A New Year Will Bring New Mortgage Changes - How They Impact You
On October 17th, the Office of the Superintendent of Financial Institutions (OSFI) announced new mortgage rule changes for conventional mortgages that must be implemented by January 1, 2018. These are mortgages with 20% or more down payment. This includes not just buyers, but also refinances. If you need to refinance, doing so before the deadline may make or break your ability to qualify. If you are a buyer with less than 20% down, these rules do not apply. I will break out what the announcement was and how it will impact you.
3 Key Changes Highlighted:
Conventional Stress Test - Instead of qualifying at the interest rate you actually get, the minimum qualifying rate for uninsured mortgages (those with 20% down payment / equity) will be the GREATER of the five-year benchmark rate published by the Bank of Canada (currently 4.99%) or the contractual mortgage rate +2% (ex. 3.39% + 2% = 5.39%).
Risk-Based LTV Limits - OSFI is requiring lenders to make down payment requirements adaptable to risk, so they can be increased if higher economic or housing market risks appear.
No Bundled Mortgages - Some federally regulated lenders were offering combination products, generally a first mortgage with them up to 80% loan-to-value (LTV) and pairing it with a private second mortgage at a higher interest rate to get it to 85% or 90% LTV. These can no longer be presented to a consumer as a combined product and interest rate, nor can they be processed at the same time.
Of the above, the stress test has the most immediate impact to the largest number of consumers so that will be the focus of this newsletter.
Stress Test - Who It Impacts
These changes are challenging to communicate because they hit the strongest buyers and those least likely to be concerned about them. More than ever, regardless of how strong you think your purchase position is, a thorough pre-approval can save you from unpleasant surprises. Find out where you stand and if these rules will impact you personally if you are:
A buyer with 20% or more down payment
Refinancing a primary residence or rental property
Renewing your mortgage on your property that you purchased with more than 20% down and want the ability to switch to a lender offering better rates
Conventional Stress Test - How It Works
Lenders determine their policies on maximum lending based on two affordability ratios. One calculation determines what percentage of your gross income is required to meet your housing costs (mortgage payment, condo fee, property taxes and heating). Most lenders allow this to be a maximum of 39%. The second calculation determines the percentage of your gross income required to meet your housing costs and your other monthly debt commitments. Most lenders allow this to be a maximum of 44%. While these are the most common maximums for these ratios, lenders determine their own policies and some do offer exceptions for conventional buyers.
Instead of using the interest rate you are actually getting to calculate the mortgage payment in these ratios, lenders will now have to use the Bank of Canada Qualifying Rate or the contract rate plus 2%, whichever is greater. This increases these calculations so you reach the lenders maximum affordability ratios at a lower mortgage amount than you do now. This rule change drops your buying power.
Mark and Nicole have salaries of $65,000/year each. They are buying with 20% down payment. For debt they each have a $650/month car loan, Nicole has a line of credit with a calculated payment of $500/month, and Mark has a $400/month student loan payment.
Assumptions: property taxes $4000, no condo fee, $125/month heating, 5-year fixed contract rate of 3.39%, 25-year amortization, standard insurer affordability ratios.
Maximum Purchase Old Rules - $530,000
Maximum Purchase New Rules - $435,000
= 18% drop in buying power
Commonly Asked Question On These Changes
Do Pre-Approvals Protect You?
It is up to lenders how they will roll out the Jan. 1st change, including how they will manage pre-approvals. So far, the majority who have announced their implementation specifics are not honouring pre-approvals issued before the 1st. That said, some may still choose to honour them.
Will This Impact My Renewal?
If you stay with your current lender you do not need to requalify at these tougher guidelines. If you choose to move lenders you will need to requalify. Unfortunately, lenders will know this and it will give them more reason to offer higher interest rates at renewal, knowing some will have no choice but to stay put. Before you sign those renewal papers, give me a call to discuss your options.
Are Credit Unions Impacted?
Credit Unions are not governed by OSFI and are provincially regulated, so they are not required to follow these guidelines. Most credit unions lend conservatively and many already use the Bank of Canada Qualifying Rate, it is up to individual credit unions to determine their lending policies and if they are choosing to follow these same guidelines.
Do I Have Until Jan 1st To Write An Offer?
No, not necessarily. It is up to lenders to choose how they will implement the deadline. Some lenders are choosing to process any offer accepted prior to midnight on Dec. 31st under the old guidelines. Others are choosing earlier deadlines for submissions, as early as Dec. 15th.
What If I Am Approved But My Possession Is After Dec. 31st?
You can confirm with your lender, but so far all lenders who have announced their implementation plans are grandfathering mortgages that have already been approved but are waiting to close, even if possession is after the rule change deadline.
If you would like to discuss how these rule changes impact your purchase or refinance, contact me to do the math on your pre-rule change and post-rule change numbers.
Toronto index stopped trending down in January
In January the TeranetNational Bank National Composite House Price IndexTM rose 0.3% from the previous month, a tic higher than the historical average for January and a second consecutive monthly increase. However, only four of the 11 metropolitan markets surveyed showed gains the first time since January 2016 that a rise in the Composite Index has had so little breadth. It was due mainly to a second straight monthly jump of the index for the important Vancouver market (1.2% in January on the heels of 1.3% in December). The Toronto index rose 0.2%, the Victoria index 1.0% and the Montreal index edged up 0.1%. All the other component indexes were down on the month: Hamilton (0.2%), Ottawa-Gatineau ( 0.2%), Edmonton (0.3%), Calgary (0.3%), Halifax (-1.0%), Winnipeg (1.1%) and Quebec City (2.0%). For Montreal, it was a 13th monthly increase, and for Hamilton it was a fifth decrease in a row. The rise of the Toronto index was the first in six months. The raw (unsmoothed) Toronto index  on which it is based was up for a third consecutive month. The firming of the smoothed index is due entirely to condo dwellings. The smoothed index for non-condo units fell in January for a sixth straight month, bringing its cumulative decline to 9.6%.
Click here for full release. https://housepriceindex.ca/2018/02/toronto-index-stopped-trending-down-in-january/
2018 CMHC Prospective Home Buyers Survey
In October 2017, CMHC surveyed 2,507 prospective home buyers on-line. Respondents were all prime household decision-makers who intend to purchase a new home within the next two years, including approximately 1,500 First-Time Buyers, 500 current owners, and 500 previous owners.
The survey results highlight that:
First-Time Buyers and Previous Owners share the same top motivator to purchase a home: they want to stop renting. Improved accessibility (physical obstacles and barriers) and investment opportunity were also noted as top motivators across all groups. Changes to mortgage regulations and concerns about possible future interest rate increases were not among the top motivators.
Over four-in-ten First-Time Buyers and Previous Owners say they would delay their home purchase if they were not able to find their ideal home, with a fairly similar proportion saying they would be willing to compromise on the size of the home and location.
The majority of future home buyers intend to obtain a mortgage to finance their home purchase, with First-Time Buyers showing higher incidence compared to Previous Owners and Current Owners.
Across all future home buyers groups, more than six-in-ten say they are likely to have a financial buffer in case their expenses change in the future. Furthermore, the majority of future home buyers, especially Current Owners, agree that they feel confident they have the necessary tools and information to manage their mortgage and debt load.
Among all groups, the two most common actions completed one to two years prior to the purchase of a home were saving for a down payment and determining what type of home to buy. On the other hand, in the last three months before purchasing, about two-in ten of prospective buyers pre-qualify for a mortgage.
About one-in-four prospective home buyers stated that they would be very likely to consider delaying their purchase in the event of an increase in interest rates.