On October 17, 2017, the Office of the Superintendent of Financial Institutions (OSFI) issued new guidelines for mortgage lending which will affect low-risk borrowers – those with 20% or more down payment on a property – and may affect the real estate market in 2018.
What we know:
- The guidelines – or “stress test” – require that low-risk buyers borrowing from a federally-regulated financial institution (bank, trust company, insurance company, etc.) must be able to qualify for payments for a mortgage at interest rates that are the greater of:
– two per cent higher than the actual amount of their mortgage or– the five-year posted Bank of Canada rate.
- The guidelines come into effect on January 1, 2018.
- The effect will be that buyers will be qualified for a lower mortgage amount than they would now, which will mean they will have less money with which to purchase a home.
- The new stress test rules will apply to mortgage renewals if the borrower moves to another financial institution; however, if the borrower remains with his/her current institution, the stress test will not apply provided there are no changes to the existing terms of the loan.
- New limits were placed on co-lending or bundled mortgages so lenders don’t go around the new guidelines.
- Once consumers are aware of the impact of the new guidelines, it is expected that there will be an uptick in sales in November and December, with a corresponding lull after January 1, 2018.
- The stress test is designed to ensure federally-regulated financial institutions are well-positioned to withstand the possibility of mortgage defaults if interest rates go up. It will also help borrowers be financially prepared to afford their mortgages if interest rates rise.
What we don’t know:
- It’s unclear how agreements of purchase and sale signed before January 1, 2018 will be affected and if the stress test will affect previous pre-approvals issued by financial institutions.
- Provincially-regulated credit unions and private lenders are not required to apply the stress test to borrowers if they are uninsured, and it is unclear if they will adopt the same practices or not.
- There is some question as to whether lengthening the amortization period will help offset the effect of the stress test (and if subsequent guidelines from OFSI might address that option).
These rules were intended to cool the market and ensure banks and borrowers were not over-extended when interest rates rose. However, the local market has experienced a slowdown since the summer, resulting in a more balanced market. These measures may unintentionally but unnecessarily tip the market further.