The Most Recent OSFI Mortgage Rule Changes
On Tuesday October 17 the Bank of Canada announced they will proceed with the implementation of a stress test for all uninsured mortgages. An uninsured mortgage is where the down payment is more than 20% down, has no default mortgage insurance and includes refinancing.
The stress test will require borrowers to qualify at the greater of the current benchmark rate or their contract mortgage rate plus 2 percentage points. Due to it being “the greater of” makes this change tougher than the rule changes that were implemented to the insured mortgages in Oct. of 2016. Currently the benchmark rate which is the stress test measure for insured mortgages is 4.89%. Compare that with a 2.00% addition on the current 3.39% rate for an uninsured conventional 5-year fixed where the interest rate used to qualify would be 5.39% once the new rules kick in. This will make it more difficult for some buyers to qualify.
Since 2008 the Bank of Canada has been implementing rules to tighten mortgage underwriting guidelines and lending standards, which really challenge Canadians ability to purchase a home. The intentions of past years changes are to address risks the regulator sees as a result of high household debt, and high real estate prices coupled with historically low interest rates. While Tuesdays announcement elicited an array of industry responses, we know it is in effect January 1st and need to prepare for what that might mean for you. If you were considering purchasing with 20% down, buying an investment property or refinancing your mortgage- you very well might want to consider doing this before the changes come into effect.
Here is a scenario on what the new rule changes might look like for a home buyer in Edmonton Alberta, whose household income is $100,000, putting 20% down, no monthly debt commitments, using a 25 year amortization, and based on a mortgage contract interest rate of 3.39%.
Currently, they can qualify at contract rate- they could purchase a home price at $675,310.35
With the rule changes the qualifying rate is either at Benchmark (currently 4.89), or contract rate plus 2% – and this is the major difference with insured or insurable deals which qualify with Benchmark.
At Benchmark of 4.89%- this homebuyer could qualify for purchase at: $592,156.70
At 5.39%- they qualify for purchase: $567,701.01.
In the scenario above, the 5.39% is greater so that what is used will be used as their interest rate qualification.
The difference: $107,609.34
A 16% loss in purchasing power.
A Brief History of Some of those Key Mortgage Rule Changes, via: CanadianMortgageTrends.com
Jan. 1, 2017: OFSI imposed onerous capital requirements on default insurers, this disadvantaging many competitors (and Consumers) b jacking up rates substantially on low-ratio insured mortgages. (Uninsured mortgages)
Nov. 20, 2016: New Stress test regulations were extended to include insured mortgages with 20% equity or more. It also banned certain mortgage types from being insured, including refinances, extended amortizations and single unit rentals.
Oct. 17, 2016: The federal government introduced a stress test to be used in approving all high ratio insured mortgages with terms of 5 years or more. It required such borrowers to prove they can handle payments at the bank of Canada’s posted 5-year rate.
Feb. 2016: The Department of financed announced it was increasing the minimum down payment from 5% to 10% on the portion of a homes price that is above $500,000
Nov. 2014: OFSI released it B-21 guidelines which set out insurer restrictions on everything from debt ratio calculations and self-employment evaluation to borrowed down payments and cash back mortgages
July 9., 2012: The government reduced the maximum amortization period to 25 years for high ratio insured mortgages, limited the gross debt service and total debt service ratio’s to 39% and 44% respectively, banned mortgage insurance on properties over $ 1 million.
March 18, 2011: Regulators introduced a 30-year maximum amortization on insured mortgages over 80% LTV, an 85% loan to value limit on insured refinances and eliminated government insurance on secured lines of credit (eg. HELOCS).
April 19, 2010: The government introduced stress testing for insured mortgages using the Bank of Canada’s 5-year posted rate. Used to qualify on variable rate terms and fixed terms under 5 years. Other key changes included 90% LTV max on refinances (down from 95%) and 80% LTV mx. For rental financing.
Oct. 15, 2008: The first mortgage rule changes announced by the government eliminated 40 year amortizations (dropping then to 35%), raised the minimum insured credit score, added a new maximum total debt service ratio of 45% and additional loan documents standards.