Unless you have hit the jackpot for the Lotto649, won big at a casino or found some buried treasure, your first step in purchasing a home or commercial real estate is to obtain a mortgage. Nowadays with the real estate market as high as it is, the majority of people aim to acquire a mortgage to help purchase their home or commercial property. With the new rules and regulations that have been applied to the mortgage market, Quebec, and the rest of the country will now begin to see about 10% of homebuyers pushed out of the market.
Federally regulated financial institutions in the province, such as Banque Nationale du Canada, RBC and Scotiabank, have begun implementing the new Guideline B-20 as of January 1, 2018. Here are three of the new rules being implemented into the provincial real estate market:
Three New Rules
- Stress tests for uninsured mortgages – even for those with a down payment of over 20%
What is a stress test? A stress test is a way for residential buyers to prove that they will be financially okay if there ever was a rise in interest rates. Federal banks are now required to check homeowner applications using a minimum qualifying rate (Bank of Canada’s five-year benchmark rate is currently at 5.14), or their contractual rate plus 2%.
For banks and other lenders this means they won’t assume bad debt trying to support individuals who can’t pay back their mortgage. For the borrower, it means they must now have a higher minimum income in order to receive a mortgage at all. For example, if a household had an income of about $69,000 a year, they could qualify for a mortgage of approximately $360,000. But, since the stress test has been implemented, the household must now bring in approximately $87,000 a year in order to qualify for the same mortgage amount.
In 2015, the average household revenue in Quebec was $59,822. With the new policies, many individuals will be staying out of the housing market and forced into renting for longer periods of time while they accumulate savings for their down payments.
- Bank lenders are now required to improve their loan-to-value measurement and limits in order to safeguard risk responsiveness.
What is LTV (loan-to-value)? LTV is a ratio that describes the size of a loan compared to the value of one’s property. Essentially, it is how much of the property is mortgaged.
For example, if a house costs $100,000, and your mortgage on the property is $83,000, 83,000/100,000 = 83% LTV ratio.
The rules such as the stress test, and the above LTV, have so far excluded credit unions and private lenders throughout the country. However, since January 1, 2018, some credit unions in Quebec, such as Desjardins Group, have voluntarily applied the OFSI’s (Office of the Superintendent of Financial Institutions) new stress test and mortgage rules. The credit union believes these new rules and regulations will be an, ‘effective way to protect consumers against the fluctuations in interest rates’.
- Restrictions on lending arrangements.
The last rule that is being implemented are restrictions on lending arrangements. Since January 1 2018, a mortgage lender cannot arrange with other banks or brokers to get around the maximum LTV ratio and/or other limits placed on residential mortgages.
For example, in the past if a individual applies for 70% LTV, and the bank or broker can only give 50%, the lender would be able to reach out to other lenders for the remainder 20%. This situation is no longer allowed.
Cases Where the Rules Won’t Affect You
- If you sign an agreement on a home before January 1, 2018, you will not have to complete a stress test.
- If your mortgage has been preapproved before January 1, 2018, some banks will give you period of 120 days to purchase your home before the rules are applied to you.
- If you have a mortgage refinancing commitment on December 31, 2017 you will also have 120 days window period to complete this.
With the rising rates of housing and commercial property, the aim for the new rules are not to push people ten step backwards, but rather to calm down the housing market (i.e. less people having bidding wards on the limited amount of places available). Once the percentage of current potential buyers decline, the plan is that real estate prices will too, go with it.