Heard what’s coming? As of January 1st, changes introduced by the nation’s banking regulator will make it harder for ordinary folk to qualify for a mortgage.
Whispers began in July of 2016 when the Office of the Superintendent of Financial Institutions Canada (OSFI), issued a public letter that it would be increasing its “supervisory intensity in this area.” That’s government jargon for, heads-up minions, new rules are coming – soon.
Under the new guidelines, all mortgage applicants will be subject to a stress test, regardless of the amount of their down-payment or mortgage term chosen.
A stress test is suppose to prove that a borrower’s finances could withstand an interest rate hike before one actually occurs—so the argument goes.
With the current structure, stress tests do not apply to borrowers with down-payments of 20% or more and who also choose a 5-year fixed or longer-term mortgage.
The prevailing rational has been—and justifiably so—that this group of borrowers pose less financial risk than their high ratio cousins—sporting down-payment minimums of 5%.
The new guidelines take a steep departure from this point of view. Lenders will now be required to add a “minimum” 2% to the quoted interest rate in order to qualify these buyers for a mortgage.
Let’s see how Julie, a first-time buyer might be affected by the proposed changes.
Julie was pre-approved for a $470,000 mortgage on a downtown condo. She’s managed to save a down payment of 20% and received a rate quote of 3.1% on a 5-year fixed term.
Julie’s been frugal with her finances, opting to live at home rent-free after graduation years ago, while earning $70,000 a year.
So why is Julie nervous? Julie’s 90-day pre-approval expires in around 30 days. She decided to delay purchasing earlier during the year when Toronto’s real estate market had become quite the buying frenzy.
Multiple offers above the asking price made headlines. Sellers would name their price and often got their price and then some.
Julie was spooked.
On the advice of friends and family she decided to hold back and see if the market would retract. Things have cooled since the heated spring market, but not in the way Julie expected.
With the arrival of the Fall Market, downtown condos in key locations are still getting multiple offers and selling above the asking price. Condo inventory is thinning and buyer numbers are growing.
That’s what Julie is facing now. Add to this haunting reality, a boogieman is preparing to enter the scene.
I put on my mortgage broker hat and sat down with Julie to crunch the numbers. Julie’s pre-approval was based on a 3.1% rate combined with a 20% down payment and a 5-year fixed term product.
We would now need to use 5.1% as the new qualifying standard to determine Julie’s eligibility. The result? An overall purchase price reduction of—wait for it—$85,000.
That’s not a typo.
Julie went from a cozy pre-approval amount of $470,000 down to a dramatic $385,000. Her risk profile and credit rating have not changed. Her annual income and employment status have not changed.
Yet, in percentage terms, Julie will lose nearly 20% of her purchasing power. The regulator has arbitrarily grouped Julie in a box with everyone else.
According to the Toronto Real Estate Board (TREB), the benchmark sales price of a downtown condo hovers at $479,800. More insightful though, is the 25.98% year over year price gain in this segment—a stirring fact most headlines have ignored.
This trend is somewhat similar to what we saw in the house segment only a few years ago, culminating in the worst affordability crisis this city has ever seen.
The story this picture paints is vivid.
Houses have become out of reach for most first-time buyers. Condos are now the go-to-option for many and will represent the dominant housing segment of the future. Yet, it is this segment that will be impacted most by these coming changes.