Mortgage rules tightening up again

Mortgage rules are changing again and it’s going to affect the entire real estate market, says a local broker.

The Office of the Superintendent of Financial Institutions (OSFI) announced last week a new set of mortgage rules to be effective Jan. 1. The rules include setting a new stress test for uninsured mortgages, requiring lenders to enhance loan-to-value measurements and limits to respond to risk, and placing restrictions on lending arrangements that could circumvent the loan-to-value limits.

Colby Sawatzky, mortgage and finance manager with TMG The Mortgage and Financial Avenue, said the new rules around stress tests will affect conventional mortgages and borrowers will have to qualify at higher rates.

“Let’s say you go to the bank and the rate they’re going to give you on a five-year-fixed is 3.5 per cent, then you have to qualify on that mortgage at 5.5 per cent,” said Sawatzky. “It’s always a two per cent increase on conventional mortgages.”

High-ratio mortgages, with less than 20 per cent down, don’t have to qualify at as high a rate as new conventional mortgages, he said. They are based off the benchmark rate in Canada, which is currently 4.89 per cent.

He said it will be more difficult for clients to qualify for mortgages as interest rates continue to climb and the purchasing power for buyers could drop significantly.

At present, if a family with an annual household income of $100,000 and property taxes estimated at $3,000, paying $100 per month for heating and debt payments for vehicles or credit cards of $600 per month, applied for a mortgage at 3.49 per cent with an amortization period of 30 years and 20 per cent down, they could qualify now for a mortgage of $518,000, he said.

Under the new rules, adding two per cent to the rate for the new stress test limit, the same family would only qualify for a mortgage of $411,000 at 5.49 per cent, he said.

It’s a difference of about $100,000.

“It’s going to affect the value of higher-end homes drastically, because people aren’t going to be able to afford those homes anymore,” said Sawatzky. “So if you own a home in the $700,000 to $800,000 mark, it’s going to drop the value of your home because you’re not going to be able to sell it.”

He said the new mortgage rules are extremely overboard.

Having a stress test requirement on insured mortgages made sense, he said, because the government was protecting the insurer, Canadian Mortgage and Housing Corporation, a federally-regulated company.

However, the government didn’t have its hands on uninsured mortgages at high ratios, like 30-year amortization and 20 per cent down, he said. Banks and mono-line lenders have traditionally absorbed the risk of these mortgages, going through foreclosure procedures when necessary.

“There have been some statements come out where consumer debt is at an all-time high, and it is,” said Sawatzky. “I’ve seen consumer debt at an all-time high when clients come in for approvals, so it is a risk.”

It may also have to do with concern over a housing crash, he said.

In cities like Toronto and Vancouver, prices have risen 20 to 30 per cent, he said.

“But that shouldn’t really be a mortgage problem, it’s more of a supply issue,” said Sawatzky.