The New Mortgage Rules in Toronto Explained

You may have heard that come January 1st, 2018, there will be some new mortgage rules in Toronto. The recent announcement from the Office of the Superintendent of Financial Institutions (OSFI) revealed that a ‘stress test’ will now be applied to all new mortgages. Previously the test, which ensures homeowners can weather a hike in interest rates, was only applied to mortgages with a down payment of less than 20%.

Overall, this means that banks will become stricter with mortgage lending and the buying power of borrowers will go down. Now, you might be wondering how this is going to affect you as a buyer or existing homeowner. Well, depending on your situation, it could have a large impact, or it may have no affect at all.

In this post, we’ll reveal the effects the new changes will have on housing affordability and the impact on buyers and homeowners in various scenarios. Let’s jump in!

What the Rules Mean for Buyers

The basic premise of the stress test is that new mortgages will need to be qualified at a rate at least 2% higher than the contracted rate. This will ultimately lower the amount that a particular borrower will qualify for. While the stress test is in place to protect homeowners, it means that as of January 1, 2018, most will be able to afford less house than they can today.

The following table shows the estimated impact on your buying power:

With 25 yr amortization (the new maximum), 20% down payment, and a 5 year term. Qualifying rates used are 3.29% today and 5.29% January 1st. (Values sourced from Fred Shoor – Invis Mortgage Intelligence)

It’s important to note that many lenders (especially those in Toronto) have already been using stricter criteria to qualify buyers, so it’s possible that many Toronto buyers won’t see that much of a difference. Your lender may have already stress-tested you when they approved you for that $800,000 purchase and you just didn’t know it, so you may still be able to afford the same amount. If you are at all unsure, check with your lender as soon as possible.

How Home Prices Will Be Impacted

Home prices fluctuate according to supply and demand in the market. In turn, supply and demand are affected by buyer and seller emotions. Of course, it’s impossible to accurately predict what buyers and sellers will do in response to a big change like this one.

However, we can look at what might happen. On the seller side, they could all rush to sell now before the changes take place, increasing the market supply. So what about the buyers? They may just decide to wait and see (which they did when the April changes were announced) thereby reducing demand. Or they may be rushing to buy before January 1st, driving up prices in the short term.

As you can see, there’s plenty of room for speculation. As such our best advice is to avoid trying to base you decisions solely on timing the market. Instead, think long-term and do the right thing at the right time, for you. Having said that, there are still certain things to consider in your decision-making, which we’ll delve into in the next section.

How It Will Affect Your Situation

Of course, there’s not just one type of buyer or homeowner. Everyone is in a different position in terms of what they might be looking to do within the next year or two. We’ve come up with some example scenarios and will explain how the new rules will impact these specific situations.

1. You’re thinking about becoming a first time buyer.

The new qualifying changes may mean that buyers can no longer afford to enter the housing market at all. If you think you might end up in this situation, you need to either re-evaluate your needs and plans, or buy before the changes take place. Talk to your lender. Do the changes mean the amount of money you can borrow will take you out the housing market completely or out of the market for what you’re looking to buy? Can you buy sooner rather than later to circumvent the new rules? Or would you consider a more affordable property?

2.   You already purchased a home that doesn’t close until after January 1st.

Firm agreements of purchase and sale (in which all conditions have been waived) dated before January 1st, 2018, will not be subject to the new qualification rules. However, individual banks may well decide to implement the rules earlier.

3.   You have a mortgage pre-approval that is valid past January 1st.

Even if you have a mortgage pre-approval that extends beyond January 1st, don’t get too excited. A pre-approval is not a guarantee of a mortgage. So if you don’t have a firm agreement of purchase and sale in place before the cut-off, you will need to qualify at the new levels. If you’re at all unsure about your pre-approval, talk to your lender as soon as possible.

4. You want to renew your mortgage.

Similar to previous changes to mortgage qualification rules, if you renew your mortgage with the same lender, nothing will change. However, if you switch to a different lender, you’ll need to qualify under the new rules. This is a huge bonus for the banks as they can effectively hold people hostage. And in this case, it’s hard to imagine them being competitive on renewal rates.

5. You want to refinance an existing mortgage.

If you’re looking to refinance an existing mortgage, then the same rules will apply. The refinancing will count as a new mortgage and from January 1st, lenders will have to apply the stress test to borrowers.

Do you need help understanding what to do? As always, your ThompsonSells team is here to help!