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Canada’s New Mortgage Rules

A few days ago the Office of the Superintendent of Financial Institutions (OSFI) released changes to its mortgage rules. Let’s talk about how it will affect affording a home from next year onwards.

The changes require borrowers to undergo a “stress test” in order to make sure they will be able to withstand higher interest rates. Previously, only insured borrowers had to undergo such a test.  So what makes an individual an uninsured and insured borrowers? An insured borrower is a buyer making a down payment less than 20% of the home’s value. If this is the case they need to acquire mortgage insurance. The uninsured borrowers are the buyers putting more than 20% down. The stress test will ensure that they are able to endure higher interest rates in the future.

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Uninsured mortgages account for 46 per cent of the country’s total $1.5 trillion mortgage credit outstanding, according to Bank of Canada data. That’s up from 45 per cent a year earlier.

The stress test is designed to simulate a borrower’s financial situation by assuming they would have to pay back the loan at the posted average — not whatever deal they were able to negotiate. So under OSFI’s new rules, borrowers would be stress tested at either the five-year average posted rate, or two per cent higher than their actual mortgage rate — whichever one is higher.

The goal of these changes is to improve the quality of borrowers that Canada’s banks see, which will protect our banking system from an economic shock.

OSFI’s new guidelines also clarified that borrowers who are renewing mortgages will not have to meet the new stress-test standard as long as they are staying with the same bank. However, renewals done with another lender will have to qualify under the revised standards because they require new underwriting.

In addition to the stress test, the new rules would require lenders to have more scrutiny around the loan-to-value ratio of the loans they give out, to ensure they are not giving out mortgages that are too large compared to the underlying value of the home.

There’s also new limitations on so-called co-lending or bundled mortgages that aim to ensure lenders don’t disregard rules designed to restrict how much they can lend.

 

For more information: https://beta.theglobeandmail.com/globe-investor/personal-finance/household-finances/ten-ways-the-new-mortgage-rules-will-shake-up-the-lending-market/article36628214/?ref=http://www.theglobeandmail.com&

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