Changing Rules Instead of Rates

If you have 20% or more down payment and are looking for a mortgage after January 1, 2018, then you need to be aware of the new mortgage stress test rule introduced recently by the Office of the Superintendent of Financial Institutions (OSFI).

To understand how this works, recall that mortgage decisions are made in two steps.  The first is a review of your credit report.  The second is a comparison of mortgage and debt payments plus property taxes to your gross income.  The total of those payments can’t be greater than approx 42% of your gross income.

the new rules

If you need a mortgage of up to 80% of property value, then the mortgage payment in that approval formula will not be calculated using the actual mortgage rate.  Instead, it will be based on the larger of the actual rate plus 2% or the government prescribed rate (which is currently used for all borrowers needing more than 80% mortgage financing).  Note – your actual mortgage payment doesn’t change – just the number used for qualifying purposes.

Yes, this will reduce the maximum mortgage you can qualify for by approximately 20%.

Through these rules, the government is ensuring that if interest rates rise, you can still afford your mortgage payment.

Let’s use an analogy.  A commercial airplane carries fuel for the trip.  It also carries Diversion fuel in case they are moved to a different airport for security or weather reasons.  Reserve fuel is added in case the plane gets placed in a holding pattern before landing.  It carries Contingency fuel for things likes unexpected headwinds.  And it carries taxi fuel and and additional surplus.  A pilot only needs the the actual taxi and trip fuel to complete a typical flight but they carry considerable reserves to deal with unexpected events.

The government is in effect ensuring you have considerable reserve in your budget to continue to making payments on your home should interest rates rise.

Something very similar to this already was in place for purchasers with less than 20% down – what one might consider higher risk mortgages.  The new rules mean that all Purchasers will have to qualify on a more level playing field.

let’s talk timing

As long as you have your mortgage approval in place before the end of 2017, the old rules should apply.  Having said that, OSFI is encouraging lenders to move to the new rules as soon as is reasonable.  I haven’t had notification of any lenders doing that just yet, but sooner is better if you are looking to an early 2018 purchase.

what should you do?

Buying in early 2018?   Contact your lender/broker and get your mortgage approval in place soonest – under current rules.

If you are shopping and have a pre-approval in place, contact your lender/broker and make sure you are still shopping within a price range that makes sense under new rules – in case you don’t find a property before the end of 2017.

Looking at some form of refinance or debt consolidation?  Start discussions with your broker/lender soon and get the approval in place before the end of the year.

Lastly, be aware that lenders can adopt the new policy at any point before the end of the year at their discretion.  So, sooner is better!

rules not rates

You might notice a shift in how the government is attempting to manage the real estate market.  Historically, it would raise interest rates to dampen a runaway housing market.  It can’t do that now without affecting the delicate balance of the manufacturing sector, exports and value of the Canadian Dollar.  So, now we are seeing changes in mortgage lending policies, repeatedly, as the government works to slow the housing market somewhat.  Not a perfect science but a definite shift.

If you have questions on any of this – or you need to move on something to do with your mortgage before the end of the year, call Jim at 519-396-6800.