Mortgage Qualifying rule changes effective January 1, 2018
BC Mortgage Rule Changes limits borrowing power
- On January 1, 2018 OFSI (The Office of the Superintendent of Financial Institutions) is imposing new rules where lenders will now require a minimum qualifying rate for uninsured mortgages to be the “greater of the five-year benchmark rate published by the Bank of Canada (BOC) or the contractual rate plus 2%. The benchmark rate today is 4.99% and the best five-year uninsured mortgage rate today is 3.29% therefore in this instance to qualify for a proposed new mortgage the lender will use 5.29% (the greater of the two rates) to ensure borrower (s) ability to debt service.
- Although the payment structure and actual interest rate will be based on the contractual rate, this change in having to qualify at an inflated interest rate is designed as a stress test to ensure that in the event of increases to mortgage rates overall the borrower (s) ability to weather any increase is satisfactory.
Current Qualifying Rules
- Current mortgage qualifying guidelines require that borrowers with less than conventional 20% down payment must (a) limit the purchase price maximum to below $1,000,000.00 and (b) the mortgage must be insured with a minimum down payment of 5% for purchase price up to $500,000. If the purchase price is over $500,000.00, down payment is 5% for the first $500,000 of the purchase price and 10% for any remaining portion. These borrowers currently qualify at the BOC rate of 4.99%.
- Conventional borrowers with 20% or more available as a down payment are currently exempt from having to qualify at the benchmark rate until the end of 2017 if they are taking a fixed rate for a 5 year term.
- For all borrowers, for terms less than 5 years or for variable rate mortgages a borrower(s) must qualify using BOC benchmark rate.
Biggest Impact of BC Mortgage Rule Changes
- The biggest impact of the new BC mortgage rule changes for potential home buyers will be on the amount these home buyers/ borrower (s) are able to qualify for;
- (a) Purchase price $625,000.00 with 20% down payment $125,000.00 = $500,000 mortgage. Contract rate of 3.29% = $2441.26 per month amortized over 25 years, with combined annual income required of $103,422.00 to service the debt vs
- (b) Qualifying rate of 5.29% equals monthly payments of $2991.12 with annual income required of $124,041.00, or
- Based on (a) above and assuming borrower (s) total combined income is $103,422.00, under new rules, the maximum mortgage amount is now reduced to $408,079.66 from $500,000.00 a difference of $91,920.00 which substantially impacts borrowing power and limits and/or reduces maximum price limits on potential properties.
How do the Rule Changes Impact Current Properties Under Offer
- Current properties with a firm offer, even if closing past December 31st, 2017, will be underwritten under the old guidelines. However, if the mortgage amount changes or the property they are looking to buy changes, they will be subject to the new underwriting rules.
What Steps Should BUYERS be Taking NOW
- Home buyers are encouraged to revisit their mortgage broker/lender to assess the impact of the new rules on their buying power
- Lenders may hold rates on pre-approvals for potential buyers if submitted prior to December 22nd given the holiday schedule
- If your mortgage is coming up for renewal after January 1st, 2018, you will have the opportunity to renew with your current lender without requalifying. However, should you want to refinance and take additional funds or switch to a lender who is offering a better rate, you will need to qualify under the new rules.
Tracy Nettles and Darnelda Siegers
Mortgage Alliance – Enrich Mortgage Group Ltd
Sunshine Coast BC