Tougher mortgage rules and higher mortgage rates may soon be coming, to slow down rising house prices. First time home buyers and new immigrants to Canada would find it more difficult to qualify to buy a house in Canada with the new proposed plans.
The Toronto housing market has been especially hot. The questions being repeatedly asked are- is a market bubble or housing price crash coming soon? Are mortgage lending rates about to go up?
The Office of the Superintendent of Financial Institutions (OSFI), has resumed consultation on the minimum qualifying rate for uninsured mortgages, and is recommending a sharp increase in qualifying mortgage rates. Re-emphasizing the importance of sound mortgage underwriting, the agency recommends that the new qualifying rate for uninsured mortgages be the higher of the mortgage contract rate plus 2% or 5.25% as a minimum floor.
The Office of the Superintendent of Financial Institutions is the independent agency of the Government of Canada that is responsible for the regulation and supervision of federally registered financial institutions and private pension plans. It was established specifically to facilitate the safety and soundness of the Canadian financial system.
OSFI has also announced a proposal to revisit the calibration of the qualifying rate at least once a year to ensure it remains appropriate for the risks in the environment. OSIF pointed out that the minimum qualifying rate adds a margin of safety that ensures borrowers will have the ability to make mortgage payments in the event of change in circumstances, such as the reduction of income or a rise in mortgage interest rates.
Qualifying rates were introduced to ensure that borrowers can keep up their payments in case mortgage rates increase over the course of their loan term, which ranges between 20-30 years. If you are obtaining an insured mortgage, you must qualify at a higher rate, called the “benchmark qualifying rate.” (Currently 5.14%) or +2% the contracted rate. The benchmark qualifying rate is the posted 5-year fixed rate, as published by the Bank of Canada every Thursday.
A statement from the OSIF emphasized that a “strong financial system that is able to support Canadians in today’s environment will be critical to Canada’s post-pandemic economic recovery. The current Canadian housing market conditions have the potential to put lenders at increased financial risk. OSFI is taking proactive action at this time so that banks will continue to be resilient.”
Jeremy Rudin, Superintendent stated that “sound residential mortgage underwriting is always important for the safety and stability of financial institutions; today it is more important than ever. As mortgages are one of the largest exposures that most banks carry, ensuring that borrowers are able to repay their loans strongly contributes to the continued safety and soundness of Canada’s financial system.”
After due consultations, OSFI will communicate their final amendments to the qualifying rate for uninsured mortgages in Guideline B-20 by May 24, 2021, with a coming into force date of June 1, 2021.
BMO economists Robert Kavcic and Benjamin Reitzes, had also recently called on the Government to take action to prevent a potential housing bubble due to prices going “parabolic.” In a report titled Canadian Housing Fire Needs a Response, they warned that “the action needed today is one that immediately breaks market psychology and the belief that prices will only rise further,”
Anxious homebuyers will be wondering whether this new proposal is strong enough to cool down the sizzling hot housing market, as it does not apply across the board. OSFI’s
Communications Officer, Colin Palmer clarified that “the proposed change applies only to uninsured mortgages because the minimum qualifying rate for uninsured mortgages is set by OSFI, while the minimum qualifying rate for insured mortgages is set by the Minister of Finance.”
Pending when the new mortgage rules and higher mortgage rates come into effect, new home buyers and new immigrants to Canada, should remain prepared for higher house prices. The bidding wars and the “Sold Above Asking” signs are not disappearing soon in Toronto, Vancouver, Winnipeg and other property hot spots.