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.
Construction intentions for multi-family dwellings in Montréal continue to climb
In October, the value of permits for both single-family and multi-family dwellings increased in the CMAs of Montral and Toronto. However, in the Vancouver CMA, both residential components fell, offsetting the gains in September.
Municipalities in the CMA of Montral issued $538.1 million in permits for multi-family dwellings in October, higher than in Toronto ($409.2 million) and Vancouver ($330.6 million). In regards to single-family homes, Toronto registered $451.3 million in permits, followed by Vancouver ($148.1 million) and Montral ($122.4 million).
The Montral CMA issued permits approving the construction of 2,956 new units, stemming mainly from multi-family dwellings (2,720). October marked the fifth consecutive month where the number of units approved for multi-family dwellings exceeded 2,000. Vancouver approved the construction of 1,860 new units for multi-family homes, while Toronto (1,691) approved fewer despite having a higher value for the component.
Housing Market Digest by Will Dunning, Economist for Mortgage Professionals Canada
The Office of the Superintendent of Financial Institutions (OSFI) now requires that all residential mortgages by federally-regulated lenders must be stress-tested, at two percentage points above the contract interest rate (or the 5- year posted rate, if that is higher). In combination with the requirements for mortgage insurance, about 90% of all new mortgages will be tested.
This can be expected to reduce housing activity by 10-15%. It is on top of the impact from recent rises for mortgage interest rates (another 5-10% drop in activity). The combined 15-25% drop in housing activity will affect the broader economy.
In two years, employment could be 150,000-250,000 lower than it would otherwise be. There is a risk that house prices will fall. In a modern economy, a sustained drop in house prices is one of the most dangerous things that can happen: as happened in the US a decade ago, falling house prices can turn into widespread economic decline.
Resale activity recovered a bit more in September, to 492,900, due to partial rebounds in BC and Ontario. Activity is flat in most other areas.
CREAs House Price Index was flat in September. The year-over-year change is now 10.7% (down from the peak of 19.7% that was seen in April).
The sales-to-new-listings ratio (SNLR) was 55.7% in September, slightly above the balanced market threshold of 51%. This indicator points to an outlook for stable prices (at worst). But, as noted, OSFIs stress test policy creates a risk of falling prices.
We should, in general, expect that resale activity will trend upwards over time, because the population is growing and the housing inventory is expanding. Therefore, it is useful to look at sales on a per capita basis. Recent activity is below the long-term average.