Another Mortgage rule change is to take effect 1 June 2021. Here’s what you need to know …
- What is a “stress test”?
- What are current Mortgage qualifying rules?
- What is the new Mortgage rule change?
- What segment(s) of home buyers does this affect?
- When does this new rule take effect?
- How does this rule change affect affordability?
- Chad’s thoughts and what might be next?
Finger pointing started a couple weeks ago. As Real Estate data from across started pouring in, Mortgage credit growth was growing at a pace not seen in years.
Commercial banks were calling for something to be done. The federal government officials were “closely monitoring” the Real Estate market. The Bank of Canada stuck to their guns saying they only focus on inflation and employment targeting. Fingers were pointing around for something to be done, but nobody wanted to be responsible for making the change …then there is the whipping boy OSFI. What?? Exactly.
Office of the Superintendent of Financial Institutions (OSFI). OSFI is like the elder businessman at the board room table who does not care about hurting anyones feelings, or being politically correct. OSFI is on the doorstep of retirement and is going to say things the way they are. OSFI implemented the latest Mortgage rules change. 8 April 2021 press release link.
What Is The Stress Test?
In general, the Mortgage stress test is simply qualifying for a Mortgage at a higher rate than the actual Mortgage rate.
October 2016 was version one of the stress test. All insured Mortgages (less than 20% down payment) were subject to this new Mortgage qualifying formula.
January 2018 was version two of the stress test. All Mortgages, regardless of down payment percentage, were subject to higher qualifying rates.
These rules, along with other market factors, reduced credit growth in Canada. See image below.
What Are Current Mortgage Qualifying Rules?
Mortgage applicants need to qualify for their Mortgage at the greater of:
- Mortgage qualifying rate (MQR). OR,
- Mortgage contract rate PLUS 2.0%
The Mortgage qualifying rate (MQR) is the median 5-year bank posted rate in Canada. Each of the large commercial banks in Canada (RBC, TD etc) post a 5 year fixed Mortgage rate. The MQR, set by the Bank of Canada, moves with fluctuations of the major commercial bank 5 year posted rate. I’m not here to debate the validity of this right now.
Today, the MQR is 4.79%.
The Mortgage contract rate plus 2.0% simply means, taking the Mortgage contract rate (ex. 2.09%) and adding 2.0%. In this case the stress test interest rate would be 4.09%.
The current Mortgage qualifying rules state the stress test interest rate is the GREATER of the MQR or contract rate plus 2.0%.
What Are The New Mortgage Rules?
(Please read above if you skipped down to here)
Now there is a “floor” to the Mortgage qualifying rate (MQR) for down payments at 20% or more (uninsurable Mortgages). The new Mortgage qualifying rules are qualifying for a Mortgage at the greater of:
- Mortgage qualifying rate floor of 5.25%. OR,
- Mortgage contract rate plus 2.0%
What Segments Of The Housing Market Are Affected?
Note: this new Mortgage qualifying rubric only applies to Mortgage qualifying for uninsurable Mortgages. Uninsurable Mortgage applications are:
- Refinance. Change in amortization and or Mortgage amount up to a maximum Mortgage of 80% of the value of the home.
- Home purchases over $1M. The minimum down payment on this purchase price amount cannot be less than 20%.
- Rental property purchases. Down payments on rental properties cannot be less than 20% down payment and are uninsurable.
- Alternative Mortgage lenders. Non-traditional lenders are uninsurable Mortgages with minimum down payments of 20%.
Mortgage qualifying, with down payments less than 20% down payment, remain unchanged.
When Does This New Rule Take Effect?
1 June 2021.
If you have a Mortgage application submitted BEFORE this deadline, the current MQR rubric will apply.
If you purchased a new build, and have an approved application, your qualifying will remain the same (all else being equal).
If you have a rate hold, and follow through with that rate hold, your qualifying will remain the same.
How Does This Rule Change Affect Affordability?
This will reduce maximum affordability by about 4.5% for uninsurable Mortgages. A higher qualifying rate reduces the maximum qualifying ratios. All else being equal, the Mortgage amount needs to decrease to qualify.
Chad’s Thoughts:
When reading this, be sure to understand what is my opinion vs fact.
Of all the rumors I heard about potential changes to the Real Estate market, to slow rapid national price appreciation and Mortgage growth (during a pandemic with underlying economic weaknesses), I like this change. Here’s why …
- I think this rule change primarily targets hotter segments of Canada’s housing market. I’m hearing more and more speculation is driving up markets in Canada. I think this would be investors purchasing rental properties and or second homes. Qualifying for this is now slightly more difficult.
- Other housing markets in Canada have more sales over the $1M price point. This seems to be less so in Calgary. Does this affect Calgary’s market, yes. Might this have more of an affect in different parts of the country? I think so.
- This was a lever policy makers can pull that was already in existence. For the most part, I think the roll out and understanding of this rule change will be rather smooth. I think other ideas to cool the housing market in Canada would have been complex to understand (I.E., taxing capital gains, changing rental property tax rubrics, restricting ownership and sales timelines etc.).
If history is any indicator of the future, this will likely cause an even further rush to housing in the short term. Near term, this segment of the market will likely see the intended slowing of credit growth.
OSFI has indicated they are making annual announcements, every December, to evaluate market conditions and update Mortgage rule criteria. Additional levers can be pulled, quite easily, to continue to push back on credit growth. One simple measure would be to apply the lower maximum qualifying ratios, that CMHC is currently underwriting files on, to the other two Mortgage default insurance lenders. I think this would have a larger effect on first time home buyers which would face serious scrutiny.
What are your thoughts? Leave me a comment below.
Talk soon,
Chad Moore
