The OSFI, or the Office of the Superintendent of Financial Institutions, an independent agency of the Government of Canada, has announced that as of last Thursday, April 8th, they shall be resuming their conversations about changing the qualifying rate for uninsured mortgages.
An uninsured mortgage, i.e having a down payment greater than 20%. When applying for a mortgage, you generally have to undergo a stress test. Which is a government required calculation which uses the Bank of Canada’s posted rate— the qualifying rate.
The current guidelines state that the qualifying rate should exceed the mortgage contractual rate plus 200 basis points or the Bank of Canada five-year benchmark rate. The benchmark rate acts as a minimum qualifying floor rate in a low interest rate environment. The current qualifying rate is 4.79%.
How does this affect the mortgage stress test?
The “Stress Test’ is a government required calculation which uses the Bank of Canada Posted Rate (currently 4.79%) when determining your maximum mortgage amount. Whether you’re applying for a conventional or a joint mortgage, you will be tested to determine whether or not you can continue to make your scheduled payments at a rate that is higher than the actual rate you will be paying.
So if the qualifying rate increases, you will be tested to see if you can maintain payments at that higher rate. Regardless of the actual rate that you secure for your variable or fixed rate mortgage. Stress tests ultimately help determine how much you can actually borrow for your mortgage.
What will the changes be?
The OSFI began conversations for renewing the guidelines concerning the qualifying rate that had started as early as January 2020, but were halted due to the COVID pandemic. The original proposition for its “based on rates from mortgage applications submitted by a wide variety of lenders, which makes it more representative of both the broader market and fluctuations in actual contract rates.”
The current OSFI proposition is to raise the mortgage stress test level to 5.25%, or two percentage points above the market rate. This new increase will reduce your qualified mortgage amount by approximately 5%. Many have already voiced that the current rate of 4.79% was already too high. However, the residential market trends beg to differ.
Despite the current qualifying rate and the global pandemic, Canadian home sales are up with demand well-outweighing supply. This has led to record breaking months within the Canadian real-estate markets.
March results from the Real Estate Board of Greater Vancouver:
- Home Sales: 5,708 (+126% year-over-year)
- Benchmark price (all home types): $1,123,300 (+9.4%)
- Benchmark price (detached home): $1,700,200 (+17.9%)
- Benchmark price (apartment home): $715,800 (+3.7%)
The real-estate market is booming and both fixed and variable rates are some of the lowest that we have seen in history. This may be the OSFI attempt to regulate the housing market during the unpredictable nature of its current state due to the COVID pandemic.
It is crucial to understand the effect these policy changes may have on your current or future mortgage and how you can capitalize on your personalized mortgage opportunities.
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We hope that this article was helpful in getting a brief overview of our current economic situation. And in turn, how it can and will effect your mortgage rates. Again, the best solution is to contact a mortgage professional, and where better to look than the mortgage professionals themselves.
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Evans, P. (2021, April 08). Bank regulator pitches higher Mortgage stress test level, making it harder to qualify for a home LOAN | CBC News. Retrieved April 11, 2021, from https://www.cbc.ca/news/business/osfi-mortgage-stress-test-rules-1.5979558
Office of the Superintendent of Financial Institutions. (2021, April 08). OSFI proposes new minimum qualifying rate for Uninsured mortgages. Retrieved April 11, 2021, from https://www.osfi-bsif.gc.ca/Eng/fi-if/in-ai/Pages/b20-let.aspx
Hueble, S. (2021, April 08). The latest in Mortgage NEWS: Osfi to Re-launch review of the uninsured stress test. Retrieved April 11, 2021, from https://www.canadianmortgagetrends.com/2021/04/the-latest-in-mortgage-news-osfi-to-re-launch-review-of-the-uninsured-stress-test/