On October 17, 2017, OFSI, Canada’s banking regulator, announced some important changes for how lenders qualify Buyers. Effective January 1st, 2018, all Buyers (irrespective of downpayment amount) will now have to qualify at the greater of the Bank of Canada’s five-year posted rate or 2% higher than the negotiated contract rate.

Why the change?

The Canadian government is worried about the housing market correcting, and they’re worried about interest rates rising. For the past few years, they’ve been taking steps to slow the market down (particularly in Toronto and in Vancouver), in the hopes of preventing a housing disaster. Making it harder to get a mortgage and ensuring people can afford their home if/when interest rates rise is intended to cool the market down.

So what exactly do the new changes mean?

It means that as of January 1, 2018, most Buyers will be able to afford less house than they can today. We asked Mortgage Jake to give us an example:

Example 1: a 1-year fixed mortgage today goes for about 2.94% from TD. Therefore adding 2% means I have to qualify this borrower at 4.94% under the new rules.
Example 2: a 5-year fixed today with Scotiabank is about 3.34%. Add 2%, now I have to qualify the 5-year borrower at +2%, so 5.34%.
So let’s take Bill. Bill works for an IT company doing network security. He makes $100,000 per year and has saved 20% down payment for his first ever condo purchase.
Today, Bill could borrow $640,000 using his income.
As of January 1, 2018, Bill can borrow $510,000.
It’s almost like a 2% rate hike – only you won’t have to pay the interest.
It’s important to note that many lenders (especially in Toronto) have already been using stricter criteria to qualify Buyers, so it’s possible that many Toronto Buyers won’t really be impacted. Your lender may have already stress-tested you when they approved you for that $1,000,000 purchase and you just didn’t know it, so you may still be able to afford $1,000,000. Check with your lender ASAP.

What else might the OFSI changes mean?

  • It’s possible that we’ll see Buyers move towards shorter-term mortgages with lower interest rates, in order to make qualifying easier.
  • We may see Buyers move to alternative and unregulated markets to borrow money.
  • We’ll probably see some market volatility in Atlantic Canada and the prairies (where markets are not over-heated and not in need of cooling).
  • We’ll also see people extending the length of their mortgage amortization so that their payments are lower, thus allowing them to qualify for more house.

So will prices go down?

That’s the eternal question, isn’t it? The goal of the stress test is to ensure the long-term viability of our real estate market – not to make it implode. But here’s the thing: the real estate market doesn’t run on logic – it runs on emotions too. It’s impossible to predict what Buyers and Sellers will do in response to the changes. Will a bunch of Sellers decide to sell and increase the supply? Will Buyers decide to wait and see (like they did with the changes announced in April) and reduce demand? Will Buyers rush to buy before January 1st and we’ll see prices increase in the short-term?

Our best advice: Don’t try to time the market. Do the right thing at the right time, for you. Think long-term.

Should I buy now?

For some people, the new qualifying changes may mean that they can no longer afford to buy, so they’ll need to either re-evaluate their needs and plans, or buy before the changes take place. Talk to your lender. If the changes mean the amount of money you can borrow will take you out the housing market (or out of the market for what you’re looking to buy), then you might want to consider buying before the new rules come into effect.

Shameless self-promotion: We can help! Our team of agents is ready to help make your home ownership dreams happen before the changes come into effect…we’ve cleared our schedules and we’re ready to go.

I already bought a house and am closing on it and taking possession January 5, 2018. Am I affected?

Firm agreements of purchase and sale (in other words, all conditions have been waived) dated before January 1, 2018, will not be subject to the new qualification rules (unless individual banks decide to implement the rules earlier, which is very possible).

I have a mortgage pre-approval that is valid until the end of February 2018. Will I be affected if I buy in January 2018?

Yes. A pre-approval is not a guarantee of a mortgage, so if you don’t have a firm Agreement of Purchase & Sale in place before January 1, 2018, you will need to qualify at the new levels. Talk to your lender ASAP.

What happens when it’s time to renew my mortgage?

Like in previous changes to mortgage qualification rules, if you renew your mortgage with the same lender who is holding your mortgage now, nothing changes. If you switch to a different lender, you’ll need to qualify under the new rules. This is a huge bonus for the banks – it’s hard to imagine them being competitive on renewal rates when they’re basically holding people hostage.

I want to refinance my existing mortgage. Will the new qualification rules change anything?

Yes, as of January 1st, 2018, lenders will have to qualify borrowers with the new rules for refinancing.

So now what? How do I de-stress about the stress-test?

We asked our favourite Mortgage Broker Mortgage Jake for his thoughts on how to deal with the mortgage qualification changes. Here’s what he had to say:

1. Maybe don’t buy a house to your absolute maximum borrowing limit? What a lot of the media hasn’t talked about is this: Yes, right now you CAN buy a property and borrow up to 7 times your income (and the new test will mean 5 times your income), but nobody has asked: SHOULD YOU? No. You should not. And frankly, from what I see, not many people do.

Look, I get it. Housing is very expensive in Toronto, from the cookie-cutter condos to the luxe market. It’s a damn expensive city and it should be! We have Google building a neighborhood, we are routinely top 5 IN THE WORLD on most economic lists, and we live in an absolutely amazing city period. It’s expensive. But it’s also BIG. And there are many options if you’re willing to stretch your boundaries, options where homes are still “affordable” in the GTA. So, go out there and think out of the box. Don’t go to the max, and you’re not stressing out.

2. Buy an income property. Just the other day a first-time buyer of mine who made a successful offer to buy a property with multiple income streams. He paid nearly $900,000 for a house with three units that are perfect to rent out. Although he qualifies for the maximum amount available under today’s guidelines (or, 7x income), he’s not using the whole amount because he’ll have 65% of his mortgage payment paid by his tenants AND he’ll get to live in the prime apartment in the house. So, when getting stressed-out, go find something with one or two income streams and that will greatly help you lessen your stress financially.

3. Get married. OK I’m joking here, sort of. As someone who has been married for 10 years (woooo!) I can tell you that having TWO incomes is a very amazing thing that’s less stressful. If you’re in the stage of your life where you’re thinking of settling down with someone, an extra income coming in will help you afford a lot more house, so consider it. (Note: I am NOT advocating marrying for money!) If you’re not in the mood to ever settle down with someone (that’s totally cool by the way), you can also consider buying  2-unit property WITH another buyer and “marry” your finances that way.

4. The Bank of Mom And Dad. Although we don’t love relying on other people to help us out, sometimes when getting stressed about your mortgage it’s the only option. Mom and Dad (or, Mom OR Dad, or, sister, or brother etc) can help us out greatly here by adding their incomes to the mix. Let’s say you’re no longer able to get into the place you can afford because of the new rule. Let’s say also that you make a solid business case about how you can afford it because you’re taking a 5-year fixed rate, and your payments won’t go up, and you’re in a solid rising-income job. Well, guess what? Mom and Dad probably are either retired, or, still working, and, have a nice income to help out. So let’s bring them in on the conversation and have them help via more income or more down payment! Voila!

Still have questions? Don’t be afraid to reach out!

Comments

  1. All of this is predicated on a very good credit rating; existing indebtedness (Canadian average is well over 100% of income), so have a frank discussion with your mortgage broker or lender before making any decisions. It’s a fact that most of us don’t know what we don’t know (after all we don’t do this every day), and so the best thing to do is to consult a professional in the field, including Real Estate.
    After all this is usually our largest commitment and investment.

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