New guidelines for the mortgage industry have been released by the Office of the Superintendent of Financial Institutions (OSFI) to take official effect as of January 1, 2018.
The new rules now include a major requirement to stress test uninsured borrowers. Previously, only insured borrowers had to undergo the “stress test”. The vast majority of first-time borrowers have to purchase mortgage insurance, and they have been obligated to undergo a stress test of their finances since October 2016.
By law, borrowers with a down payment of under 20 percent for a home, must purchase mortgage default insurance. Borrowers pay an insurance premium, but the beneficiary is actually the lender because the insurance protects the loan giver in the event the borrower defaults on the loan.
And the insurance premiums can easily be into the thousands of dollars, on top of the cost of a home, ranging from 0.6 to 4.5 percent of the mortgage, depending on the size of the down payment and the price of the property.
The Canada Mortgage and Housing Corporation is the biggest mortgage insurer in Canada, with competitors like private rivals Genworth Financial, Canada Guaranty.
On a $500,000 home with a $50,000 down payment, the CMHC says a borrower would be charged an extra $13,950 to insure the $450,000 mortgage.
Anyone who puts down more than 20 percent of the value of a home doesn’t have to pay such insurance, and is known as an “uninsured” borrower — the people affected by the new rules revealed Tuesday.
The stress test itself consists of ensuring the borrower would be able to pay the loan if interest rates become higher than they are today.
Particularly, the new stress test rules won’t apply to mortgage renewals as long as they are with the borrower’s existing lender.
The critics, including many in the real estate industry, said imposing a stress test on all buyers would put a chill on the housing market at a time that it can ill afford it.
But OSFI is pressing ahead anyway with changes it describes as “vigilant.”
In practical terms, the stress test would mean that a potential buyer of a $1 million home with 20 percent down would see their purchasing power knocked down by approximately 15 percent.
Fiona Dwyer, MBA, BBA| CIBC Mobile Mortgage Advisor & Builder Specialist – Edmonton, AB | CIBC Mortgage Channel| Tel: 1-888-771-7605| Cell: 780-200-7744| firstname.lastname@example.org|