WHAT WILL YOU BE ABLE TO AFFORD ON JANUARY 1, 2018?
On October 17th, the Office of the Superintendent of Financial Institutions (OSFI), Canadas banking regulator, announced that it will be establishing a new minimum qualifying rate, or stress test, for borrowers making a downpayment of MORE than 20% of the homes value. Since November 30, 2016, stress test requirements only applied to insured mortgages (those with down payments of less than 20%) and most variable mortgages and terms less than five years.
Here is a bit more insight into the changes that are happening as of January 1, 2018 for uninsured mortgages/customers with 20% or more downpayment:
1) As of January 1, 2018, the borrower will have to qualify at the GREATER of either two the contract rate plus+ 2% OR the Bank of Canada Benchmark Rate (currently 4.99%)
2) High ratio mortgages greater than 80% loan-to-value will still be qualified at the GREATER of the contract rate OR the Bank of Canada Benchmark Rate (the 2% is not added)
3) Firm Agreements of Purchase and Sale dated prior to January 1, 2018 will qualify under the current rules (regardless of the closing date)
4) Firm Agreements of Purchase and Sale dated after January 1, 2018 will require the borrower to qualify under the new rules. (Rule 1 or 2 above)
5) Refinances approved prior to January 1, 2018 must close within 120 days of application date to qualify under current rules.
6) Pre-approvals that have not been converted to live deals before January 1, 2018 will be subject to the new rules.
Here is an example of how this new rule will affect you:
Under the current rules, prior to January 1, 2018, you can qualify at your contract rate being offered by the lender (for this example I will use 3.39% as the contract rate) with 20% or more downpayment:
$700,000 - purchase price
$140,000 20% down payment
$560,000 mortgage 80% loan-to-value
3.39%, 5 year term, 25 year amortization
$110,000 annual income to qualify
GDS (gross debt service ratio) = 36.88%
For the same income and purchase price under the new rules as of January 1, 2018:
You now must qualify at the greater of the benchmark 4.99% or the contract rate +2%
If contract rate is 3.39% then (3.39% + 2% = 5.39%) so 5.39% is the rate they must qualify at because it is greater than the benchmark rate.
Example above redone using contract rate +2% = 5.39%:
$700,000 - purchase price
$250,000 down payment client requires more down to qualify for this purchase
$450,000 mortgage 64% loan-to-value the client now qualifies for $110,000 less
3.39%, 5 year term, 25 year amortization, qualified at 5.39%
$110,000 annual income to qualify
GDS (gross debt service ratio) = 36.39%
You would have originally qualified for a $560,000 mortgage under the current rules; under the new rules you will qualify for a $450,000 mortgage - that is $110,000 less. Based on the above scenarios, under the current rules you qualify at 80% loan-to-value; under the new rules you will qualify at 64% loan-to-value - that is a difference of 16%. You will qualify for 16% less than you can now under the current rules (the above calculations are for scenario and illustration purposes only).
Canadian Income Survey, 2016
Canadian families and unattached individuals had a median after-tax income of $57,000 in 2016. Median after-tax income increased from 2011 to 2014, but held steady in 2015 and 2016. The slower growth in 2015 and 2016 was associated with the resource price slowdown, which began in the second half of 2014.
After-tax income is comprised of income from market sources and government transfers. Market income includes employment income, retirement income and income from investments, while government transfers include benefits to seniors, child benefits,
Employment Insurance benefits, social assistance and other benefits. While growth in overall median after-tax income slowed in 2015 and 2016, there was also a significant increase in government transfer income. Median income from government transfers rose from $5,800 in 2014 to $7,400 in 2016. About half of this rise was due to increased child benefits, which became a larger source of income for families with children.
In 2014, the median child benefit received by couple families with children were $2,500. This rose to $3,400 in 2015, and to $4,000 in 2016. For a lone-parent family, the median benefits rose from $5,100 in 2014 to $5,800 in 2015, and then to $6,400 in 2016.
Bank of Canada maintains overnight rate target at 1 1/4 per cent
The Bank of Canada today maintained its target for the overnight rate at 1 1/4 per cent. The Bank Rate is correspondingly 1 1/2 per cent and the deposit rate is 1 per cent. Global growth remains solid and broad-based. In the United States, new government spending and previously-announced tax cuts are anticipated to boost growth in 2018 and 2019. However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks.
In Canada, the national accounts data show that the economy grew by 3 per cent in 2017, bringing the level of real GDP in line with the projection in the Banks January MonetaryPolicy Report (MPR). In the fourth quarter, GDP growth was slower than expected, largely due to higher imports, while exports made only a partial recovery from their third-quarter decline. The gain in imports mainly reflected stronger business investment, which adds to the economys capacity.
Strong housing data in late 2017, and softer data at the beginning of this year, indicate some pulling forward of demand ahead of new mortgage guidelines and other policy measures. It will take some time to fully assess the impact of these, as well as recently announced provincial measures, on housing demand and prices. More broadly, the Bank continues to monitor the economys sensitivity to higher interest rates. Notably, household credit growth has decelerated for three consecutive months. The implications of the recent federal budget for the outlook for growth and inflation will be incorporated in the Banks April projection.
Inflation is running close to the 2 per cent target and the Banks core measures of inflation have edged up, consistent with an economy operating near capacity. Wage growth has firmed, but remains lower than would be typical in an economy with no labour market slack. Inflation is fluctuating because of temporary factors related to gasoline, electricity, and minimum wages.
In this context, Governing Council maintained the target for the overnight rate at 1 1/4 per cent. While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economys sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.