On October 17, the Office of the Superintendent of Financial Institutions (OFSI), Canada’s top banking regulator, released new mortgage industry guidelines with far-reaching implications for prospective homebuyers, real estate lawyers, and the Canadian housing industry.
Under the new rules, mortgage providers will be required to “stress test” all borrowers of uninsured loans, an expansion of a 2016 policy that applied only to insured mortgage applications or buyers who made a down payment of less than 20% towards the purchase of their property. The regulations are intended to cool red-hot housing markets in Toronto and Vancouver, and protect both banks and consumers from the pitfalls of over-expensive mortgages.
Insured vs. uninsured mortgages
Individuals who apply for a mortgage with a down payment of less than 20% of the total price of their home are required by law to buy mortgage insurance, for which they pay a premium ranging from 0.6 to 4.5 per cent, depending on the size of the down payment and the price of the property, according to the CBC.
By way of an example, if a person makes a $50,000.00 down payment on a $500,000.00 home (or the equivalent of a 10% down payment), a 3.1% premium would result in a $13,950.00 charge on the $450,000.00 remaining mortgage.
Mortgage insurance is a fact of life for most first-time homebuyers, especially in Canada’s more expensive real estate markets. However, if a homebuyer is able to put down 20%, they can purchase an uninsured mortgage.
Stress testing
Individuals who purchase insured mortgages have been required to undergo stress tests since last year. According to the CBC, the test ‘consists of ensuring the borrower would be able to pay the loan if interest rates become higher than they are today … The stress test is designed to simulate a borrower’s financial situation by assuming they would have to pay back the loan at the posted average – not whatever deal they were able to negotiate.’
As of January 2018, all new homebuyers – even those with a down payment of more than 20% – will have to undergo stress tests in order to purchase a mortgage. Contact a team of real estate lawyers if you have further questions about insured mortgages, uninsured mortgages, or stress testing.
Consequences
As expected, the 2016 regulations helped stabilize housing markets in Toronto and Vancouver. TD Bank economist Brian DePratto opined to the CBC that “on balance, these changes should help enhance the resilience of the Canadian banking system in a rising interest rate environment.”
However, DrPratto also noted that he expects a 5 to 10% decline in housing demands, once the new changes take effect. This decline would be welcomed by red-hot real estate markets in cities like Toronto and Vancouver to assist in curbing down the competition, but it could also negatively impact others like Calgary, where the housing market is still recovering, and Halifax, where the market is comfortably robust.
Writing for Canadian Lawyer, columnist Marg Bruineman noted that more stringent mortgage rules may force homebuyers away from traditional lenders and towards under-regulated alternatives, a trend that worries real estate lawyers because private lenders are not subject to federal banking regulations.
Bruineman explains: “The concern is that the risks the new guidelines are designed to reduce are now being transferred to the shadow banking market – a vast network of non-bank lenders from credit unions to private investors that are not subject to the same tough regulations as the banks.”
If you are considering purchasing a new home and have concerns about mortgage applications, stress tests, or any other aspect of the process, feel free to contact the real estate lawyers at Nanda & Associates to learn how we can help. Our team has years of experience helping clients navigate the Ontario real estate market.
