New mortgage rules are coming Jan. 2, 2018, and there has been considerable concern in some quarters that the changes may produce a negative effect in the Canadian housing market and the national economy.
The new rules enacted by the Office of the Superintendent of Financial Institutions Canada (OSFI) mean that home buyers looking to make a down payment of 20 per cent or more must pass a financial “stress test” to ensure they will be able to continue making mortgage payments if interest rates rise. To pass, they have to qualify for a mortgage at either the Bank of Canada rate, which is currently 4.99 per cent, or the rate offered them by a lender plus two per cent, whichever is greater.
Until now, the stress test applied only to those making a down payment of less than 20 per cent.
Will the changes impact Ottawa buyers?
The short answer is, likely not very much.
Ottawans are very budget conscience and quite responsible in their home buying. Most of the mortgage applicants I see comfortably meet the two ratios that measure debt against ability to pay that lenders look at when qualifying buyers for a mortgage. Those ratios are known as Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS).
With Statistics Canada reporting the 2015 household median income in Ottawa at $104,070 and with housing prices that are not even close to those in Toronto, we are doing quite well in terms of our ability to purchase homes within our means.
Also, in Ottawa many young adults leave university to join high-tech companies and the civil service, which pay well from the outset. This allows many first-time home buyers to tackle their student debt immediately, an opportunity that might not be available in Toronto or Vancouver, where high rents eat up a good chunk of take-home money.
That being said, many first-time home buyers cannot make a down payment of 20 per cent or more and so they have been used to the higher Bank of Canada qualification rate for over a year now.
How the new mortgage rules could effect Ottawans
If you have a conventional mortgage and were tight on your lending ratios when you got it, you could have no choice but to accept your current lender’s terms when it’s time to renew. That’s because the stress test will apply if you try to switch lenders – a potential problem if your financial circumstances remain tight or have gotten worse.
As well, in the past refinancing was always a great option to consolidate unsecured debts or finance home improvements before getting ready to sell a home. This is now a little trickier. For example, you will now have to qualify at the higher interest rates, and the maximum you can borrow will be 80 per cent of the appraised value of the home minus the current mortgage. That means your maximum loan might be considerably less than 80 per cent of your home’s appraised value.
However, it’s important to remember that some mortgage agents have access to a few credit unions that are not governed by the OSFI and therefore can still qualify borrowers without the stress test.
What are your options if your debt-to-service ratio is too tight?
- Increasing your down payment to reduce the debt you need to service.
- Having a co-signor, who you might be able to remove when your salary increases.
- Increasing the amortization to 30 years would lower the monthly payments and could get you a little more purchasing power for that home you’ve fallen in love with.
- Applying for a two-year rather than a five-year mortgage would mean slightly smaller payments because the two-year rate is less than the five-year rate.
- Using a credit union that can still qualify conventional mortgages without the stress test.
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