Mortgage changes: New mortgage qualifications mean new homeowners can afford less house

Federal institutions increase minimum qualifying rates

By Emily Jaycox, Pipestone Flyer Contributor

First-time home buyers in Canada will find it harder to buy a house in the new year as changes to mortgage qualifications come into effect January 1, 2018.

The Office of the Superintendent of Financial Institutions (OSFI) announced the changes in October.

All federally regulated financial institutions will be required to increase their minimum qualifying rate for uninsured mortgages to be greater than the Bank of Canada’s five-year benchmark rate.

The benchmark rate is currently close to five per cent.

“Basically they call it a stress test,” said Mark Moran, branch manager of Encompass Credit Union Wetaskiwin.

Last year, the OSFI changed the rules and said banks have to do a stress test for mortgages with less than 20 per cent down, and as of January, they have to do it for mortgages with more than 20 per cent down as well, according to Moran.

Basically, all new mortgages will have to pass a stress test, no matter how much is given as a down-payment, unless the borrower uses a financial institution that is not federally regulated, such as a credit union, which are provincially regulated.

These changes mean borrowers will be approved for lower mortgage amounts, but it also means they will avoid payment shock in the future.

Most financial institutions allow 40 per cent of one’s income for total debt when calculating the total mortgage amount someone can be approved for, said Moran.

For a person with a 200,000 annual income, 40 per cent leaves plenty of flexibility in the budget, but for someone with a $70,000 income, 40 per cent doesn’t leave a lot, he said.

“It’s all relative to the individual.”

Twenty years ago, mortgage rates were typically 12 or 13 per cent, he said, adding rates only dropped in 2008.

“We’ve never had interest rates for so low for so long,” said Moran.

Right now, the prime rate is between two and 2.25 per cent.

“We have a whole generation of people qualifying at that rate.”

Interest rates have been climbing, however, rising almost a full-half point in the last year, according to Moran.

If that trend continues, current homeowners will likely see a significant hike in their monthly mortgage payment when they renew in years to come.

For example, a payment on a $300,000 mortgage that raises by just one per cent, would be $250 more each month.

“And that’s where it’s affecting Canadians,” he said.

“If they’re lucky their income will have increased with the cost of living [or they] will have to adjust their spending.”

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