b-LOG: Getting a Grip on the New Mortgage Rules
Shopping for a new home in 2018? Then you’ve likely heard of the new mortgage rules put in place by the Office of the Superintendent of Financial Institutions (Canada’s banking regulator).
We’ve heard from many with questions about how these new rules affect them and whether or not they should consider following through with making the move to a new home.
There is a lot that hasn’t been made clear and as full-time REALTORS®, we wanted to take the opportunity to clear the air and dig deeper into what the new rules are and how they will impact your decision to buy real estate in the near or distant future.
Let’s start with the basics: As of January 1, the OSFI has implemented 3 new rules on mortgage lending by federally-regulated financial institutions like big banks. Before we move on, it is important to note that private lenders like credit unions are not bound by these new rules. They may, however, opt in so we encourage you to do your research when shopping for a mortgage.
So What Are the New Rules?
Stress Test: Perhaps the biggest impact on your decision to buy will be due to this new hardened ‘Stress Test” aimed at limiting the amount of debt Canadians and financial institutions take on. This will mean financial institutions will vet a mortgage using the greater of two indicators: either 200 basis points (2%) higher than the mortgage rate you qualified for or the Bank of Canada’s five-year benchmark rate.
Before the changes, a family with an annual income of $100,000 could afford a mortgage of $726,939 with a 20% down payment and a five-year fixed mortgage rate of 2.89%. Under the new rules, this same family will need to quality at 4.89% meaning the mortgage they can afford drops to $570,970.
Enhanced Loan-To-Value Measurements (LTV): Traditional mortgage lenders like banks use the LTV ratio to determine the risk of a loan. The higher the ratio, the greater the risk. The OSFI is now asking lenders to have internal risk management protocols in place in higher priced markets to ensure that if property values decrease, that homeowners will not be faced with negative equity in their property.
Restrictions on LTV Limits: Previously, if you applied for a mortgage with an LTV ratio of 80% but only qualified for 60%, lenders could partner with second lenders to make up the difference. This is no longer an option under the new OSFI rules.
Who is Affected?
The new rules affect Canadians renewing, getting or refinancing a mortgage. This applies to even those buyers with a down payment of more than 20%.
What Are My Options?
These new rules may seem strict. But that doesn’t mean you are without options.
Those affected have 4 choices if they feel they will not pass the new ‘stress test’. Those include:
- Putting more money down on their down payment
- Adding a co-signor that has income
- Deciding not to purchase, or
- Considering alternatives to single detached homes like condos or townhomes (see our currently inventory of real estate for sale)
In any event, we’re here to help clear any road blocks and help you accomplish your goals of purchasing a new home in the Niagara region.
To learn more about how these new rules will apply to your situation, visit RateHub’s mortgage calculator at: www.ratehub.ca/mortgage-payment-calculator.
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“Broker vs Lender – The Same But Not the Same”
“Mortgages 101 – Pocket Guide to Mortgage Types in Canada”
“Getting a Mortgage That Saves You Money”
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