Canada’s top banking regulator is proposing rules that will make it harder for some to qualify for a mortgage.
On the heels of the first interest rate hike in seven years, the Office of the Superintendent of Financial Institutions (OSFI) is proposing stricter rules on uninsured mortgages that could have an even more profound effect on the housing market.
Under these new rules, buyers with a 20 per cent down payment or more now have to undergo a more rigorous stress test, and qualify based on the highest posted five-year fixed rate – 4.64 per cent, roughly 200 basis points higher than actual mortgage rates.
Last year, in an effort to cool down hot real estate markets in cities like Toronto and Vancouver, Ottawa introduced new mortgage rules on only insured mortgages – meaning those who put less than 20 per cent down. Anyone with an uninsured mortgage were exempt from that stress test. But since then, the uninsured mortgage market has grown. So, to help reign in this segment of the market, OSFI is now proposing extending the stress test to uninsured mortgages.
Now, since buyers have to qualify for a higher interest rate, this means they can’t borrow as much, reducing their home-buying purchasing power by about 20 per cent.
Rising household debt from mortgages a concern
The Bank of Canada and regulators have expressed concern over the rising level of household debt, largely fueled by mortgages. This appears to be the main reason behind the proposed rule change on uninsured mortgages.
“I believe their intention is to try and mitigate risks of possible rising interest rates. Which in turn will protect the housing market on a whole and avoid large scale mortgage defaults in the event of large rate increases, as we saw in the U.S. during the financial crisis [of 2008],” said Fred Babbie, a mortgage broker at Safebridge Financial Group.
OSFI’s proposal is one of many recent changes to the Canadian real estate market, including the overnight rate hike last week and the introduction of the Ontario Fair Housing Plan this past April
“At this particular point this change could be considered a little premature and perhaps overkill as there have been many major mortgage regulation changes in the last eight to 12 months and the market has not had time to see what the real life effects will be,” Babbie continued. “A little patience, on the part of the policy makers, to wait and see the results over the next four to six months may be the prudent course of action here.”
Toronto and Vancouver likely to be hit hardest by new stress test
The new stress test is likely to be felt hardest where home affordability is already a challenge, like in the country’s hottest real estate markets, Toronto and Vancouver. While economists predict this will continue to put downward pressure on prices in these markets, the effect will likely be minimal, and the dream of home ownership may become more out of reach for some. And what’s more, the new stress test won’t only affect home buyers – it affects current home owners looking to refinance.
“This could have a cooling effect on the market as people will be able to afford less and could slow down refinance opportunities. This could permeate through to smaller markets as well,” said Babbie. “It will cause a bigger divide between the haves and have nots.”
The proposed rules could also force more people to alternative and private lending sources, which we have already seen based on the previous rule changes.
“This is the elephant in the room that is not being addressed by any of these changes which could prove problematic in the future,” Babbie said.
And while consumers may be enthused by the thought of lower prices and less competition in the market, it needs to be understood that this now comes with a price: higher mortgage rates for everyone.
“(This) brings us to my real concern which is more so for the consumer, who deserves healthy competition in the market to keep all players honest which spurns innovation, better pricing and provides choice,” Babbie expressed. “The fear of overregulation is that it breeds an unbalanced playing field that generally only benefits the largest players in the market.”
The new stress test for uninsured mortgages is one of a few changes OSFI is proposing. Other proposed changes include:
- Requiring that loan-to-value measurements remain dynamic and adjust for local conditions when used to qualify borrowers; and
- Prohibiting bundling mortgages in order to circumvent the 80 per cent+ loan-to-value limit on uninsured mortgages.
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