November 17, 2017
Mortgage Matters: Borrowing rules tighten up
By Kevin Lutz
If you are planning to purchase a home in the near future, be mindful of this pending change that could affect how much you can borrow. The latest change in mortgage lending guidelines affects homebuyers who have 20 per cent or more down payment. If you have less than 20 per cent down, there is no change to the amount of the mortgage that you qualify for.
Starting on Jan. 1, 2018, residential mortgage borrowers with a down payment of more than 20 per cent will need to qualify at a significantly higher rate when they do business with a federally regulated mortgage lender. To be clear, you still receive a regular discounted mortgage rate, but you must qualify based on a higher rate. This was officially announced by the Office of the Superintendent of Financial Institution (OSFI) as part of final revisions to so-called Guideline B-20 on residential mortgage underwriting and procedures. The view of OSFI is that such a move was necessary to further safeguard Canadian households and the financial system against future interest rate increases.
Under the revised guideline, federally regulated financial institutions (FRFIs) must set the qualifying rate for non-insured mortgages (including home buyers who have 20 per cent or more down payment) at the greater of the contractual mortgage rate plus two percentage points, or the five-year benchmark rate published by the Bank of Canada. This brings the qualifying rules for FRFI non-insured mortgages more closely in line with those for insured mortgages, which were tightened a year ago for home buyers with less than 20 per cent down.
The higher qualifying rate clearly represents a very stringent “stress test.” For example, to be able to buy the same average home in Canada (slightly over $500,000) after Jan.1, a buyer will be required to have a minimum income that is $16,000 or 18 per cent higher than is currently needed based on the increase from the current five-year rate (3.49 per cent) to a rate that’s two percentage points higher. This will be an impossible rise for some home buyers, who will need to either come up with a larger down payment, choose a lower priced home, or look to a different part of the city with lower prices.
It is important to be fully approved by your financial institution with a formal pre-approval letter issued to you before Jan. 1, 2018. Once you find a home, the credit assessment will be based on the original qualifying rate in effect before changes on Jan. 1, 2018.
Second, the new rule does not require financial institutions to re-qualify borrowers at the end of their term if they renew their mortgage at the same institution.
RBC Economics expects that, following a brief run-up in activity fueled by buyers rushing to lock-in existing qualifying criteria, the change will have a dampening impact on the housing market shortly after it comes into effect in January.
Kevin Lutz is RBC Regional Sales Manager,