OSFI Proposed Changes Targeting Refinances, Investors, and Uninsured Purchases: Explained, and Our Take On It
In an attempt to cool our hot housing market, the Office of the Superintendent of Financial Institutions, or OSFI, is taking action.
What is the Change?
OSFI has proposed a change to the stress test on uninsurable mortgages. The change would see the stress test increase on uninsured mortgages from the current rate of 4.79% to a higher rate of 5.25%.
Remind me Again, What Is the Stress Test?
The stress test is the interest rate that applicants need to qualify for when applying for a mortgage. The Bank of Canada wants to ensure that if rates go up in the future, potential mortgage holders will be able to handle any increase in their payment. The interest you actually pay will be much lower (about half!) of the stress test rate.
What Do You Mean by an Uninsured Mortgage?
Specifically, this change is targeting uninsured mortgage applications. Uninsured mortgages are mortgages in which Canada’s three default insurers, CMHC, Sagan, and Canada Guaranty, will not insure a mortgage, per Bank of Canada guidelines. Uninsured residential mortgages can be summed up by the following types of transactions:
1. Refinances – this type of transaction is when someone is increasing their existing mortgage to take out extra funds. Learn more about refinances, or check out our case study on refinances.
2. Purchases with a downpayment of 20% or more, on 30 year amortizations.
3. Purchases of $1,000,000 or more (no matter what the amortization is).
4. Rental property purchases.
It is important to note that this change is only affecting uninsured mortgages. This increase will not affect first time homebuyers who might have less than 20% down, nor those who have more than 20% down and amortize over 25 years. The stress test remains at 4.79% for insured mortgages, but note that the maximum mortgage is 25 years for insured mortgages versus 30 years for uninsured mortgages.
Why Is This So Important?
Uninsured mortgages make up 70-75% of total mortgage issuance by Canadian Financial Institutions. A huge portion of the application pool will be affected by the change.
A huge number of people will be limited in their ability to refinance, which is a tool used by many Canadians to access funds from their home.
To give you an example, if you currently qualify for a mortgage of $400,000 under the existing stress test over 30 years, after the change takes effect, you will only qualify a mortgage of $385,000. This means that you’ll qualify for $15,000 less.
The numbers get even more pronounced as they increase. For example, if someone qualifies for a $750,000 mortgage now, they will only qualify for a mortgage of $715,000 after the change takes effect.
While this may not seem like a huge change for most people, it could make all the difference for those who need extra funds for debt consolidation, or those whom are on the cusp of qualifying for the funds they need on a purchase.
Will This Have an Effect On Our Market?
In the very short term, we will see a bump in purchases and refinance applications as people try to get their applications in prior to the change taking effect on June 1st, 2021. This will drive prices up even more in the very short term.
In the longer term, we may see a slight slowing in the market, as the current frenzy will die down once the change takes effect. However, I don’t think there is going to be any major housing market correction. The current market, especially here in Victoria and neighboring Vancouver, is hot. A slight change in the stress test rate will not change buyers’ psychology or make them any less motivated to purchase property. In addition, the actual rate that mortgagors will pay is still very low, which is a tangible factor that affects buyers budgets.
In regards to refinances, people will have to scale back their expectations with regards to how much equity they will be able to pull out of their home. Ultimately, we might see slightly less people pulling funds out of their homes if they can’t qualify for what they need or want. They might renege on the transaction altogether, but we don’t expect this to happen often. People will still refinance, they will just get less money on the transaction.
Important Note: Currently, the changes are only proposed. However, historically, all proposed changes have been implemented. This increase will take effect on June 1st, 2021. Any applications that are currently approved or in the pipeline are unaffected by the change.
If you are wondering if now is the right time for you to refinance, or want to discuss how this mortgage stress test change could affect you, please contact our office today. Myself or my team are here to help!
Signing off for today,
For more information from OSFI, see the new release here: