Changes are coming for homebuyers and uninsured mortgages. Those immersed in the current real estate market will know that there has been a dramatic increase in current house prices. According to the Canadian Real Estate Association, some markets have reached up to a 30% upsurge. To calm the popularity of the in-demand housing market, the Office of the Superintendent of Financial Institutions (OSFI) has proposed strengthening the present Mortgage Stress Test. The Bank of Canada has acknowledged this and has shown its support for tighter regulations.

The proposed changes from Canada’s banking regulators have begun as of June of 2021. These changes increase the qualifying rate for uninsured mortgages to either two percentage points above the market rate or 5.25%, whichever is greater. The former stress test rate had a minimum qualifying rate of 4.79%, about 50 basis points lower.

How could the Mortgage Stress Test affect you?

If you are looking to buy a home, these new mortgage rules could affect the price of the home you can afford. As a new homebuyer, you will have to show a lender that your current income supports a mortgage loan at the above rates. If you are in the process of purchasing a home, you will have to prove that the monthly mortgage payments would still be manageable if the interest rates were to rise at all in the future. This test is not just for homebuyers but for those who want to refinance their home, take out a homeowner line of credit, or switch to a new lender.

There will be about a 5% decrease in affordability, and it will be slightly more challenging to qualify for the mortgage amount a home buyer needs. On every $300,000, it will increase the qualifying payment by approximately $80,000, therefore decreasing affordability by around $4,600 per $100,000 of a mortgage.

The former Mortgage Rules as they stand are:

1. Credit Scores will need to be at least 680. Credit Score evaluation has increased from the previous requirement of 600. If you are buying a home with a partner, at least one applicant’s credit score must be 680.
2. Borrowed funds will not count towards a down payment and will not count as equity in considering the mortgage default insurance.
3. The gross debt ratio is now limited to 35% from 39%, and the total debt service ratio is 42%, down from 44%.

The Mortgage Stress Test Impact on the Housing market

While the increase of regulation in the housing market could lead to a decrease in activity and the number of potential buyers, it could also decrease the price of listings in certain areas. The market has reflected a win for home sellers, despite the pandemic. However, this could soon change, as the Canadian housing market might see a change in demand since the new rules have come into place as of June 1^st, 2021.

If you require assistance with your real estate transactions and your rights and obligations, please feel free to contact Paria Katie Rad, a real estate lawyer at Woitzik Polsinelli LLP Lawyers and Mediators. You can contact her at 905-640-4242 or 905-668-4486 ext. 230 or paria@durhamlawyer.ca or paria@yorkregionlawyer.ca

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”