A New Year, a New Set of Mortgage Regulations
The Canadian mortgage market has seen a number of regulatory changes intended to prevent a real estate market meltdown as crippled the United States after the 2007 Great Recession that it is only now pulling out of. Some regulatory changes are intended to cool down the overly inflated mortgage markets of Vancouver and Toronto where housing has become unaffordable for a majority of the population.
The OFSI originally considered banning co-lending, such as taking out sub-prime loans to get around loan to value limits that prime lenders set. The OFSI is banning co-lending intended to get around loan to value limits like the 20% minimum down requirement for average borrowers and 35% for borrowers with poor credit. However, it is not banning co-lending altogether.
The OFSI is applying the stress test to every mortgage. Stress tests used to apply to insured mortgages, short term mortgages and those putting down less than 20% of the property’s value. The growth of mortgages through other channels now account for almost half of all mortgages, such as loans by provincially regulated credit unions and non-bank institutions, and they’re now going to be obligated to run stress tests. Even those putting 50% down on a property and don’t need mortgage insurance also have to go through a stress test.
The interest rate used in the stress test is also changing. The benchmark rate is the interest rate used for the stress test unless your loan rate is less than the benchmark rate. Then they run the stress test at 200 basis points above the mortgage interest rate, even if that is much higher than the benchmark rate. If a borrower’s interest rate is 4.8% and the benchmark rate is 4.99%, what it has been for most of 2017, the stress test is run at 6.8%, not the benchmark rate of 4.99%. This change is expected to drive two to three percent of would be home buyers out of the market. Sometimes understanding the new rules by yourself can be hard, contact a Grande Prairie Mortgage Broker to help you understand more about this new mortgage process.
If someone does not pass the stress test when they apply for a mortgage, they have several options. One is to save up a larger down payment, and the likely drop in housing sales due to these rules changes could cause housing prices to soften. Another option is to continue renting, paying down personal debt and/or raising one’s income so that their debt to income ratio improves. A third choice is to seek a co-signer for the loan.
Other Regulatory Changes
The Canadian housing market suffered a shock when the maximum loan to value ratio decreased from 90% to 80% for most buyers. The maximum LTV remains 80% for buyers with good credit and 35% for those with bad credit.
The Impact on the Market
The RBC expects the mortgage rule changes to put downward pressure on housing prices nationwide. This is expected to increase the overall affordability of housing in Canada. CEO Paul Taylor says he thinks this will slow down the housing market more than expected and potentially hurt the Canadian economy. Other sources expect the impact to primarily hit the overheated Toronto and Vancouver markets, whereas the only segment affected in cheaper markets like Calgary will be the luxury home market.