As we approach the end of 2017, it’s a perfect time to look ahead at some of the regulations that will impact the Vancouver market in the next year. Effective January 1, 2018 new mortgage qualification rules will be in effect. What does this mean for aspiring buyers?
The Office of the Superintendent of Financial Institutions (OSFI) made this announcement earlier in the fall. The new rules require the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada (currently at 4.99%) or the contract mortgage rate plus an additional 2%. Discounted rates below 4.99% are possible, but 4.99% is the default before discounts are given.
To give an example, this means if the agreed-upon contract rate is 3.34% (the interest rate that your mortgage payments are based on) then you would qualify at the greater rate, which would be 5.34% or 4.99%. The most noticeable difference for will be in the initial amount you are able to borrow. Monthly payments are still based on the contract rate.
Who should rethink their purchasing strategy? The new mortgage rules apply to all new borrowers who are purchasing a property and paying in excess of 20% as a down payment. These mortgages are uninsured. The rules will also apply to homeowners with more than 20% equity in their home who want to refinance their current mortgage.
You might not be affected by this change. If you are renewing an existing mortgage, or purchasing a home with less than a 20% down payment on an insured mortgage, these new rules will not mean anything to you. Home buyers with less than a 20% down payment on an insured mortgage already have to qualify under this new stress test, so they are aware of the requirements.
In the meantime, it is advantageous for people hoping to qualify for a purchase or refinancing to get a final approval. The lower rate is still being used when determining the quantity applicants may borrow. After December 31, 2017, the posted rates will be used, and borrowers will receive less. Take advantage of the grace period before the stricter rules are in place. Getting pre-approved now will likely not help you avoid the new rules, as this is not a final approval, and your final approval will require you to meet the revised stress test.
If you have any questions about the stress test rules, don’t hesitate to reach out, and I can explain how these updated requirements may affect your buying power. I hope everyone has a great holiday season and recharges for the year ahead – I’m very excited about the market in 2018!
Picture Source: REW