According to a new report from mortgage comparison site Ratehub, a proposal by Canada’s banking regulator to expand “stress tests” for mortgage borrowers will reduce how much house Canadians can afford by 21%, says a new Canada’s federal banking regulator, OSFI. The regulator has proposed a “stress test” for borrowers of uninsured mortgages, where the borrower puts 20% or more down. That follows a new rule introduced last fall which requires borrowers who put less than 20% down to pass a similar stress test.
About 46% of mortgages outstanding in Canada are uninsured, with a 20% or more down payment. I’ve calculated that household with an annual income of $100,000 and a fixed-rate 25-year mortgage at 2.84% can afford a house worth up to approximately $725,000 currently.
Under current banking rules, only insured mortgages, variable rates and fixed mortgages less than five years must be qualified at a higher rate. That rate, of course, is the Bank of Canada’s posted rate (currently 4.84%, higher than typical contract rates).
Under the new rules, the same household would be able to afford only approximately $573,000, a reduction of more than $150,000. The change is predicted to take effect this month (date not yet available).
In my opinion, this is great news for first-time buyers in Vancouver. When buyers can qualify for less mortgage financing, it puts significant downward pressure on home prices. Price reductions may be significant (10 – 20%) under the new rules. Properties worth more than $1 million will be most affected by this change.
The other proposed changes include:
- Requiring that loan-to-value measurements remain dynamic and adjust for local conditions when used to qualify borrowers.
- Prohibiting bundled mortgages that are meant to circumvent regulatory requirements. The practice of bundling a second mortgage with a regulated lender’s first mortgage is often used to get around the 80%+ loan-to-value limit on uninsured mortgages.
These two proposed changes are minor, and would only affect less than 1% of all mortgages in Canada. Both changes are also predicted to be finalized this month.
