This Tuesday, Canada’s federal banking regulator introduced new regulations which extend stress tests to all homebuyers, including those contributing more than 20% towards their downpayment.
Currently, the stress test only applies to down payments under 20% and to borrowers with a term of less than 5 years.
These new rules are scheduled to take effect at the beginning of January 2018, and will extend to mortgage renewal applications if borrowers switch lenders. Furthermore, banking institutions can choose to apply the test to existing borrowers, if need be.
Under the new guidelines, borrowers will need qualify for the minimum qualifying rate equal to the greater of the Bank of Canada’s benchmark rate (which is currently set to 4.89%), or to their existing rate plus 2%.
How will this affect your mortgage payments?
The new regulations could significantly impact your monthly payments, or your ability to qualify for a loan.
As an example, let’s consider the scenario of a borrower who is offered a mortgage at 2.83% which is 2% below the Bank of Canada’s current 5 year benchmark rate of 4.89%.
If they were to apply for a mortgage today, with a 20% downpayment, a 5 year fixed mortgage with a 25 year amortization rate, they would be able to afford a home worth $726,939.
However, after January 1, they would only qualify for a home worth $570,970 under the same terms.
(Example source: Ratehub)
Potential effects of the new legislation
The new rules are intended to regulate heated markets and prevent a housing bubble. The changes are likely to slow down price increases, potentially lowering home prices by 2-4% in 2018.
Another potential effect is that borrowers may become more likely to use provincially regulated mortgage lenders, such as credit unions, as these are not affected by the OSFI changes.
Prospective home buyers may also be required to shop for cheaper homes, such as BMV properties and hot deals.
Other changes implemented to the Guideline B-20 include restrictions on bundled mortgages and co-lending, which prevent financial institutions from circumventing rules limiting their lending capacity.