The Canadian government isn’t quite done meddling with the housing market. Instead of focusing on those putting less than 20% down like most of the changes over the past decade, this will be hitting borrowers who have more than 20% equity. Although there is not 100% certainty on what guidelines will change, the most commonly discussed option is for the government to apply the “stress test” to all mortgages funded by federally regulated lenders.
Last October the stress test was announced which requires all borrowers putting less than 20% down to qualify at the benchmark rate which is currently 4.84%. Previously only variable rate mortgages or mortgages with terms of less than 5 years had to qualify at the benchmark rate, so taking a 5yr fixed was a commonly chosen option to qualify. The change reduced borrower eligibility for those who would be taking a 5yr fixed by 20%. Currently with 20% taking a 5yr fixed rate is still a way to qualify at the actual rate, not the benchmark. The government is looking to likely close this option which will reduce borrowing power by 20%. This will reduce incentive for borrowers to take 5yr fixed rate mortgages and enter more variable rate contracts as there is no qualification incentive to take the perceived “safer” option of the longer term rate.
We have heard from a few lenders that they worry the next round of changes will impact some of their lending products. One lender in particular has a “net worth” program which allows borrowers to not need an income to qualify for a mortgage, which has been a dying breed in today’s lending climate as lenders fear government auditing and wrist slapping for non-income qualifying loans. It is possible that this next wave of changes brings about further restricting lenders to lend based on their comfort level and pushes more borrowers to seek more expensive alternative lenders.
There is a possible reconsideration of launching these guidelines however. Toronto’s market has dropped considerably over the summer and most other markets in Canada has been fairly flat over the past few months. It is possible that they tap the brakes on launching new guidelines for fear of sending some markets like Toronto is a more aggressive tailspin.
What should you do?
If you are looking to buy with 20% down or want to refinance to unlock equity to invest, you may want to look at doing this sooner rather than later. The government has been more apt to moving swiftly once changes are made so policies may come into effect quickly.
Also, consider that Credit Unions are provincially regulated, not federally regulated. Over the past few years this has given them a few competitive advantages when it comes to qualification guidelines. Further government changes may widen this gap and give Credit Unions a larger piece of the mortgage pie, if they want it.