The Office of the Superintendent of Financial Institutions Canada (OSFI) revised the mortgage rules and put new ones in effect as of 1st January.
Some of these changes tackled topics such as establishing the rate of minimum qualification or rather the ‘stress test’ for uninsured mortgages, and the restrictions, limitations and expectations surrounding loan-to-value (LTV) frameworks.
These changes are a crackdown by the Canadian government on the real estate market in the larger cities. These new mortgage requirements have the rates skyrocketing. Also, they have made it harder for borrowers to qualify for home loans.
Who will be affected by these changes?
All mortgage lenders that are federally regulated, need to abide by these new rules. Others affected by these new rules are the people who are applying for a mortgage with a 20% down payment or higher.
What is the qualifying requirement?
The mortgage applicants must qualify for the Bank of Canada’s five-year benchmark rate, which currently is 4.99%, or +2% (200 basis points more than the current rate) on the contractual rate, depending on which one is higher.
The 2% points on the contractual rate means that the applicant must show that they have a higher loan-to-value measurement and are responsive towards risk. In other words, if an applicant has negotiated a mortgage at a rate of 3%, then they need to show that they are capable of paying the mortgage even if the rate rises to 5%.
What will the effects of these new mortgage rules be?
These new rules set by the OSFI will not only affect the Canadian real estate market, but also the overall economy of the country. These new rules are bad news for consumers who have their hearts set on buying a home for themselves and were leaning towards mortgage options.
However, the money the prospective homeowners had saved up for a down payment will now go in savings, because of the changes in the mortgage rates. This will work as a future investment, which is good for the economy.
The real estate market and the issue of over population in the larger cities will also stabilize.Stricter mortgage policies would entail fewer people qualifying for the home loans. This will result in a decrease of property buyers in the market, which will pull down the high property prices, also resulting in a slight drop in inflation. Furthermore, this would lead people to search for cheaper property options, outside the larger cities.
What can be done?
Anyone interested in buying a house while these new mortgage rules are in practice has three main options. They can wait to buy a house until one of the following happens — more savings add up, the real estate prices drop, or the mortgage rules change. Yet if they are adamant on immediately buying a home, then they can either opt for a smaller and cheaper option or improve their credit scores and other factors that might affect their eligibility and rates for the mortgage.