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Written by Jeff Mark
OSFI has been talking about implementing this mortgage stress test for some time now, but just days ago it became official. In the fall of 2016, insured mortgages (less than 20% down payment/equity) were hit with this stress test, which sidelined many buyers. Now, the conventional market (greater than 20%) is under fire and, in our humble opinion, the impact will be material. 2018 will be an interesting year for the real estate and mortgage market.
In simple terms, banks will have to qualify mortgage borrowers at the greater of the Bank of Canada posted rate or contract rate + 2%, which curbs buying power by approximately 15-20% for buyers with at least a 20% down payment (this is referred to as an uninsured mortgage). OSFI wants to ensure that Canadians can absorb higher payments caused by rising interest rates. Prior to this change, borrowers were able to qualify for a larger mortgage buy opting for the 5 yr fixed rate rate, which is substantially lower than the posted rate. All other terms (i.e., 1-4 yr fixed and variable), however, were qualified at the posted rate.
Upwards of 15% of the market will be impacted by this change and you’ll need at least a 20% income increase to offset this change! First, buyers will qualify for less. Next, people who want to re-finance to consolidate debt, invest, etc., will have a harder time. Also, people looking to renew their mortgages and shop for an attractive rate will be limited. Lenders will love this because it will automatically increase their retention and will reduce the need to be as competitive on rate. Moreover, private lenders will have a heyday. They’ll be able to pick up the slack, by lending to these AAA clients, but at a hefty price. Traditionally, private lenders tend to deal with less prime borrowers. Here’s the big one. What is going to happen to real estate prices? Well, time will tell, but we would be shocked if they didn’t drop. It won’t happen imminently, but rather will go something like this. December will be insanely busy with sellers prematurely listing their properties to cash out. Similarly, buyers will be stressed (no pun intended), to buy before they’re no longer able to; accordingly, demand will be pushed forward. The aftermath will carry over into the new year, at which point things will cool. Activity will slow down while the qualifying realities of the stress test settle in. Then the market psychology will kick in, and prices will inevitably drop. The only thing that will combat this is if banks are able to ease up in other aspects of traditional mortgage qualifying (i.e., higher ratios, longer amortization, more exception, etc); but, this is unlikely.
Well. If you’re hell bent on buying and your qualify ratios are already tight, then you’d better get after it. Similarly, if you’re looking to refinance or even get a HELOC (home equity line), then you’d better act quick. If you’re not part of the 15-20% of people who will be impacted by this rule, then you needn’t worry.
There’s a lot of ambiguity around dates at the present time. As it stands right now, any deal entered into prior to January 2018 will qualify under the existing rules. We’re still waiting to see if there are specific guidelines around contract dates, new builds, and so forth, as there were for the insured mortgage stress test. Next, the fine print that was overlooked by the public is that OSFI actually wants banks to implement these changes imminently and will monitor it up to the new year. We’re waiting to see what happens as this is yet another failed roll out in terms of details and communication.
Bottom line – this, in our humble opinion, is one of the most substantial changes in Canadian mortgages in recent time. A large group of people will be affected by this and it’s not going to be pretty.
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