New Mortgage Rule Changes Explained

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As many of you have seen on the media, OSFI has implemented new mortgage rule changes starting January 1, 2018. Now, non-insured mortgage consumers (buyers with a 20% or greater down payment) must qualify at the “a stress test rate” which is the higher of the Bank of Canada Rate (currently 5.14%) OR the rate from the lender plus 2%.

What effect will this have on the average consumer?

The biggest impact will be on the amount in which the homebuyer will be able to qualify for. Previously, the homebuyer qualified at the rate offered by the lender with no stress test for non-insured buyers. This new change applies to all terms, fixed and variable rates. The stress test for non-insured mortgages applies to both fix rate and variable rate mortgages.

We saw a similar rule change in October of 2016 for those consumers putting down less than 20% for their home purchase.  These “insured” consumers must qualify for a mortgage at the Bank of Canada rate (currently 5.14%).

What about the news of interest rates rising?

 

Although the above mentioned rule changes don’t quite have a direct effect on interest rates, the strength of the Canadian economy does.

 

The Bank of Canada (BoC) has 8 meetings every year where they discuss how well the economy is doing. If the Canadian economy is doing better than expected, there will be an increase to the “overnight lending rate”, which is essentially the rate of interest at which banks lend money to one another. When the BoC raises the overnight rate, it becomes more expensive for banks to borrow money, and they raise their respective prime rates to cover the added costs. Conversely when the BoC lowers the overnight rate, banks usually lower their prime rates by the same amount. Each bank sets its own prime rate, but most of the banks follow the BoC prime rate. The increase/decrease in the “overnight lending rate” is done to combat rapid inflation and vice versa.

The scheduled for the meetings is below;

Wednesday, January 17
Wednesday, March 7
Wednesday, April 18
Wednesday, May 30
Wednesday, July 11
Wednesday, September 5
Wednesday, October 24
Wednesday, December 5

The results of the January 17th meeting were that the BoC decided to raise the “overnight lending rate” to 1.25% from 1%. This triggered the BoC prime to go up from 3.2% to 3.45 Because of all these changes the Qualifying rate, or the “stress test” rate also increase from 4.99% to 5.14%.

Now more than ever, it’s a great time to contact a licensed mortgage professional to discuss your options. We will help you navigate through all of the rules changes, and help you get into the home of your dreams.

-Sunny Vig

Jan 25, 2018