You arrive to get your haircut today with your long time hairdresser/barber. Before the first hair is trimmed you are not asked what you are looking for in a new hair style, instead the barber says, “It’s going to be a lot warmer in the next few months so I am cutting your hair a lot shorter than normal”. “Don’t worry, you will feel a lot better and thank me in the long run.”.
Today the Office of the Superintendent of Financial Institutions (OSFI) has introduced a new stress test for consumers looking to purchase or refinance where they have a down payment or equity in their home of 20% or more of the home value. These rules come into effect on January 1, 2018. OSFI has performed a haircut.
Summary of new rule;
A new minimum qualifying rate, or “stress test” for uninsured mortgages (mortgages where consumers are putting 20% or more down payment).
- B-20 now requires mortgage clients to qualify on a minimum rate based on the greater of the five year Bank Of Canada rate (currently 4.89%) or the contract mortgage rate +2%.
Those of us in the business have seen this before in October 2016. The government a.k.a. Finance Minister – Morneau ( you know the one, leading the way with taxing small business while enjoying his french villa owned through a conveniently tax sheltered corporation he owns) introduced this same stress test rule for first time home buyers and those with less than 20% down payment last fall. What has been the fallout from that set of rule changes:
- Some first time home buyers are no longer qualifying for a mortgage they once would have, thereby reducing their purchase price or completely leaving the buying process.
- Debt reduction for some has been the focus since they don’t qualify based on the stress testing rules (currently 4.89%). While this seems like a good idea, in theory many prospective buyers have been going back to banks, credit unions and other lenders to renegotiate payments (not the amount they owe) to lower their payment so they can afford a higher mortgage amount. Some family members have stepped up moving wealth from one generation to another and thereby eliminating some debt (thanks Mom/Dad and maybe grandparents)
- High demand for lower priced homes and therefore more moving into condos. The last set of changes has reduced purchasing power putting more consumers, namely first time home buyers, into a more competitive situation where supply is small. Some have decided to wait while others have looked at buying condos since prices are lower.
Let’s fast forward to today’s announcement. What are the potential unintended consequences?
- Loss of confidence. Confidence in home values is a fickle thing. If you suspect that the home you are looking at buying may decrease in value, you are likely not going to take the plunge and make an offer. While we haven’t experienced this for many years, this may be a reality. A loss in confidence in home values would have a spinoff impact on many businesses.
- Potential move up buyers will decide to stay where they are. The new stress test will reduce their mortgage qualification by 20% if they are purchasing at the maximum of their affordability. If you could qualify for a $400,000 mortgage you will now be down to $320,000.
- Busier than normal November and December real estate markets. Whenever a major change happens, consumers will jump at the opportunity to take advantage of the “old” rules before the new ones take effect. This often creates a bit of a storm before the calm, not always the best thing for a market but the barber knows best. If you are a realtor or mortgage broker, expect the months of January and February to be “deadsville”
- Liquidity crisis for Credit Union’s or other unregulated lenders. Believe it or not, credit union’s are not regulated by OSFI. Other unregulated lenders are private lenders where fees can range from $1500 to 5% of the mortgage amount and interest rates from 7-12%, who will not be impacted by these changes. This may force some consumers who want to buy a home to these lenders just so they can qualify. These credit unions and other lenders only have so much money to go around and if they experience a run on their money, they adopt changes to their policies or even worse, shut off funding for some mortgages.
While the government is trying to cool the housing market in Toronto and Vancouver, these changes could clearly freeze the rest of the country especially in smaller centers like Winnipeg.
So when the barber is telling you to cut your hair shorter, it might be wise to ask what weather forecast they are basing this on, as we know the weatherman is not always right.
Author: Daryl Harris, AMP
Accredited Mortgage Professional