New mortgage regulations that will reduce borrowers' spending power have inspired backlash across the industry. What will the new criteria mean to you?
Time is ticking, home buyers — new rules are coming on Jan. 1 that could slash your real estate budget.
Dubbed Guideline B-20, these changes target real estate purchasers with down payments of 20 per cent or more, requiring they pass a “stress test” to prove they can afford their monthly mortgage payments should interest rates rise.
B-20 is the latest intervention from the federal Office of the Superintendent of Financial Institutions (say that five times fast), otherwise known as OSFI. Their mandate is to rein in risky lending practices and lower household debt levels — issues that have prompted warning bells from both the Bank of Canada and the Canada Mortgage and Housing Corporation (CMHC).
By clipping borrowers’ spending power, OSFI is hoping to both calm debt levels and real estate prices in the nation’s hottest markets.
What is the B-20 stress test?
Under B-20, borrowers will need to qualify at the Bank of Canada’s five-year benchmark rate (currently 4.99 per cent), or tack 2 per cent onto their contract rate – whichever is higher. For example, a borrower who gets a five-year fixed-mortgage rate pre-approval from their bank at 2.50 per cent would actually need to have the financial assets and credit rating to qualify at 4.99 per cent.
The new regulations also restrict co-lending mortgage arrangements, which are loans from various institutions that were combined to help a borrower with their qualification. They’ll also require banks to have higher loan-to-value requirements for mortgages on homes that have seen rapid value appreciation, meaning a buyer may be required to pony up an even larger down payment if buying a home in an especially hot neighbourhood.
In all, B-20 is expected to slash about $150,000 from the average buyer’s budget: Assuming a five-year fixed rate of 2.84 per cent and 25-year amortization, a household earning $100,000 annually would see their buying power shrink from $726,145 to $573,791.
Busting the bank of Mom and Dad
What’s notable about B-20 is that it targets lower-risk borrowers who have more upfront equity and don’t need mortgage default insurance, which is required of borrowers with down payments that are less than 20 per cent (a stress test for these “high-ratio” borrowers was rolled out in October).
The group that could be most affected, however, are those who are getting a leg up on their down payments with help from family. This parental cash infusion can mean the difference between being a low- or high-ratio borrower, which helped many buyers skirt the stress test rules the first time around.
In the uber-hot Toronto real estate market, such down-payment gifts were even speculated to be propping up market prices despite measures to knock out overextended buyers. That won’t be the case this time, though, as borrowers must prove they’ve got what it takes to carry their home purchase on their own.
Buying on a deadline
Buyers on the precipice of a purchase are no doubt feeling the pressure to squeak in under the wire, and that new urgency may be fuelling unseasonably hot autumn sales activity. In its October report, analysts from the Canadian Real Estate Association noted the impact of the looming rules.
“Newly introduced mortgage regulations mean that starting January 1, all home buyers applying for a new mortgage will need to pass a stress test to qualify for mortgage financing,” wrote CREA President Andrew Peck. “This will likely influence some home buyers to purchase before the stress test comes into effect, especially in Canada’s priciest markets.”
Adds Chief Economist Gregory Klump, “National sales momentum is positive heading toward year end. It remains to be seen whether that momentum can continue once the recently announced stress test takes effect beginning on New Year’s Day.”
‘A new sense of urgency’
Mike Bricknell, a mortgage specialist at CanWise Financial, says that while he hasn’t seen a surge of new business, applicants are increasingly anxious to close in a hurry.
“The deals that are coming in definitely do have a sense of urgency — and once they’re approved, they want to move the closing date even sooner,” he says. “I sense it is to beat the upcoming B-20 rule changes.”
However, borrowers may have less time than they think, as Bricknell warns some lenders will be implementing the new criteria before Jan. 1.
“There are some lenders who have said that a mortgage approval granted up until Dec. 15 will qualify at the current rules whereas any approval posted after that date will be subject to the new ones,” he says.
As well, those with pre-approvals granted before mid-December may need to get new ones should they not act in time.
But will B-20 actually work?
As expected, the B-20 rules have garnered a fair amount of backlash: Ontario Real Estate Association President Tim Hudak referred to them as a “war on home buyers”, while numerous analysts say that, combined with measures like the Ontario Fair Housing Plan, consequences could be harsher than intended for the housing market.
However, CIBC Deputy Chief Economist Benjamin Tal recently expressed doubt that B-20 would be as effective as policy makers hope. In a research note titled “The Housing Market: When the Fog Clears”, Tal writes that unless measures are taken to improve housing supply, attempts to cool demand will be “temporary at best.”
“We are in the midst of an important transition period in the trajectory of the Canadian housing market in general, and Vancouver and Toronto in particular,” he writes. “The level of activity is likely to stabilize and perhaps soften in the coming quarters as markets adjust to recent and upcoming regulatory changes. But when the fog clears it will become evident that the long-term trajectory of the market will show even tighter conditions.”
It should be noted that B-20 only impacts new mortgage applicants — those who currently have mortgages won’t be stress tested when they renew their terms if they stay with their current lender. As well, Tal adds, options such as extending mortgage amortizations from 25 to 30 years, or seeking private financing options, will still be available to borrowers determined to minimize the impact.