I’m going to break down the OSFI changes effective January 1st, 2018 that were announced last week. I’m REALLY going to break it down into layman’s terms. I know if I wasn’t in this industry I would need to break it down this way. So, I’ve done extensive research to be able to explain it to you all in this post.
Let’s start with Office of the Superintendent of Financial Institutions or better known as OSFI
Who are they: they’re an independent agency of the Government of Canada who Reports to the Minister of Finance.
- The agency was created in the late 1800s
- Created to contribute to increasing confidence in Canadian Financial systems
- Responsibilities include: supervise, advise, advance & administer, monitor and evaluate systems
Now that we understand who is behind the BIG news. Let me outline the...
OSFI has Revised the B-20 guidelines
What’s the B-20 guideline? It’s a form that outlines the guidelines that each person goes through to get qualified for a mortgage. It outlines the rules and criteria a lender must consider. For example, a lender must consider your credit report, spending patterns, payment patterns, income, etc. It outlines what, when, how, who, where of your financial history.
NEW Stress test for everyone starting January 1st, 2018
For BOTH Insured & Uninsured mortgages. The stress test implemented earlier this year only looked at insured mortgages. That’s anything that had a down payment of 20% or less. So it doesn’t matter if you are putting 15% down, 10%, 25%, this applies to ALL NEW MORTGAGES.
The Stress Test
200 points or 2% - an added 200 points or 2% will be added to any interest rate you qualify for see if you can withstand the increase. So, say you can get 2.5% rate, just using this as an example to keep it simple, you will be tested against 4.5% (+2%). If you can afford it at 4.5% then you pass the stress test and qualify for a mortgage.
OR tested against the Greater 5-year Bank of Canada rate which is currently 4.89%.
If you want to understand how I get these numbers and the breakdown then shoot me an email and I can go over your specific numbers. What you need to know is simple, think of your income, break it down into a monthly budget of expenses including mortgage then add 2% onto the mortgage rate you are going for. When you add the 2%, are you going into debt on a monthly basis? Do you have wiggle room? Is it cutting it close? All things to consider...
Now let's talk about the
Elephant in the room. Talks of another .25%, or 25 basis points, increase in the rate that could happen at any time. Well today, thankfully, the Bank of Canada announced they would NOT be making that hike. However it could still happen in the near future. Let's look at it in numbers if there was a .25% and 2% increase. What does that look like monthly $$$.
- If interest rates go up by 25 basis points and you have a mortgage of $750,000 mortgage it will cost you another $100 a month.
- Basically for every $100,000 a 25 basis point will increase your mortgage by 13.50$ monthly
- Now think of the news, with the stress test. For every $100,000 adding 200 basis points is equivalent of multiplying 13.50 by eight so now you are having to QUALIFY for $100 per month more on every $100k of mortgage.
Many people are freaking out, which always happens when the government announces a new rule. You can’t please everyone. I’ve been seeing agents post about this all week and the comments left on their posts are mostly negative. I get it. Not everyone likes change. Change makes people feel uncomfortable. Here are some reasons why they are doing it.
Protection from inevitable the rate climb
Protection from yourself. The first analogy that came into my mind was the same kind of protection that you do when you go into a casino and you ban yourself from the casino. But this time it’s coming from the government. Know your limit and stay within it.
This stat is crazy but there has been an increase in uninsured mortgages by 17.3% year over year. Why? People love loopholes, wherever they can find them they jump in. Putting more down allowed people to go uninsured, let’s say their parents loaned them the down payment to get them to 20%, they could still be running at risk but under the radar because they put the 20% down. This stops that.
Solutions? [are there any?]
- The more INCOME you have the more likely you’re going to pass the stress test.
And I know, I get it, you cannot pull income out of your – you know what. However, I did have a client take on another job on Saturday evenings so he can afford a home. I thought it was the humblest action he could do for his family to have a future. It’s not ideal and not everyone will mentally boggle down and do it. However, it’s become the sad reality
- Self-employed should DECLARE income! You thought you could go under the radar and avoid tax and get all the benefits of a low-income household, right? Well now this may not work in your favor if you are thinking of owning a home anytime in your future.
- DO NOT DO
Rush to purchase before Jan 1st, 2018. If you're at a high risk already, think before you REACT.
I can give you my predictions but I don’t hold a crystal ball and anyone who says they know is fooling themselves.
- I see a trend of other major cities around the world. NYC, Cali, Paris. I view us being the NYC of Canada
- Toronto will become the Playground for the Rich
- With all the factors it will push people to price down on their budget which will end up making them thinking of renting and then rent will inevitably go up. Which is problematic in cities like Toronto and Vancouver where we have a vacancy rate of less than 1%.
- Influx the GTA. Which will impact, transportation, jobs, supply of homes.
Although in life I have been known to promote a life is short, live life to the fullest mentality. I still think future smart. Which is to think smart about your future and not negate it.
Be Positive. This is just a new set of rules & regulations we will get used to. Life always moves on. Time tells all!
For more details watch Ravi's latest State of the Market below.
Written by: Sarah Gheriani
Sarah Gheriani is driven for success. She's increased her business by 50% from 2016-2017. Helping more people in their new homes than ever before. She has made Re/Max Hallmark's award club, 2017 100% club. Her believe is..."if you are not helping other people, you are wasting your time".
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