September 24, 2020

New ‘stress test’ means uninsured mortgages to require more income


Home buyers looking to qualify for an uninsured mortgage through a federally regulated financial institution will soon face a new hurdle.

The Office of the Superintendent of Financial Institutions (OSFI) will roll out revised guidelines for residential mortgage writing practices and procedures, starting Jan. 1, 2018.

One change is a new “stress test” for uninsured mortgages, requiring the borrower to qualify at the higher figure between the five-year benchmark rate published by the Bank of Canada and two per cent above the contracted mortgage rate.

“Overall, I think it’s a prudent policy,” says Todd Hirsch, chief economist of ATB Financial.

“When you look at some of the other economies than have gotten into trouble, notably the United States in 2007 and 2008, it was because the mortgage lending was too lax. What the policy-makers are trying to do now is make sure we don’t get into that situation here — especially Toronto and Vancouver — where there have been a lot of people taking on an awful lot of mortgage debt.”

 However, residential markets in other centres in Canada, such as the Calgary area, aren’t carrying the same weight.

“Our housing market is actually stable,” Hirsch says. “Remarkably stable throughout the recession, in fact. And now coming out of the recession, it’s been stable.

“Even though Vancouver and Toronto are the targets,” he adds, referring to the coming lending rule change. “We still want to make sure, now that we’re coming out of the recession, we don’t see Albertans taking on far too much mortgage debt.”

Stricter qualifying requirements have likely already been in place with many lenders anyway, Hirsch says.

“The banks and financial institutions have no incentive to see people foreclose on mortgages,” he says. “All along, I think the banks have already been building that buffer in. So I don’t know if we are going to see a tidal wave of people rushing to get into a mortgage in the last couple of months of the year here, simply because the banks have already been raising that level.”

While the lending rules will pose a challenge for some to qualify for certain mortgages, when it comes to its influence on Calgary’s overall residential market, other factors are at play.

“There are a lot of things pushing and pulling,” says Hirsch. “On the one hand, mortgage rates are rising, there are stricter lending rules coming into place, on the other hand, we will see Calgary’s economy doing better, we will see consumer confidence picking up gradually, we will see the job market picking up, all of those things bolster the confidence in home ownership.

“Between those push and pulls on the different sides, I think we can expect 2018 to be modestly improved from 2017, but emphasis on modest.”

Between Jan. 1 and the end of October, the most current data available, the benchmark price on single-family homes through the resale market in Calgary is $505,480, says the Calgary Real Estate Board.

According to calculations provided by Mortgage Professionals Canada, with the lending rule change on uninsured mortgages, the qualifying income for people buying a $500,000 home could jump by more than $16,000.

Purchasing a home for $500,000 with a down payment of 20 per cent, the qualifying income, after the change, increases to $108,405 from $92,160. The new figure is based on 4.99 per cent, which is the current published five-year benchmark rate through the Bank of Canada, and the earlier number is from a contracted rate of 2.99 per cent.

The new calculation also assumes that the annual property tax is one per cent of the purchase price, heat costs are $150 per month, the amortization is 25 years, and the maximum Gross Debt Service (GDS) ratio is 32 per cent.

Using the above mentioned factors, the change also boosts the qualifying income on a home purchased for $600,000 to $128,961 from $109,467, and for a $700,000 home, it increases to $149,518 from $126,117.

Tightening the rules on uninsured mortgages pose yet another challenge for house hunters in search of affordability, says Guy Huntingford, CEO of Building Industry Land Development (BILD) Calgary Region.

From BILD, which has representation on the local, provincial and national levels, “our mantra has always been choice and affordability,” says Huntingford.

“Every time one of these rules is put in place or the legislation is changed, or a new policy comes down the pike — that has a negative effect on that — then we question it,” he says.

“Is the need to take the heat out of Vancouver and Toronto negatively affecting all of the other markets? The answer is yes, it is. When you introduce something nationally like this, it has a dampening effect everywhere.

“It seemed a bit overkill, in my mind — and certainly, we’ve said that,” Huntingford says. “The beauty of our markets here in the west are that they are still affordable for a lot of people and we want to keep it that way.”

This coming update for uninsured mortgages comes on the heels of a change to the lending rules impacting buyers seeking high-ratio insurance-backed mortgages. Starting from October 2016, applicants must qualify for both their contract rate and the conventional five-year fixed posted rate through the Bank of Canada.

Qualifying at the Bank of Canada rate was already needed for high-ratio insured mortgages with variable interest rates or fixed interest rates with terms less than five years.

At that time, through Calgary’s resale market, “We had the initial reaction where sales increased before things took hold,” says Ann-Marie Lurie, chief economist for CREB.

“But because our market was going through an adjustment anyway, we didn’t necessarily see it curve off sales activity,” she says. “Ultimately, it comes down to what your economy is doing, what type of employment there’s been and other factors. It didn’t necessarily cause any significant shifts.”

With that said, having “a lot of supply in all price ranges,” helped, Lurie adds.

“If these sorts of things happen and we didn’t have any supply, you probably see the impact more so on demand, but because we have ample supply for a lot of purchasers, even the first-time ones, they still had choices.”

With the upcoming mortgage rule change, Lurie expects buyers may move to other ends of the market.

“We are somewhat fortunate in our market in that we do have product available in the lower price ranges,” Lurie says. Sixty-two per cent of homes currently posted for resale in Calgary are less than $500,000. In comparison, Lurie says in 2014, the ratio was “closer to 50 per cent.”

“What we expect is that this will really cause some shifting in demand from some product types to others, just because we do have a sufficient amount of product available.”

With the downturn in the Alberta economy, home sales in the Calgary area eased in 2016. But year to date in 2017, CREB says sales on homes of all kinds have climbed five per cent from the same period a year ago.

“I don’t anticipate that it will have enough of a significant impact on our market to derail some of the recovery that we have been seeing. It’s just going to prolong the period of time that it takes for our market to recover,” Lurie says.

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