In October 2017, the Office of the Superintendent of Financial Institutions Canada (OSFI) released new rules and regulations regarding the Residential Mortgage Underwriting Practices and Procedures. Changes were specifically made to the minimum qualifying rate for a mortgage also known as a mortgage “stress test”. These changes were effective as of January 1, 2018.
A mortgage stress test’s purpose is to ensure that no matter what, a homebuyer will still be able to pay their mortgage. It looks at what the homebuyer’s current debt to income ratio is and if the homebuyer could still afford to pay their mortgage if the rates rise.
The new rules require homebuyers who are getting a high ratio mortgage (paying less than a 20% down payment) OR ( under the new stress test rules) an uninsured mortgage (a down payment of 20% or more) to qualify for the Bank of Canada’s five-year benchmark rate , which is approximately 5% OR to qualify for the contracted rate plus two percent. They must qualify for whichever rate is higher. Even if homebuyers will only be paying a rate of 2-3%, they must be able to pay their mortgage as if the rate was 5%. These new rules apply to all federally-regulated lenders, including all major banks.
So what does this news mean for first- time homebuyers?
The majority of people affected by the new rules will be first time home buyers. According to Mortgage Professionals Canada, the new rules mean that the amount of a mortgage that homebuyers can afford will lessen by 20%. For first time homebuyers this will mean they may have to lower their budget, make a larger down payment to pass the test, or wait longer before buying a home in order to save more.
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