The Office of the Superintendent of Financial Institutions (OSFI), Canada's top banking regulator, introduced new rules on mortgage lending this month, which will take effect January 1, 2018. The rules include a minimum qualifying rate, or what is called a "stress test" for uninsured mortgages. The test is a way to ensure that the loans can withstand higher interest rates and that the borrower will be able to pay the loan should the interest rates increase.
These rules will now apply to uninsured mortgages, whereas in the past the stress test was only used on uninsured mortgages. Borrowers are required to obtain mortgage insurance when they have paid a down payment of under 20% of the value of their home price. An uninsured mortgage refers to a loan with a down payment of 20% or higher of the value of the home price and an insured mortgage refers to mortgages with a down payment of 5-19.99%.
The rule was introduced as a measure to protect Canadians from risks. The idea is that this will decrease the risks for borrowers with high levels of indebtedness if interest rates rise.
The lender will simulate a borrower's financial situation and look at whether a borrower would be able to pay back the loan based on whichever is higher of:
- The five year average posted rate, which currently is 89 percent; or
- Two percent higher than the actual rate.
Potential Effects
It is predicted that this may cause people to reduce their budget when looking for a house or may drive people out of the market all together. This could put a chill on the housing market and may cause housing prices to drop.
In turn, this could also affect the rental market. The trend towards renting has increased over the past few decades and this could cause it to continue to increase.
Over the past few decades there has been a shift from owning to renting. In the recent Toronto Census Metropolitan Area, the results indicated that only 39% of young adults, namely people aged 20-34, owned their home. This is a drop from young adults living in Toronto about 35 years ago. The Census indicated that today, 50.2% of 30 year olds owned their homes, compared to 55% of 30 year olds in 1981. We may continue to see this rental trend rise in light of the new mortgage rules.
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