On January 1, 2018, the federal government will implement a “stress test” that will require homebuyers to qualify for a mortgage at the greater of the Bank of Canada’s conventional five-year fixed mortgage rate (which is currently 4.99 percent, up 0.35 percent from this time last year) or 200 basis points above the homebuyer’s contract mortgage rate with their individual lender. The regulation’s stunning impact is best captured through an example, courtesy of ratehub.ca. Prior to the new rule, a family with an annual income of $100,000 and a down payment of 20 percent could purchase a home up to $706,692 at a five-year fixed mortgage rate of 3.09% amortized over 25 years. Under the new rule, that same family can only purchase a home up to $599,896 (a decrease of 20.77 percent), as they would need to qualify at a rate of 5.09 percent (200 basis points above the contract rate with their lender). This regulation will have extensive, tangible effects on many individuals, most especially first-time homebuyers, homeowners seeking to reduce their debt loads or withdraw equity through a refinance, and homeowners hoping to switch lenders. The objective of this new rule is to protect homebuyers from default in the event that interest rates rise. What it means in practical terms, however, is that many homebuyers may be forced out of the market.
Some industry experts predict that the goal of protecting homebuyers will be foisted by unregulated private lending and non-prime lenders, which can offer more flexibility and buying power but at much greater cost and risk to clients. Another downside is that many homeowners whose mortgages are eligible for renewal will be forced to stay with their current lenders. While individuals who renew their mortgages with their current lenders at the end of their terms are not subject to requalifying under the new rules, those individuals would be subject to the new rules if they switch to new lenders, as underwriting would be required. What this means is that a homeowner who could not qualify for their current mortgage amount under the new rules will be subject to the whim of their lender when it comes to rate hikes, as their only other options are with unregulated lenders. Others point out that “the bank of Mom and Dad” will suffer, as young or first-time homebuyers will need co-signers to increase their buying power. Only time will tell whether these measures are successful in protecting homebuyers or whether they simply give lenders the ability to exploit existing customers at renewal time.
The good news is that there is still time to qualify under the old rules. Homebuyers who have a purchase and sale agreement signed prior to January 1 are subject to the old rules. Homeowners whose refinance is approved prior to January 1 are similarly subject to the old rules, so long as the refinance closes within 120 days of the application rate. My advice to anyone seeking to buy, anyone whose mortgage may be up for renewal soon, anyone seeking to reduce their debt load through a refinance, or anyone who may wish to withdraw equity from their homes while they still can – contact me as soon as possible so that I may direct you to the appropriate professionals who can help you determine whether you’re a candidate to be sheltered from the impact of these regulations.