This week was one full of financial related news from the Federal Government. Some positive, some perhaps not.
The worst kept secret is now no longer such. Effective Jan 1, 2018 the Office of the Superintendent of Financial Institutions (OSFI), the federal crown corporation that regulates all chartered banks, will require lenders to “stress test” all mortgages, regardless of the down payment.
- This new regulation will affect all borrowers.
- The new rules will require buyers to demonstrate they could still afford their mortgage payments if interest rates were 2% higher than the actual rate they negotiate.
- This effectively reduces the amount borrowers will qualify for by 20%, a significant amount by any stretch of the imagination.
- Potential home-buyers will either need to lower their purchase price expectations, come up with more down payment, utilize the “bank of mom and dad”, or obtain a co-signer.
- Currently, purchasers with less than 20% down payment already face very similar rules.
As an example, a client could negotiate a 5 year fixed rate of 3.09% however the lender will need to base their approval on the client’s ability to qualify at a rate of 5.09%. On a $500,000 mortgage the client would need to "have the ability" to pay an extra $568 per month. In reality, prospective purchasers who want to borrow at the maximum threshold will need to reduce the amount they borrow so their new mortgage payments are $568 less, in this example, which is roughly equal to $100,000. For those clients who are not approaching their upper borrowing limits, the new rules will have little impact.
Many banking and real estate industry leaders speculate that this latest move by the government will slow down housing activity modestly in 2018 as consumers adjust to the new lending environment. There is no doubt that this rule is likely the most significant to be introduced in years and designed to reduce the perceived risk in the banking sector with household debt at record highs, along with the price of housing in many major cities. Only time will tell. One thing is for certain; this will not help improve affordability. Unfortunately, any rules that could help affordability would likely need to come at the expense of managing mortgage risks.
According to Desjardin Economics, Vancouver already has the lowest affordability ratios in the country. After January 1, 2018 these ratios will be even lower. This graph illustrates the various ratios in major cities across the country.