This month, the Office of the Superintendent of Financial Institutions Canada (OSFI) put into effect a revised guideline that will affect both new home buyers and current homeowners as of January 1, 2018. In a nutshell, all borrowers, whether they put forward a down payment of under or over 20%, will have to withstand a financial ‘stress test’ to ensure they pay back their loan should interest rates increase. Previously, only insured buyers (those that made a down payment of less than 20% of the property’s purchase price) were subject to a stress test.
So, what does this mean for you? It means that there are some things to think about when it comes to your mortgage, but no reason to stress – no pun intended. The best thing you can do is talk to your mortgage advisor or Realtor and get informed. Let’s dive into the facts about the new mortgage stress test rule to get a better idea about its impact.
1. This test helps banks ensure that the mortgage can be paid back at a higher interest rate
With the new rule, home buyers will be stress tested at either the five-year average posted rate (4.89%) or two percent higher than their current mortgage rate, depending on which rate is higher. This is to ensure that borrowers can handle a potential rise in interest rates, based on their current household income. You will still have the ability to shop around for the best mortgage rate based on your financial situation and continue to take advantage of low posted rates.
2. New stress test rules won’t apply to mortgage renewals if you stay with your existing lender
This stress test will not impact mortgages approved prior to October 17, 2017. But, should you renew your mortgage with a different lender, you’ll fall under the new OSFI guidelines. Check with your broker, mortgage agent or financial institution to find out if the OSFI stress test will be applied to your mortgage.
3. Both insured and uninsured first-time home buyers will have to pass the stress test in order to qualify for a mortgage
All first time home buyers will now have to pass a stress test, as of January 1, 2018. An insured borrower is defined as someone who puts a downpayment of less than 20% of the purchase price, and who pays an additional premium of mortgage insurance. An uninsured borrower is someone who puts down more than a 20% downpayment. Until December 31, 2017, buyers putting down more than 20% may not be put to a stress test when seeking pre-approval with a bank. Check with your bank, as some may start to implement the OSFI rules at an earlier date.
There is still time to take advantage of the potentially higher pre-approval amount you may qualify for before the new stress test rules officially kick in. I’m here to answer your questions and help you navigate making one of the biggest purchases of your life. Don’t worry, I’ll be with you every step of the way. Contact me today with any questions you may have about the new OSFI mortgage rules.