater of the Bank of Canada’s bench mark rate which is currently 4.89% or 2% over the contract rate (right now 3.04%+ 2.00% = 5.04%). If rates stay the same as of January 1st then the qualifying rate would be 5.04% on all uninsured mortgages!!! Crazy right?? Especially for those Canadians that have either saved a considerable amount for a downpayment to avoid paying high ratio insurance premiums for a purchase. This also applies to refinances and transfers of renewals.
Let’s see what the difference will be come as of January 1st, 2018 and how this may affect you. Consider a couple with a combined income of $100,000 with a 25 year amortization and with 20% down on a purchase.
Right now – qualifying rate of 3.04%
maximum purchase price is $780,000, maximum mortgage is $624,000
As of January 1st if the qualifying rate is the Bank of Canada benchmark rate of 4.89%
maximum purchase price is 675,000, maximum mortgage is $540,000
As of January 1st if the qualifying rate is higher at 2% above the contract rate ie. 5.04%
maximum purchase price is $637,500, maximum mortgage is $510,000
The reduction between the current rate and 4.89% is $105,000 in purchase price and $84,000 in mortgage. For the higher rate of 5.04% it would be a reduction of $142,500 in purchase price and $114,000 in a mortgage. These are significant losses of purchasing power, on average 20% less.
This example is based on a 25 year amortization however there are extended amortizations of 30 and 35 years available that would help extend out your payment (lower payment) and allow you to qualify for more. However, keep in mind that with the 35 year amortization you should expect higher rates.
The bottom line is if you are unsure if you will qualify for a mortgage amount come January 1st then here is what you have to do:
Purchase – Put an offer on a home and have a valid approval from a lender prior to January 1st, 2018 even if your mortgage is closing afterwards.
Refinance – Arrange the mortgage now at the current qualifying rates and close either before January 1st, 2018 or afterwards. The key is to have the commitment from the lender prior to January 1st, 2018.
Renewals – If you have a maturing mortgage in the coming months and you are looking for the best rates outside of your current lender, again – arrange an approval as soon as possible.
#2 Rule – Loan to Value Ratios to be Adjusted to Market Conditions for Lenders
Lenders are required to adjust their Loan to Value ratio limits based on market conditions. Loan to Value means if your home is worth $600,000 and your mortgage is $400,000 then your loan to value is 66.67%. It is still unclear as to how this is going to be rolled out
#3 Rule – Bundling of Mortgages are no Longer Allowed with Financial Institutions
This may seem confusing and if you are not in the industry it can certainly be a head scratcher. Basically this disallows a financial institution from arranging a mortgage and combining another mortgage product from another lender to get around loan to value limits. They are called co-lending agreements. The good news is that Mortgage Brokers will still be able to arrange these as long as the borrower qualifies for both mortgages.
Feel free to contact me should you need my assistance or have any questions..
Kim Gibbons, Mortgage Superhero ®
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Your Toronto Mortgage Broker