In an effort to protect consumers in Canada the Office of the Superintendent of Financial Institutions (OSFI) has introduced new mortgage rules for 2018. These new rules will have a significant impact on home buyers.
We will explore the new mortgage rules for 2018 that have been put in place and how these new mortgage rules will impact you in 2018 and beyond.
What Are The New Mortgage Rules in Canada For 2018?
The OFSI, which is Canada’s banking regulator, has put three new rules in place regarding mortgage renewals, refinances and new mortgage loans. The rules are intended to give homeowners a chance to prove they will be able to handle an interest rate increase that is substantially higher than their existing interest rate.
The new rules the OFSI has set into place include:
A Stress Test For All Mortgage Holders
One of the new rules is a new minimum qualifying rate that has been put into place. This is also known as a stress test. All potential homeowners – even those with a down payment of 20% or more – must pass the minimum qualifying rate. Previously, mortgagees had to pass a stress test after January 2017 only if their down payment was below 20%.
If you are unable to pass the stress test you will not be approved for a mortgage – regardless of how large a down payment you have saved.
Under the new mortgage stress rule to qualify for a mortgage (or mortgage refinance / mortgage renewal) you must qualify for a mortgage that has an interest rate that is the greater of either:
- 200 basis points (2%) higher than the mortgage rate you qualified for or;
- The Bank of Canada’s benchmark rate.
The new mortgage stress test will not mean you will have a higher mortgage payment as your actual mortgage payment will be based on the negotiated rate with your lender; although in order to qualify for the mortgage you must pass the higher stress test.
Enhanced Loan-to-Value Measurements
The OFSI has set rules that mortgage lenders (not including private lenders) must use an internal risk management protocol to limit Loan-to-Value (LTV) ratio in higher priced markets, including Vancouver and Toronto. Limiting the LTV ratio will prevent you from having negative equity in your home if a property bubble bursts and the value of your property decreases, perhaps substantially.
Certain Arrangements Restricted
Traditional lenders (not private lenders) are no longer allowed to partner with a second lender if the first lender can only approve you for a LTV ratio of 60% and you’ve applied for a mortgage with a LTV ratio of 80%. Previously, the first lender could partner with a second lender for the additional 20%. Under the new OFSI mortgage rules for 2018 traditional mortgage lenders are unable to arrange a mortgage or other type of loan to get around the LTV ratio limits.
How Will These New OFSI Mortgage Rules in Canada Impact Me?
These new rules are intended to limit the amount of debt Canadians can take on. While the Canadian government has passed several regulatory changes since July of 2008 in a bid to reign in the debt load Canadians are carrying, these new rules are much more severe.
The biggest impact on Canadians is that most homeowners will now be able to afford approximately 20% less of a home. Your mortgage payment will not increase but you will not be able to qualify for a mortgage if you cannot pass the new mortgage rules.
These 3 new rules went in place on January 1, 2018 will mostly impact uninsured mortgages, although most Canadian mortgage holders will be impacted by these new rules.
In addition to lower purchasing power for families, the strict mortgage rules are expected to have a negative impact on softening housing markets and decrease housing demand by as high as 10%. First time homeowners might have to wait longer and save more of a down payment, while people looking to refinance their mortgage will have a more difficult time negotiating a mortgage renewal.
Who Should Be Worried By The New Mortgage Rules?
The new mortgage rules will have the biggest impact on uninsured mortgages.
First-time homebuyers will likely have to wait longer to purchase. Seek a condo or townhouse rather than a detached home, or get approved with a co-signer.
If you are worried that these new mortgage rules will hurt you, there are options available, such as seeking a mortgage through a private lender.