January 1, 2018 will bring another change to mortgage rules that will apply to all federally regulated financial institutions. The changes are to reinforce the expectation that lenders will remain vigilant in their mortgage underwriting procedures. Currently all insured mortgages, those with less than 20 per cent loan to value (LTV) within the transaction, must be qualified at the Bank of Canada benchmark rate. The current rate is 4.89 per cent, so even if the actual contractual rate being offered is lower, you must still have sufficient income to support the higher rate. The logic behind the “qualifying” rate is to insure that Canadians will still have the wherewithal to continue making their mortgage payments in the event of future rate increases.
The new changes coming into effect will apply this “stress test” to all mortgages regardless of the LTV of the transaction. You will need to qualify at the Bank of Canada benchmark rate on all mortgages, or if an unsecured mortgage, the greater of the benchmark rate or the contractual mortgage rate plus two per cent.
The net effect of this change for the Canadian consumer is one of affordability. You simply can afford less house than you would previously, with the tightening of the stress test qualification.
The second change implemented by the Office of the Superintendent of Financial Institutions is to place restrictions on certain lending arrangements that are designed, or appear designed, to circumvent loan to value limits. Currently lenders may offer uninsured mortgages beyond the 20 per cent loan threshold by essentially offering an uninsured first mortgage at 80 per cent LTV and then perhaps bundling this with a five per cent second mortgage, to achieve an overall 85 per cent LTV. This would essentially bypass the insurance premiums and qualifying criteria attached to an insured mortgage.
This change is interesting in that it potentially restricts creative solutions to individual mortgage problems. Clients without 20 per cent down when purchasing a home or 20 per cent equity when refinancing their home are going to find less affordable alternative options, now offered by nontraditional institutional lenders. This will be problematic for those on the cusp of qualifying under the new rules. Our expectation is that private mortgage lenders will step up to fill the void.
As always, we recommend you speak to a qualified mortgage broker to guide you through the complex world of mortgage rules and lending criteria, in order for you to obtain your best mortgage terms and the best mortgage rates.
Bruce Smith is with Casb Management Group. Please find more information at https://casbmanagementgroup.com/.