The MortgageGirl has answers!
Once again, the Office of the Superintendent of Financial Institutions (OSFI) recently introduced new rules on mortgage lending to take effect January 1,2018.
OSFI is setting a new minimum qualifying rate, or stress test, for uninsured mortgages (mortgages with down payments of 20% or greater than their home price).
There has been a stress test already in place for high ratio insured mortgages (mortgages with less than 20% down payments) since October 2016
What is a stress test?
When getting a new mortgage, regardless of rate or term a borrower takes, they have to pass a stress test which tries to predict whether a homeowner can keep up with mortgage payments at their current income levels, if interest rates were to rise.
What are the differences between now and after Jan 1, 2018?
This new rule change which will now require a stress test for uninsured mortgages with more than a 20% down payment or 20% in existing equity. A borrower will be qualified at the GREATER of their contract rate + 2% or the five- year benchmark rate published by the Bank of Canada, which is currently 4.99%.
Here is an example, per $100,000 mortgage. Based on an interest rate of 3.29% with a 25yr amortization.
Mortgage Payment – $488.25 (3.29% with 25yr am)
Benchmark Rate Payment – $581.04 (4.99% with 25yr am)
Stress Test Payment – $598.22 (5.29% with a 25yr am)
One piece of good news that may come from this new rule change is perhaps the Bank of Canada may take a bit of a pause with any rate increases
What happens when my current mortgage comes up for renewal
If you stay with your current lender at your renewal date, you DON’T have to pass the stress test. However, if you change lenders at mortgage renewal time, you may have to pass the stress test but it hasn’t been announced yet if this will be the case for those switching mortgage lenders.
If this is the case, it seems like OSFI wants a good number of borrowers to be held captive by their existing lender as they will effectively make it harder for a borrower to get the best deal at renewal. This will give a lender less incentive to offer their best renewal mortgage rate if they know some will have trouble leaving them due to having to requalify under the new, tougher stress test.
What if I can’t pass the stress test?
If you aren’t prepared to settle on a less expensive home or not buy at all right now, you may want to put more money down or add a strong co-signer.
Another more expensive option is to consider non-prime lenders. These alternative lenders will charge somewhat higher rates and perhaps up-front fees so the strategy would be to eventually get the borrower back with a prime lender once income increases or there is a pay down to the mortgage loan and/or consumer debts.
With this latest change I believe more clients will choose to proceed with financing this way as there will likely be a new “normal” where client’s expectations will have to change on what financing looks like for them. Important for some clients to be aware why some of the lower rates just aren’t accessible to them.
Will it be easier if I put less than 20% down?
Even if you have a 20 percent down payment, it may make more sense to make a 19 percent down payment. Here are four reasons why you may consider this option:
- You’re subject to a less strict mortgage stress test (you’re only stress tested against the Bank of Canada’s five-year benchmark rate, but not your contract mortgage rate plus two percent).
- Meeting the debt servicing requirement for insured high ratio mortgages can be easier with some lenders then for a low ratio or conventional mortgage
- Although you’ll have to pay mortgage default insurance, you’re more likely to get a lower mortgage rate than you would for a conventional mortgage. This is because conventional mortgages are considered to be riskier to the lender as they are not backed by the insurance company in case of default.
- There’s a spread of about 0.45 percent on high ratio (less than 20 percent down) versus conventional (20 percent or more down) five-year fixed rate mortgages.
Whatever you decide to do, make sure you understand what you qualify for using the new regulatory rules and get a pre-approved mortgage before you start house-hunting. You don’t want any surprises after you have already found a home.
The mortgage financing world has become much more uncertain and complex and now more than ever, seek the advice of an experienced mortgage professional to find the right rate with the right terms that suit your individual situation.
The industry is still interpreting these new guidelines and although we do have some insight into how these issues will be addressed, only time can tell how some of these will actually play out.
Make sure to contact the MortgageGirl.ca and put her 35 plus years of experience to work for you. Former banker turned #MortgageBroker. Contact her today! Phone: 780-686-5734 Email: firstname.lastname@example.org. Follow her on Facebook (MortgageGirl.ca), Twitter (MortgageGirlca), Blog (mortgagegirls.wordpress.com).