Pattie Lovett-Reid: What the new rules around uninsured mortgages mean for homebuyers
HUNTSVILLE, ONT. -- It is not the first time and it won't be the last time the Office of the Superintendent of Financial Institutions (OSFI) changed up the qualifying rules for uninsured mortgages (i.e. residential mortgages with a down payment of 20% or more).
Effective June 1, even with a hefty down payment, the minimum qualifying rate for an uninsured mortgage will be the greater of the mortgage contract rate plus 2%, or 5.25%.
Why are they doing this?
The aim is to protect homebuyers who are stretched too thin and have little wiggle room should rates go higher. In other words, this is going to make it more difficult for home buyers to qualify for a mortgage and reduces the mortgage amount a household can qualify for by roughly 5%.
The purpose isn't only to slow the housing market down by reducing demand while forcing Canadians to save more. It is to protect the current loan quality metrics and to ensure they remain very strong.
It is clear the housing market has been blistering hot in parts of Canada due to lack of supply, increased demand and competitive bidding, while, at the same time, Canadians are still highly indebted.
Just this past week, the Bank of Canada governor said the quality of mortgages has declined during the pandemic and the central bank repeated warnings that the housing market poses one of the biggest risks to Canada's financial system.
But before we panic, Canada has not experienced a run-up in mortgage arrears seen in the U.S. in part thanks to payment deferrals at the start of the pandemic. Credit card delinquencies also remain very low. Debt levels may be high, but Canadians have still been managing their payments effectively.
However, this is still a risk in the event the economy continues to mend and require less stimulus.
This type of dynamic could create the perfect financial storm for households living so close to the margin they might be unable to make their mortgage payments should rates start to increase. OSFI is trying to protect not only homeowners but the lender as well.
Call to action: If you are house hunting ensure you are pre-approved. You may be grandfathered under the current stress test in place for those who were approved prior to June 1, but it is at the lender's discretion. So don't assume grandfathering rules apply without checking first.
For anyone who purchased a home already, it would be a good idea to obtain mortgage approval prior to June 1 as that should allow you to qualify under the current conditions.
And finally, if you need to refinance you might want to seek approval prior to the new rules taking effect June 1.
The good news is we have a strong Canadian financial system and Canadian households have proven resilient in this economic environment. Yet, it still makes financial sense to err on the side of caution, even if the stricter stress test will only have a modest effect on the housing market in the second half of the year as the economic reopening plans kick into gear.
We also will get a look at just how strong the big bank balance sheets are when they begin reporting earnings for the 2nd Quarter on Wednesday.