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Canada’s New, Tough Mortgage Rules Effective January 1, 2018

The Office of the Superintendent of Financial Institutions Canada (OSFI) announced a number of new mortgage rules which came into effect on January 1, 2018. The new rules, which affect all Canadians renewing or refinancing a mortgage, will require people to pass a stress test to prove that they can handle interest rate hikes that are significantly higher than their current rate—even if they never actually reach those lofty levels. The new, wide ranging changes, apply to all federally regulated financial institutions.

If you’re thinking of refinancing or renewing a mortgage, the new mortgage rules will make it very difficult o renew with a new lender. Even if you stick with your current lender, you may not be able to refinance as much as you were hoping to; you might also get stuck renewing a mortgage with uncompetitive rates.

Stress Test

A stress test helps banks determine how much of a mortgage you can afford under certain circumstances. The stress test doesn’t really work in your favour; it’s the big banks way of seeing how you’d do in a worst-case scenario.

For example, could you still afford your mortgage payments if interest rates increased, your income was reduced, you lost your job, or were hit with an unexpected expense?

According to the OFSI, the stricter stress test will make the Canadian real estate market more stable. But critics say the new stress test will hit those looking to refinance the hardest.1

Federal, provincial, and local government regulations can also damage the broader economy as fewer homes are renovated, purchased, and furnished.

Loan-To-Value Ratio

The loan to value ratio is a number that measures the value of a mortgage as a percentage of the total value of the property. Traditional lenders, like Canada’s big banks, need to ensure the loan-to-value (LTV) ratio is adjusted to local market conditions. The higher the LTV ratio, the riskier the loan.

For many financial products, including a mortgage, line of credit, or home equity loan, the LTV ratio had to be lower than 80%. In other words, you could only get a financial product if you had built up at least 20% of equity in the value of the property.

For example, if the total appraised value of a home you were looking at buying was $450,000 and you saved up a down payment of $90,000 (or 20%), the total mortgage loan amount you would want is $360,000 ($360,000/$450,000), or an 80% loan-to-value (LTV) ratio.

If you saved $50,000 (or 11%) for a down payment on the same house, you would be looking at a mortgage of $400,000 ($400,000/$450,000) or an LTV ratio of 88%.

Depending on market conditions, the LTV can either rise or fall. Ideally, it falls because the value of the house increases as you pay off the mortgage. But, if the housing market suffers a correction, the LTV ratio could rise and be higher than the total value of the property.

How Does This Impact Canadians?

Old Rule

Under the old LTV ratio rule, if you were renewing a mortgage, you did not have to pass a stress test. If you were refinancing, the maximum amount of equity you could tap was 80%.

New Rule

Under the new guidelines, if you’re renewing a mortgage, you technically do not need to pass the more stringent stress test requirements. But the banks could still vet you. If you fail, you could be stuck renewing with the current financial institution or have to accept uncompetitive rates.

If you’re looking to refinance a mortgage to consolidate debt, you’ll have to qualify according to the higher stress test rates; not the mortgage rate you initially secured. This means the lender will stress test your loan adding two percent to the initial five-year fixed rate. If you have a mortgage with a five-year fixed rate at 3.3%, you’ll be stress tested at 5.3%. This means you might be stuck getting a smaller loan.

If you’re looking to refinance a mortgage, the new mortgage lending rules mean it will be a lot more difficult to qualify for your refinance. As a result, you may not be able to refinance until you build up more equity.

Canada’s stricter lending rules will also make it tougher to qualify for a home equity line of credit (HELOC). Again, that’s because the big banks need to stress test you by adding two points to the current “benchmark rate” when you apply.

Canadalend.com, the Mortgage Refinancing Experts

Starting January 1, 2018, all borrowers in Canada have to pass a strict stress test if they’re borrowing from a federally regulated financial institution. Fortunately, Canadalend.com can help circumvent those rules and get you the mortgage or other financial product you deserve.

The licensed mortgage professionals at Canadalend.com are independent. That means they can help you find a mortgage with the best rates and terms. How can Canadalend.com beat what the big banks are offering? Where banks are stuck providing their own financial products and legally need to follow the new OSFI mandated stress test, Canadalend.com has access to hundreds of different private lenders; lenders that do not follow the same rules.

If you’re looking to secure a first mortgage, renew a mortgage, or refinance, contact Canadalend.com today. We’ll evaluate your current financial situation and help you find a lender that can provide you with a mortgage that suits your financial and lifestyle needs. Or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.

Sources:

1.“New mortgage rules could disqualify 10% of buyers with big down payments: Bank of Canada,” The Globe and Mail, November 28, 2017; https://www.theglobeandmail.com/report-on-business/new-mortgage-stress-tests-could-disqualify-10-of-buyers-bank-of-canada/article37109981/.

Flipping houses is a popular real estate investment, where the investor buys the home with the goal of quickly reselling it for profit. Often, they make improvements to the property to maximize its value.

Flipping houses in the GTA real estate market can be a smart investment and a positive experience if the investor knows what they’re doing. The biggest aspect that many don’t consider are the tax implications that come with flipping a property.

How to Flip a House

There are different ways that one can go about this. Some prefer to hold onto the mortgage for the shortest amount of time possible by flipping them as soon as the market heats up. They might not maximize value but they should yield a profit.

Other investors play the longer game where they invest in the property through renovations and improvements. This can result in a greater return on investment but it means the investor will be responsible for the mortgage for longer, and must finance the renovations. A greater financial commitment can lead to a much greater reward.

What’s the Risk?

There is risk with any investment. Each property comes with some problems, which could affect how quickly the house can be sold. In addition, markets fluctuate fast and if it happens to cool before an investor can resell the property they could have to financially carry it for longer. This could reduce the profit margin.

Any unexpected delays in renovations or construction could also result in less profit.

Restrictions and Tax Implications

When the GTA market heats up, one suggestion to cool the rising prices is to tax house flippers. This would impede speculative purchases and allow more residents to buy a home. Restrictions and tax implications could hinder some investment opportunities, but in conjunction with the new mortgage rules could protect borrowers, lenders and investors.

Another idea being considered is a graduated tax system. This means that an owner who buys and sells a home shortly after purchase would pay a higher tax rate.

These ideas do come with the contrarian viewpoint that it would take value and money out of the market, driving down the price of homes.

Flipping a home isn’t for everyone, but savvy investors who understand a specific market could yield a huge return.

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Predicting any housing market is difficult. Predicting Toronto’s housing market requires almost Nostradamus-like abilities.  The Toronto market has held strong for several years now, but the recent dip has led many prognosticators to wage a bet that another spike is looming.

Where will Toronto’s housing market end up a decade from now?

Long-term Growth

There are signs that Toronto will come out of the recent market lull and enter a period of growth that will send housing prices soaring. It might take another year for this to happen, but the market is expected to increase in value. This could create some negative scenarios for those dreaming of homeownership.

Once the demand races beyond the supply and people adjust to new policies and regulations, the market will turn.

Housing Will be Less Affordable

For years, there’s been discussion about Toronto’s housing being unaffordable, especially for young professionals and the middle class.  With the housing market bound to rise in value, there’s a chance that affordable housing will become more challenging.

The condo market should continue to hold strong for the next few years but the housing market should outpace it at some point.

Remember, once the market starts to heat up, there will be a rush to buy including speculators looking to make a buck on an investment. This could speed up the market and inflate it to unsustainable levels.

A Good Time to Enter the Market

Now is a good time to enter the market as prices are relatively low. There are some obstacles—high interest rate, stress test, lack of supply—but if a person can get approved, there’s a window where aggressive bidding could pay off in the future.

A Decade Later

It might seem futile to try to predict the future of a volatile housing market but it’s a worthy exercise. The current state of Toronto’s housing market is temporary and the future will affect tens of thousands of households throughout the GTA.

Researching what will happen in a year or two or ten can help someone make more informed decisions as to when to buy, when to wait and when to invest.

Many Canadians use debt to purchase their homes, start a business or to receive a post-secondary education. The total household debt statistic takes an accumulative approach to see what households owe in relation to disposable income. Trouble can be brewing on a national level when debt greatly outweighs income.

A recent report by the Organization for Economic Co-operation and Development (OECD) claims that Canada’s household debt levels are higher than other countries. This report acts as a warning sign to our national economy. 

OECD’s Report

This economic report frames the current economic situation through the lens of the 2007 credit crisis. A reason for that crisis was the increase in household debt across the board. Since that time, most nations have lowered their debt load, yet for some reason, Canada has not followed this trend. In fact, it’s done the opposite.

At 101%, Canada’s household debt to gross domestic product ratio ranks last. To compare, the U.S’ ratio is 80%. Italy is barely scratching 40%.

Why are Canadians Relying on Debt?

The easy culprit to pin Canada’s debt crisis on is real estate. As housing prices increase in value, Canadians must borrow more to be homeowners. Borrowing doesn’t end with mortgages, though. From heat to furniture to maintenance, Canadians use debt to keep their homes running.

In places like Vancouver and Toronto, thriving housing markets impacts the rental market, forcing many renters to live off debt. As Canada’s population grows, the debt load per household for both homeowners and renters will rise.

Possible Solutions

Household debt is a problem that has surfaced for most western countries. The simple solution (if there is one) is for Canadians to spend more within their means, curbing their reliance on debt. It could be as straightforward as families getting by on one car instead of two, but in fairness, this is always easier said than done.

Measures to protect borrowers and lenders from skyrocketing prices is the most immediate way to reduce debt load. The Government has taken steps through implementing a stress test and a recent interest rate hike by the Bank of Canada could provide some relief.

The data provided by this report should be taken very seriously by Canadians and policy makers. It’s a situation that needs to be monitored and handled before the ratio becomes even more out of whack.