HOMEBUYERS FACING NEW ‘STRESS TEST’
Rules aim to prevent people from taking on too much mortgage debt
Homebuyers looking to qualify for an uninsured mortgage through a federally regulated financial institution will soon face a new hurdle. The Office of the Superintendent of Financial Institutions (OSFI) will roll out revised guidelines for residential mortgage writing practices and procedures starting Jan. 1, 2018.
One change is a new “stress test” for uninsured mortgages, requiring the borrower to qualify at the higher figure between the five-year benchmark rate published by the Bank of Canada and two per cent above the contracted mortgage rate.
“Overall, I think it’s a prudent policy,” says Todd Hirsch, chief economist of ATB Financial.
“When you look at some of the other economies than have gotten into trouble, notably the United States in 2007 and 2008, it was because the mortgage lending was too lax.
“What the policy-makers are trying to do now is make sure we don’t get into that situation here — especially Toronto and Vancouver — where there have been a lot of people taking on an awful lot of mortgage debt.”
However, residential markets in other centres in Canada, such as the Edmonton area, aren’t carrying the same weight.
“The Alberta housing market is stable,” Hirsch says. “It was remarkably stable throughout the recession, in fact. And now coming out of the recession, it’s been stable. Even though Vancouver and Toronto are the targets,” he adds, referring to the coming lending rule change.
“We still want to make sure, now that we’re coming out of the recession, that we don’t see Albertans taking on far too much mortgage debt.”
Stricter qualifying requirements are already in place for many lenders anyway, Hirsch says.
“The banks and financial institutions have no incentive to see people foreclose on mortgages. All along, I think the banks have already been building that buffer in.
“So I don’t know if we’re going to see a tidal wave of people rushing to get into a mortgage in the last couple of months of the year here, simply because the banks have already been raising that level.”
While the lending rules will pose a challenge for some to qualify for certain mortgages, when it comes to its influence on Edmonton’s overall residential market, other factors are at play.
“There are a lot of things pushing and pulling,” says Hirsch.
“On the one hand, mortgage rates are rising, there are stricter lending rules coming into place, on the other hand, we’ll see Edmonton’s economy doing better, we’ll see consumer confidence picking up gradually, we’ll see the job market picking up, and all of those things bolster the confidence in home ownership.
“Between those push and pulls on the different sides, I think we can expect 2018 to be modestly improved from 2017, but emphasis on modest.”
According to calculations provided by Mortgage Professionals Canada, with the lending rule change on uninsured mortgages, the qualifying income for people buying a $500,000 home could jump by more than $16,000. Purchasing a home for $500,000 with a down payment of 20 per cent, the qualifying income, after the change, increases to $108,405 from $92,160.
The new figure is based on 4.99 per cent, which is the current published five-year benchmark rate through the Bank of Canada, and the earlier number is from a contracted rate of 2.99 per cent. The new calculation also assumes the annual property tax is one per cent of the purchase price, heat costs are $150 per month, the amortization is 25 years, and the maximum Gross Debt Service (GDS) ratio is 32 per cent.
Using the above mentioned factors, the change also boosts the qualifying income on a home purchased for $600,000 to $128,961 from $109,467, and for a $700,000 home, it increases to $149,518 from $126,117.
This coming update for uninsured mortgages comes on the heels of a change to the lending rules affecting buyers seeking high-ratio insurance-backed mortgages. As of October 2016, applicants must qualify for both their contract rate and the conventional five-year fixed posted rate through the Bank of Canada. Qualifying at the Bank of Canada rate was already needed for highratio insured mortgages with variable interest rates or fixed interest rates with terms less than five years.
“Ultimately, it comes down to what your economy is doing, what type of employment there’s been and other factors. It didn’t necessarily cause any significant shifts,” says Ann-Marie Lurie, chief economist for the Calgary Real Estate Board. “If these sorts of things happen and markets don’t have any supply, you probably see the impact on demand, but if you have ample supply for a lot of purchasers, even the first-time ones, they still have a lot of choices.”