The recent mortgage rules changes have created a new reality in the real-estate world. I would like to look into these changes and share my thoughts with you:
On October 17, 2017, the Office of the Superintendent of Financial Institutions (OSFI) released revised guidelines for the mortgage industry. The new regulations will take effect starting January 1, 2018. Current contracts will not be impacted before this date.
The major change to rules is a requirement to apply the ‘stress test’ on all borrowers, including those who have more than 20% down payment. This reduces the purchase power by 20%-30%.
Linda’s Case Study
Linda saved $120,000 and she wants to purchase a home for $600,000. Right now she can be approved to a mortgage of $480,000. As of January 1, 2018, she will only be able to be approved for a mortgage of $330,000. Her borrowing power will be reduced by $150,000 and she won’t be able to buy the house she wants.
What Reduces the Buying Power?
The new ‘stress test’ indicates the way that the applicant’s income is looked at. Previously, the monthly income needed to support a monthly mortgage payment calculated for the rate you actually got, let’s assume it was 3.09%.
From January 1st, 2018 your income will need to support a mortgage payment for 3.09% + 2% = 5.09% or for 4.99%, the greater of the two.
Whoever passes the test gets access to the real rate of 3.09%.
It means that much more income will be needed to support the same mortgage amount. In other words, with the same income you will be approved for a much smaller mortgage.
Since the ‘stress test’ has already been in place for variable rate mortgages, most of our clients who chose the variable rate in the past won’t be impacted. Clients, that need the fixed rate to be approved, will be affected much more.
What Will This Do To the Real Estate Market?
Unfortunately, we still don’t know. The new measures were put in place in order to cool down the markets in big Canadian cities. However, since the main players who drove the market up were from outside Canada and not local salaried families, there is no guarantee that the market will go down in the long run.
Condos, the main affordable option for salaried clients, may be impacted differently. The limited condo’s inventory resulted in increased completion and higher prices. The change in rules might slow down the condo market starting January 2018. Right now what we see is a bidding war over condos, coming from clients who do not want to miss out in purchasing under 2017 regulations.