Photo: James Bombales
Time is running out before new Canadian mortgage rules kick in, which could potentially make it harder for first-time buyers to get a mortgage.
On January 1, the Office of the Superintendent of Financial Institutions’ (OSFI) new stress test will require all uninsured mortgage borrowers to qualify against the Bank of Canada’s five-year benchmark rate, or at their contract mortgage rate plus an additional two per cent.
The tightening of the lending rules comes a year after a stress test was implemented for insured mortgages in October 2016. Now extending to all mortgages starting in the New Year, the stricter qualification process aims to ensure borrowers will be able to withstand higher interest rates.
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However, the stricter lending criteria coupled with projected rate hikes next year could make it harder for buyers to enter the market.
"Both of these factors are going to raise the bar even higher for first-time home buyers, in particular, that in our view will cool demand overall,” RBC Senior Economist Robert Hogue tells BuzzBuzzNews.
According to TD Bank Senior Economist Brian DePratto, OSFI decided to tighten the mortgage lending rules after its internal data suggested that the amount of uninsured mortgages is rising.
In August, insured mortgages were down 4.5 per cent year-over-year but uninsured mortgage credit increased 17.3 per cent from a year ago.
Hogue says the new mortgage rules, announced in October, pose downside risks for the country’s housing market. He adds that the market is already showing signs of a soft-landing, which he believes is still the most likely outcome for the market in 2018.
"We've already seen significant slowdown in all of Southern Ontario. So, given the size of the Southern Ontario market, it does have a bearing on the overall Canadian market,” says Hogue.
Along with declining demand, Hogue predicts that home price growth will also ease next year. The stress test is expected to reduce purchasing power for borrowers and decrease their home buying budget. In turn, Hogue says this is reason to forecast moderate price increases in the market next year.
According to the RBC economist, the new mortgage rules could cause a more significant risk for the market. Borrowers could choose to move to non-federally regulated mortgage lenders that will not be impacted by OSFI’s new rules. These lenders include provincially regulated credit unions.
Hogue says the “migration” of these borrowers could have a significant effect on the market’s stability.
"If the new rules push a lot of borrowers to the less regulated or non-regulated space then it could have some unintended consequences with respect to the overall resiliency of the overall system,” says Hogue.
Over the long-term, he says the new mortgage rules will leave the banks in a better position to withstand any significant housing correction.
And for borrowers who are not fond of the new stress test, Hogue adds that these “upcoming rules are for their own good.”