Beginning on January 1, 2018 the Office of the Superintendent of Financial Institutions (OSFI) will be implementing a new mortgage ‘stress test’. The idea of a stress test is not new to the public. In the fall of 2016, the federal government announced that it was implementing a stress test for those individuals who had a downpayment of less 20%.
On the contrary, this new rule will apply to those individuals who provide down payments greater than 20%. Applicants will also be required to qualify for the higher of Bank of Canada 5-year qualifying rate (currently 4.99%) or the mortgage holder’s contracted rate + 2%.
Approved loan applications occurring between October 17, 2017 and January 1, 2018 might be subject to the new rules, depending on the institution. Where possible, lenders are encouraged to comply with the new rules as soon as they can.
If an individual has a higher than average debt to income ratio (a measure that compares an individual’s debt payment to his or her overall income) they will still be able to find a lender to approve them after January 1. That’s because most provincially regulated lenders are not bound by OSFI’s new rules.
However, if other lenders know that a more heavily indebted borrower can’t qualify at a big bank (e.g. TD Bank, Scotiabank, BMO, etc), they will charge a rate premium for the privilege of borrowing money with more flexibility. This practice is called “risk-based pricing”.
If you are currently going through the mortgage process or considering doing so in the near future, here is some important information:
Existing Mortgage Applications:
If you have received approval for a mortgage, the new rules won’t affect your mortgage, regardless of when your property closes.
Banks should honour existing preapprovals before October 17, 2017. Preapprovals between Oct. 17 & Dec. 31, 2017, the lender can choose which rules to apply.
Applications in 2018:
All loan applications or preapprovals from a federally regulated lender after January 1, 2018 will be subject to the new rules. There will be no exceptions.
During the past 12 months, the market has gone through a number of policy changes. Because of all these changes, it has become harder to predict where the market is headed. Some buyers and sellers will have a wait and see attitude, while others who are more confident will jump right in. Moving forward these policy changes will continue to forge a strong, balanced and normalized market.
Source. The Globe and Mail, Friday October 27, 2017.