The New Mortgage Changes Decoded
The OSFI (Office of the Superintendent of Financial Institutions) announced that effective January 1, 2018 the new Residential Mortgage Underwriting Practices and Procedures (Guidelines B-20) will be applied to all Federally Regulated Lenders.
The changes to the guidelines are focused on:
- The minimum qualifying rate for uninsured mortgages
- Expectations around loan-to-value (LTV) frameworks and limits
- Restrictions to transactions designed to work around those LTV limits
What the above means in layman’s terms is the following:
The new guidelines will require that all conventional mortgages (those with a down payment higher than 20%) will have to undergo stress testing. Stress testing means that the borrower would have to qualify at the greater of the five-year benchmark rate published by the Bank of Canada (currently at 4.99%) or the contractual mortgage rate plus 2% (5 year fixed at 3.19% + 2% = 5.19% qualifying rate).
These changes effectively mean that an uninsured mortgage is now qualified with stricter guidelines than an insured mortgage with less than 20% down payment. The implications of this can be felt by both those purchasing a home and by those who are refinancing their mortgage. Let’s look at what the effect will be for both scenarios:
Purchasing a New Home
When purchasing a new home with these new guidelines, borrowing power is also restricted. Using the scenario of a dual income family making a combined annual income of $85,000 the borrowing amount would be:
Current Lending Guidelines
Qualifying at a rate of 3.34% with a 25-year amortization and the combined income of $85,000 annually, the couple would be able to purchase a home at $560,000
New Lending Guidelines
Qualifying at a rate of 5.34% (contract mortgage rate + 2%) with a 25-year amortization and the combined annual income of $85,000 you would be able to purchase a home of $455,000
This gives a reduced borrowing amount of $105,000… A much lower amount and lessons the borrowing power significantly
Refinancing A Mortgage
A dual-income family with a combined annual income of $85,000. The current value of their home is $700,000. They have a remaining mortgage balance of $415,000 and lenders will refinance to a maximum of 80% LTV.
The maximum amount available is $560,000 minus the existing mortgage gives you $145,000 available in the equity of the home, provided you qualify to borrow it.
Current Lending Requirements
Qualifying at a rate of 3.34% with a 25-year amortization, and a combined annual income of $85,000 you are able to borrow $560,000. If you reduce your existing mortgage of $415,000 this means you could qualify to access the full $145,000 available in the equity of your home.
New Lending Requirements
Qualifying at a rate of 5.34% (contract mortgage rate + 2%) with a 25-year amortization, combined with the annual income of $85,000 and you would be able to borrow $455,000. If you reduce your existing mortgage of $415,000 this means that of the $145,000 available in the equity of your home you would only qualify to access $40,000 of it.
That is a reduced borrowing power of $105,000. A significant decrease and one that greatly effects the refinancing of a mortgage.
How Client First Mortgage Solutions Is Here To Help You
Are you financially ready? These changes are significant and they will have different implications for different people. Whether you are refinancing, purchasing or currently have a bundled mortgage, these changes could potentially impact you. It is important for you to know your current financial situation, and Steve and Nathan from Client First Mortgage Solutions can help you with that and more. Contact us today!
Original Article - Dominion Lending Centres - October 20, 2017