What you NEED to know about the new stress test for mortgages.
Well, it has happened!
The much awaited intervention of the Office of the Superintendent of Financial Institutions has come out with their new guidelines. Below is a summary, with clickable links at the end of the blog.
Here is what you need to know:
OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages.
- Guideline B-20 now requires the minimum qualifying rate for uninsured mortgages to be the greater of either the five-year benchmark rate published by the Bank of Canada, or the contractual mortgage rate +2%. (Note.. this means the buyer must qualify at best 5yr rate plus 2%. That would be 4.9% today)
OSFI is requiring lenders to enhance their loan-to-value (LTV) measurement and adding limits so they will be dynamic and responsive to risk.
- Under the final Guideline, federally regulated financial institutions must establish and adhere to appropriate LTV ratio limits that are reflective of risk and are updated as housing markets and the economic environment evolve.
OSFI is placing restrictions on certain lending arrangements that are designed, or appear designed to circumvent LTV limits.
- A federally regulated financial institution is prohibited from arranging, with another lender a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law.
“Okay... great... but what does all this mean?
And what should I do when talking to clients?
The most important thing you can do is to position yourself as the expert/local economist of choice to your clients. It is all about adding insight and value to your customers. Buyers will be qualified for approx 20% less than the current mortgage amount, starting Jan 1st, 2018.
1) First time buyer is currently qualified for 400K mortgage. On January 1st, this same buyer will qualify for 320K.
2) Move up buyer currently qualified for 750K mortgage, will be reduced to 600K.
3) Luxury Buyer qualified at 1,500,000 in mortgage, now qualified for 1,200,000.
1. Call every buyer you are working with and share this information.
The time to buy is NOW because they can afford the house they want, instead of inferior house in the New Year.
2. Have conversation with sellers:
- Expect potential 20% drop in sale price over a period of time to match up to the new supply of (20% less) qualified buyers. If they originally would have qualified for your 500K condo, they are now only qualified for 380K purchase price.
- 40% of our market are First Time Buyers, 45% are Move Up Buyers. (If a Seller can't get what they want for their condo, they won't pay what the seller of the move-up house they're looking at, wants or needs).
- If you have a seller who is counting on the equity from their home to fund retirement and were planning on selling in next year or two.....the time to sell is NOW!
3. This is your wake up call to get busy and help as many families as you can for the next 10 weeks.
I expect some initial volume drop as Buyers and Sellers slowly adapt to the new reality. But, as always, great agents can succeed in any market... take this time to get informed and prepared for the shift... and get out there!
Media- Financial post article
OFSI News Release
Letter with Annex and further explanations