OTTAWA, ON. (NEWS 1130) – The Office of the Superintendent of Financial Institutions (OSFI) has introduced new rules on mortgage lending to take effect next year.
OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages (mortgage consumers with down payments 20 per cent or greater than their home price).
The rules now require the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada (presently 4.89 per cent) or 200 basis points above the mortgage holder’s contractual mortgage rate. “The main effect will be felt by first-time buyers,” says James Laird, co-founder of Ratehub.ca.
“No matter how much money they put down as a down payment, they will have to pass the stress test.” The effect of the changes will be huge, resulting in a 20 per cent decrease in affordability, meaning a first-time homebuyer will be able to buy 20% less house, explains Laird.
MoneySense asked Ratehub.ca to run the numbers on two likely scenarios and find out what it would mean for a family’s bottom line. Here’s what they found:
SCENARIO 1: Bank of Canada five-year benchmark qualifying rate
In this case, the family’s mortgage rate, plus 200 basis points, is less than the Bank of Canada five-year benchmark of 4.89 per cent.
According to Ratehub.ca’s mortgage affordability calculator, a family with an annual income of $100,000 with a 20 per cent down payment at a five-year fixed mortgage rate of 2.83 per cent amortized over 25 years can currently afford a home worth $726,939.
Under new rules, they need to qualify at 4.89 per cent.
They can now afford $570,970
A difference of $155,969 (less 21.45 per cent)
SCENARIO 2: 200 basis points above contractual rate
In this case, the family’s mortgage rate, plus 200 basis points, is greater than the Bank of Canada five-year benchmark of 4.89 per cent.
According to Ratehub.ca’s mortgage affordability calculator, a family with an annual income of $100,000 with a 20 per cent down payment at a five-year fixed mortgage rate of 3.09 per cent amortized over 25 years can currently afford a home worth $706,692.
Under new rules, they need to qualify at 5.09 per cent
They can now afford $559,896
A difference of $146,796 (less 20.77 per cent)
Laird says if a first-time homebuyer doesn’t pass the new stress test, they have three options.
“They can either put down more money on their down payment to pass the stress test, they can decide not to purchase the home, or they can add a co-signer onto the loan that has income as well,” says Laird. The stress test will be done at the time of refinancing as well, with one exception.
“If on renewal you stay with your existing lender, then you don’t have to pass the stress test again,” says Laird. “However, if you change lenders at mortgage renewal time, you may have to pass the stress test but it’s not crystal clear now if this will be the case for those switching mortgage lenders.”