Home Buyer's received a slight break from September 2017 through to December 2017. Bidding wars were less rampant to none existent and conditions started to come back into Purchase and Sale Agreements. What does the 2018 market have in store for home buyers and home sellers? Well, one thing is for sure, Canada's banking watchdog, the Office of the Superintendent of Financial Institutions Canada (OFSI), confirmed on October 17 that all borrowers will have to qualify for a mortgage that is two percentage points higher (the "stress test") than their actual contractual mortgage rate offered by the federally regulated lender.
Currently, where a Buyer has a down payment of at least 5% of the purchase price but less than 20%, their mortgage must be backed by mortgage insurance from either Canada Mortgage and Housing Corp., Genworth Financial Mortgage Insurance Company Canada or Guaranty Mortgage Insurance Company. The latter being two private-sector firms. The mortgage insurance is needed as these loans are categorized as "high loan-to-value" or "high ratio" mortgages and the mortgage insurance protects the lender in the event you the borrower defaults on your payments.
As of January 1, 2018, the new "stress test" will be used for all new mortgages, even those in which the buyer has more than 20 percent of the down payment. The reasoning behind such application is to assure that home buyers could still make their mortgage payments should interest rates rise in the future. It is estimated that the new ‘stress test' will cause the same borrower to qualify for a mortgage that is 15-20 per cent less than what they could have received in 2017.
What might be of interest to some home buyers is that these new mortgage rules will only apply to federally regulated mortgage lenders. Institutions that are provincially regulated, like credit unions, will not have to comply with the new federal rules. Neither will private mortgage lenders who loan their own monies to home buyers. This however does not mean that some credit unions will not adopt the tougher standard.
Under the new rules, home owners looking to refinance may also be affected as individuals looking to switch institutions will have to qualify under the new rules. Should you choose to stay with your existing lender, the home owner may be exempt from the stress test, however, the financial institution can choose to apply the tougher standard.
What effect will these tougher standards have on home buyers in 2018? What effect will these tougher standards have on the home sellers listing their home or condo for sale in 2018? For starters, home buyers will be buying less of a home, meaning where your money could purchase a detached, you might only be able to afford a semi-detached in the area you are looking, or perhaps a condominium. Surely, other side effects will appear as both home buyers and home sellers get creative to adhere to the new rules, but only time will tell how the market adjusts to handle the governments intervention on rising home prices.
Should you be looking to sell or purchase a home in 2018 be sure to contact my office to assist you in the process. My office has assisted home buyers and sellers and has acted on numerous mortgage transactions whether through a top five bank or similar institution or through private mortgage lenders.
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This blog is not to be construed as legal advice and you should consult a lawyer for legal specific matters.