A more stringent lending requirement for Canada’s chartered banks
now means better-heeled home buyers will have to clear the same
qualifying hurdle put in place for high-ratio mortgages just over a year
As of Jan. 1, even those who can afford a 20-per-cent down payment
— the minimum required to avoid paying a premium for mortgage insurance
— must show they have some budget wiggle room should interest rates rise.
The latest “stress test” placed on home buyers is their ability to
afford the greater of two percentage points above the contractual
mortgage rate or the five-year benchmark rate published by the Bank of
That rate currently sits at 4.99 percent.
“The (rule was) already in place in October 2016 for high-ratio deals —
meaning 5, 10 percent — where you had to qualify at a 4.99 percent
interest rate,” explained Judy Ivers, a mortgage expert with Dominion
Lending Centres White House Mortgages.
“Will it impact Osoyoos? It’s going to impact home buyers all across Canada.
A reduction of 20 percent-plus in maximum borrowing power for those with
20 percent or greater down payment — a big reduction for the group with a bigger down payments. It’s going to affect everybody.”
The rule change — announced in October by the federal Office of the
Superintendent of Financial Institutions Canada (OSFI) — will mean all
prospective home buyers seeking mortgages from chartered banks will now have to find up to an extra 20 percent in their monthly budget in order to qualify for an uninsured mortgage.
On a $400,000 purchase, for example, with an $80,000 down-payment, an
interest rate of 2.99 percent and a 20-year amortization period,
prospective buyers will have to show they can afford to pay an
additional $302 per month above the $1,799 they would be required to pay
at the lower contracted rate.
One financial expect described the impact of the new rules as a
“purchasing power haircut.”
Even with more than 16 years as a banker and mortgage specialist in the
South Okanagan, Ms. Ivers said she’s unsure how that might impact the
Osoyoos housing market.
“It’s a retirement community,” she said. “And there are people who live
here and they work elsewhere. It’s certainly going to impact them on
their borrowing power.”
Compounding home-purchasing difficulties for many buyers, she added, are
increasing housing costs in the community.
“Is anybody going to be able to buy a house?” she mused, expressing her
concern especially for younger families looking to break into the market.
“In Osoyoos, the prices have skyrocketed in the last year to year and a
half. I just don’t know — unless they have parents to co-sign — how
they’re supposed to pay these prices.”
She expects many of the homes selling after the rule change to be “cash
sales” involving retirees who “have sold the family farm and are moving
The rule change won’t impact the community’s two credit unions, said Greg Sol, general manager of the Osoyoos Credit Union.
“That only effects the chartered banks,” he said. “It does not affect us. We are provincially regulated.
“FICOM (the provincial regulator) may change some rules, but at this point, there’s nothing.”
Although it won’t impact his clients, Mr. Sol did point out how it might impact clients of the major banks looking to move a mortgage to another chartered institution.
“Imagine if you have your mortgage at Royal Bank and suddenly you want to go and do something different — you want to move your mortgage to Bank of Montreal — well, guess what, you’re going to have to qualify under the new regulation.
“What does that do to your negotiating power in terms of interest rates and other features?”
About 70 per cent of mortgages in Canada are uninsured, meaning a
minimum 20 percent down-payment is required to forego the mortgage
OSFI explains the rule change as part of the regulator’s job to “prepare
federally regulated financial institutions to navigate a number of
severe but plausible scenarios, while continuing to provide financial
services to Canadians and maintaining the confidence of the public.”
An option, for the OSFI to consider, Ms. Ivers said, would be to bring back the 35- or 40-year amortization. Presently high ratio mortgages are capped at 25 years.
“This would justify the “stress test” qualifying rate and any interest rate increase, providing the home buyer with increased borrowing power and affordability,” said Ms. Ivers.
“What they are preparing people for — and maybe it should have been done a long time ago — is if interest rates rise are we protecting the public.”